02 October 2013

Air France vs Turkish Airlines: A Primer in Experience Economy

One of my pet peeves is the interminable refrain about the detrimental effects of labor cost for companies. Since the Reagan years (and the accompanying Mergers and Acquisitions (M&A) mania), it became the mantra of top CEOs that jobs are the main source of their economic woes. Business publications always describe corporate titans bravely slashing, cutting and shedding jobs.

The importance of achieving profitability through layoffs has been repeated so many times that, by now, everyone considers it a truism.

I don't. In fact, I believe that, in most cases, this is pure rubbish.

Recently, I came across of a perfect example to illustrate why I consider job slashing a self destructive action for most corporations.

Air France has just announced that, after six consecutive annual losses, they will be cutting 2800 jobs. This is their third round of reductions as they started the trend in 2009 with 2500 layoffs citing the economic crisis. A couple of years later, they followed through with another 5000 jobs. And now 2800 jobs. The most recent layoff plans are also accompanied by drastic fleet cuts.

Air France is not unique. Lufthansa has been in the red for some time and Iberia and British Airways are struggling as well.

The industry experts are offering several explanations for this state of affairs:
  • Economic crisis and low demand environment
  • High fuel cost
  • Competition from low cost airlines like RyanAir, EasyJet and Vueling
  • High labor cost
And they maintain that since the first three elements are beyond their control they have no option but reduce their labor cost.

The problem is that in the same time period, there is another European airline that continued to expand, to hire people and to enlarge its fleet. Moreover, that company managed to remain profitable. In other words, economic crisis, high fuel cost and competition from cheap airlines seemed to have very little effect on that other airline.

How could this be? Either the causes offered by the traditional airlines are invalid or this other company is doing something quite remarkable despite all these adverse elements.

The company in question is the Turkish Airlines. Since the 2008 crisis, its revenues went up, the number of passengers it carried increased and its operating profits soared almost every year:
In 2012, Turkish Airlines saw its operating profit grow almost threefold, with revenues up 26% on passenger capacity growth of 18%. It has the youngest fleet of any significant network carrier in Europe and its 7.0% operating margin puts it behind only Ryanair and easyJet. This financial success is built on one of Europe’s most efficient cost structures and a very productive work force. 
This is their basic statistics:
YearPassengers carriedGrowthRevenue (billion)
200616,947,000US$ 2.23
200719,636,000Increase 15.9%US$ 3.0
200822,597,000Increase 15.1%US$ 4.5
200925,102,000Increase 11.1%US$ 4.0
201029,119,000Increase 16.0%US$ 5.6
201132,648,000Increase 12.1%US$ 7.1
201239,045,000Increase 19.6%US$ 9.0
I will provide two reasons for the failure of Air France and the success of Turkish Airlines.

One is the traditional economics argument about productivity. And the other is a fairly new concept related to the Experience Economy.

Productivity

Let me put it boldly: the problem for Air France is not that its labor force is expensive. The problem is that Air France's operational and logistics infrastructure is so out of date and so badly designed that to function at a basic level it has to use too much of that expensive labor force.

I am not making this up. Here are the numbers: Take a look at where Air France stands.

Overall labour productivity ranking: 2012
Overall rankAirline/groupTotal points*
1Wizzair11
2Ryanair17
3Vueling23
4easyJet34
5Aegean43
6Turkish Airlines44
7Norwegian46
8airberlin53
9Finnair55
10Lufthansa Flying Segments58
11Aer Lingus67
12British Airways68
13TAP Portugal76
14Flybe80
15IAG82
16Lufthansa Group84
17Air France-KLM Group96
18Iberia101
19SAS Group102
Let me illustrate this with some anecdotal evidence.

If you have ever flown with Air France you would know that the average airport check-in time is 10-15 minutes. Sometimes even longer. The uniformed person behind the counter furiously types things only to surface briefly to ask you some inane questions. Then they are gone again, typing away. All that time, you are there thinking why is this taking so long. It is one passenger, one seat. What is the big deal?

Wasting your time is not important from the corporate perspective. But the problem is that, at that pace, the company has to deploy more counter agents if they hope to check-in a 300-passenger flight within two hours.

The same goes for their Web site. It is not well designed. It is not easy to reserve a ticket. And check-ins are a pain. The system crashes all the time. It loses your frequent flyer information sporadically. And infuriatingly, sometimes it refuses to check you in for no apparent reason. In such situations, you have to call a live agent and explain your predicament. And more often than not they cannot help you, as the company has given them no authority to fix things. So you need to call someone else or go to the airport and extend your time at the counter.

