Key Success Factors

Airline Industry

The ability for airlines to succeed today is measured according to several key success factors.

Often key success factors next appear as elements of a competitive strength assessment in examining the relative strength of the business unit compared to its rivals in the industry.
When a strategic management control system is designed to ensure achievement of the business unit's strategic objectives, key success factors may suggest either strategic objectives themselves or measures for strategic objectives for that business unit—or both.
ey success factors have several direct and several possible uses for any business unit whether it is for-profit or not-for-profit, large or small, domestic or foreign. In strategic analysis of a business unit, key success factors often initially appear as analytical tools for examining the character of the industry in which the business unit competes?
he key point of this examination for those in other industries is that practitioners of strategic management should look closely at the number of key success factors appropriate for the industry being examined at the time of the examination

An industry's key success factors (KSF's) are those competitive factors that most affect industry members' ability to prosper in the marketplace... KSF's by their very nature are so important to future competitive success that all firms in the industry must be competent at performing or achieving them or risk becoming an industry also-ran. Crafting and Executing Strategy

The Key Success Factors

The origin of the key success factors focused on in this article dates from an earlier study by this author regarding the success or failure of new U.S. interstate airlines after deregulation in 1978.

That study explained according to 12 key success factors the success or failure of eight airlines that began interstate service between 1978 and 1995. A computer model of an airline was constructed and then simulated the operations of the eight airlines examined over the time periods studied, most of the airlines for a five-year period. Those same 12 factors can be used with today's eight leading (by service volume) U.S. airlines to explain their respective situations and to suggest changes that each airline must make to survive in the long run.

Successful airlines must do many things well. Not doing well in any one area may not result in failure as we define it. However, performing very poorly in any one area, or poorly in two or more areas, appears to make success elusive.

Airlines are in part service businesses. To be successful, an airline must be effective in four general areas: 1) attracting customers; 2) managing its fleet; 3) managing its people, and 4) managing its finances

Attracting Customers

In this article, we use two factors of measurement with regard to customers: 1) the attractiveness of the airline's service and 2) the effectiveness of the airline's promotional expenditures. In the original research we used a rather complex model of an airline's "attractiveness" relative to that of its competitors, for example including infrastructure convenience, and scope of service. The base was the attractiveness of the price of tickets. In this analysis only the relative price of tickets has been used because ticket price was by far the most significant factor in attractiveness. A lower relative price would generally be more attractive to most travelers.

Similarly, the derivation of the promotional effectiveness in the current analysis has been simplified to that of the base used in the original study model. A measure of ticket sales per dollar of promotion expense is used in this study, with higher sales per promotion dollar being advantageous. Except where otherwise noted, the data for the analysis are taken from the U.S. Department of Transportation databases.

Managing the Fleet

In the area of fleet management, the same factors are used for this analysis as in the earlier study. Airplane utilization in hours per day deals with how well the companies' major assets (airplanes) are used as a group. The load factor relative to the industry average indicates how well the average individual airplane is used. Simply stated, the load factor is that proportion of an airplane's seats that are sold and actually filled at departure.

Managing People

We use two factors with respect to how well the airline manages its people. Productivity, in airline capacity per employee, is a measure of how effectively the employees work together in providing the physical service of getting passengers from one place to another. Morale is a measure of how committed employees are to providing good service to the airline's customers. As in the original study, productivity is measured in available seat miles per employee. Morale is measured using proxies since the original morale model is complex and requires information not currently available for the airlines being examined. In this case, lost bags per 1000 passengers and complaints per 100,000 enplanements derived from the Air Travel Consumer Reports are used as indicators of how committed airline employees are to serving their customers. The activities that result in lost bags or in poor enough treatment of passengers that they file complaints are indicative of the morale of the airline employees. Labor-management relations (including strikes and threatened strikes) are one example of a driver of these effects.

Managing Finances

The last of the four areas is financial management, for which six factors are used. Unit revenue and unit cost are important by themselves, but their relationship is also important. Therefore, we have compared both unit revenue and unit cost as well as the unit margins among the airlines. A measure of capacity to normalize these factors is used since the airlines fly all their available seats, not just those that are occupied. Better unit revenue may not be an advantage for an airline whose unit costs are out of line.

In addition to unit revenues and unit costs, funding for growth is an important factor for an organization's long-term success. Most successful organizations choose to grow over time. In the case of the airlines, growth is measured in terms of capacity growth. Furthermore, in order to grow, an airline needs adequate funds. To be attractive for most equity investors, an airline must grow its equity over time. Moreover, to be attractive to most debt investors, a reasonable debt-to-assets ratio is desirable. In this realm of funding, this study is less precise. However, in light of this study's prior research, the measures in this case appear to indicate the likelihood of enduring success for the airlines.

The Analysis

The second direct use of key success factors often occurs in the construction of a competitive strength assessment of the business units to be compared, the rivals within the industry. The first step in this assessment is analyzing the data. The second step is presenting the analysis in a comparative manner.

This article limits its analysis to U.S. airlines because the U.S. Department of Transportation maintains a database of information which U.S. airlines are required by law to provide to the government. Some of the same key success factors apply to airlines of other countries, but to the author's knowledge, no other country has a similar consistent source of airline information, nor does the International Air Transport Association (the international airline organization).

Conclusions

With regard to the key success factors in the U.S. airline industry, one question comes to mind: Why is the airline industry able to continue to attract enough investors to keep all these airlines in business?

US Airways' merger with America West may be an indicator of a consolidation trend. However, something else may be involved. A 1995 Fortune assessment concluded, "Chaos may just be in the nature of this crazy business." The possible explanation that followed dealt with an economic phenomenon known as "core theory." Fundamentally, core theory is a mathematical formulation of the competitive environment of an industry. As in many mathematical models, there may be many, one, or no solutions to the equations of the model. According to this theory, the model for the airline industry has no solution, therefore it is an "empty core." A lot of things have changed in the ensuing decade, but the industry still seems to be just as chaotic as before. However, Lester Telser, the University of Chicago economist who is the proponent of core theory, is still exploring that theory with respect to the airline industry.

While the economists pursue their theories, it would seem to be appropriate for more airlines to emulate Southwest and its few other successful rivals—if not literally, at least in terms of the competitive strengths of the key success factors.

As explained in the introduction, an increase in the number of key success factors for a maturing industry is supported by this example. It is impossible to choose only five or six of these 12 and have confidence that successful performance will follow. In fact, as the industry further matures and more competitors are able to imitate the practices of the successful airlines, even more key success factors may be needed.

And more key success factors may be needed as more international expansion is pursued, as indicated in the introduction. Perhaps a risk assessment factor that includes such risks as currency risk or political risk (perhaps "Managing the Public Policy Environment") will be appropriate as large organizations evolve to have no dominant national home.