The software system behind the Web site and the airport check-in process is simply archaic. Let me explain with an example: Recently, I tried to upgrade an economy ticket to business by paying the difference myself. No frequent flyer miles, just straight credit card transaction, nothing complicated. I couldn't do it on the Web site. I called their number, they told me that it couldn't be done on the phone. I had to go to the main Air France agency at Invalides in Paris. It took 45 minutes to complete the transaction and three agents had to get involved and several calls had to be made.

While sitting there helplessly, I glanced at their in-house screen and it looked like a combination of UNIX and OS2. The agent who was trying to help me kept repeating to herself the key combinations she was supposed to remember for various transactions. To scroll a three page document took her 20 seconds as she had to place her finger on the down arrow key to move the cursor line by line for three pages. It was unbelievable.

Inside the airplanes, it is the same situation. On a recent flight to New York, I was seated in the upper cabin of an Airbus 380. There were only two flight attendants for the entire upper deck. Clearly, labor cost reductions in action. As a result, even though they skipped a number of steps (like offering refreshments before the meal), the whole process took too long and at the end, the attendants were exhausted (I caught one of them napping sitting upright on a stool) and the passengers were unhappy.

Ground services are equally dismal. When you land in Paris, it takes 30 minutes or more for your luggage to arrive. Fortunately for Air France, French border police are set up in such a way that there are rarely more than two agents available for passport control, so the actual waiting time for your suitcase (i.e. by the conveyor belt) is ten to fifteen minutes.

You might think that these are not significant issues (if you are French you might think that this is the best there is) but each of these instances illustrate lack of productivity enhancing tools, techniques and training.

In contrast, let's take a look at that other airline. From the above table you already know that they are the most productive full service airline in Europe. There is a reason for that.

With Turkish Airlines, airport check-ins rarely take more than two minutes (I mean your time at the counter) as they allow all passengers to check-in at the same row of counters, regardless of their flights. They have a state of the art logistics system behind it and it sorts out luggage and destination. Which means that 15-20 counters could check-in the passengers of multiple planes leaving within a five-hour window.

Turkish Airlines Web site won several awards. It is well designed. It is fast. It almost never crashes. It retains your information, including previous multiple searches without you making an effort. It makes price comparisons easy and it gives you the option to reserve a ticket without actually buying it (almost no airline allows this anymore).

Online check-ins are a breeze and the system is advanced enough to let you get your boarding pass in your smart phone (iOS or Android). And you can use it to board the plane by simply showing the screen to the screen reader at the gate. (My French friends shrieked with horror when they heard that notion).

In the planes, the service proceeds at a much faster rate even though they offer you more choices. Flight attendants seem happy to be there. They encourage you to ask for stuff and bring those items to you with a smile.

When you land, your suitcase will be on the conveyor belt within exactly fifteen minutes of landing because the subcontractor who handles luggage will not get paid if they arrive one minute later. I am told that it is in their contract. So when you pass the border police, your suitcase is there waiting for you.

That is the productivity part.

While the company became the fourth largest airline in the process, with 234 destinations in 103 countries, thanks to its high productivity, its cost profile is closer to Low Cost Airlines, as mentioned above. Interestingly, the company is employing some of those expensive labor elements from European airlines with no apparent ill effects:
The airline company currently employs 357 foreign pilots out of which 53 of them are Greek, 43 Spanish and 42 Italian. 
They are followed by 27 German, 17 English, 16 Austrian and 14 French pilots.
The other explanation I will offer is related to the Experience Economy.

Commoditization of Goods and Services

A product or a service becomes commoditized when they begin to be mass produced, contain no real distinguishing features from similar products and compete mainly on the basis of price. Since the Industrial Revolution countless segments of goods and services market became commoditized. What Henry Ford did to manufacturing, Ray Croc did to food. And with the massive corporate move to China in the last three decades, we can confidently maintain that most things we consume nowadays have been commoditized.

In 1999, two management consultants by the name of Joseph Pine and James Gilmore published a book called the Experience Economy. Their main argument was that unless you change your product or service to convey a specific experience to the client and immerse them in it, sooner or later your offering will become commoditized. And somebody will offer it at a lower price point and destroy your margins. If you are curious but do not wish to read about it, here is a short video clip summarizing their argument.

What they mean is better understood through a couple of example.

As you know, coffee beans are fairly cheap. The amount of beans for a cup of coffee is not worth more than 2-3 cents. If you get a cup of coffee in a gas station or a diner, it will never be priced for more 50 cents as it has no distinguishing features. But if you offer it in a specific environment like Starbucks, customers would be willing to pay $2-3 without blinking.

That's because Starbucks is more than a place you buy a cup of coffee, it is a designed experience. It has its own lingo, like Tall, Grande and Venti (which is a made up word, btw), its own interior design and color scheme; it suggests a certain lifestyle blending youthful intellectualism with refined taste and care for the environment. Those elements are insinuated by laptop carrying young clients, free Wi Fi, specially selected music you can download on the spot and signs to let you know that everything you consume comes from a Fair Trade source. There is a barista skillfully making your coffee to your exact speciications.

So having an espresso there is almost an immersion into a distinct culture.

Or they say, look at Apple, its stores and its products. Whereas all the brick and mortar computer stores went belly up (apparently because of low cost competition from Amazon and the likes), Apple stores are thriving. That's because, the authors argue, they offer you more than a product, they offer you an experience. They say that the store environment has been designed to give you the impression of a high end boutique hotel's lobby or bar. Salespeople are not salespeople. They are knowledgeable geeks walking around not pushing products. They are young and happy and pleasantly geeky. They can sell you stuff without taking you to a cash register: their iPhones will process credit cards and will email you your invoice.

Apple products also evoke a strong feeling. Most Apple computers are more expensive than PCs and in terms of specs, they are not as advanced. But they command a significant premium over those grey and black boxes. This is not just because Apple hardware is well designed but it is especially because their use provides the customer with a very special experience.

The point is that unless you redesign your product and service and turn it into a whole new experience, you will end up competing on the basis of price. And sooner or later your margins will erode and you will no longer be profitable.

Let's take a look at what Air France did when Low Cost Airlines commoditized air travel.

They tried cutting their cost by copying the Low Cost tactics. The first thing was to reduce the cost of food and beverages. Now in most short-haul destinations (in Economy) Air France will give you a stale sandwich in a Saran-wrap and water. In long-haul flights, it will offer two equally inedible choices, usually a piece of chicken or some soggy pasta.

This is from the national airline of a country famous for its refined cuisine.

Their in-flight entertainment is dismal. The screens are low resolution and they have terrible viewing angle: if the person in front of you moves slightly your movie becomes invisible.

The seats are cramped as their fleet mainly consists of ageing planes. Even in Business Class they are superseded by most other airlines in the world (their First Class is actually very good but for the price of a small car it should be).

Lately, they have been piloting a new idea: introducing a Low Cost alternative without creating a new brand: they now have flights out of Orly with no Business class and where checked-in luggage is an extra. The seat do not recline and the food is not part of the category of comestible things.

The Air France lounges for Business Class passengers are mediocre. While most of them are reasonably airy, the seating design is awkward, the service is lacking and the food is utterly unappetizing.

When you look at the other airline, things are much different.

In short haul flights (3-4 hours) in Economy class, they offer a choice of two hot meals and in most cases they are both quite good. Their menus have been created by famous Turkish chefs and they use their names to emphasize that even in in the back of the plane things are different.

In long flights, they have actual chefs in the plane with full kitchen outfits, going around in all cabins to check if people are happy with their meal. I went to Hong Kong with them and on the way in I was in Economy and on the way out I was in Premium (the class between Economy and Business) and in both cases, I was offered several choices, a chef asked my opinion about the food, flight attendants were happy to give me more wine with my meal. I felt like I was in a decent restaurant. I would take their Premium over Air France's Business class any day.

The seats were large and comfortable, they reclined quite well and the entertainment system was top-notch. The screens were high resolution and the programming was extensive. Film start times were fast and the sound was decent.

Finally, their lounge in Istanbul is simply spectacular and it is the embodiment of the Experience Economy concept.

It is immense but it is subtly divided using sphere-like structures. It has several live cooking areas, like a pizza oven, a kebab pit, a large pastry island, a salad bar and a huge buffet with various Turkish specialties.

In each case, there are chefs, rolling dough, barbecuing food and generally putting on a show.

There are fresh fruits everywhere, self-service drink carts with a large selection wine and alcohols.

There is movie theater, a flat panel TV wall with 9 screens, a billiard hall, a free locker for your hand luggage.

Google it and the first page will have several people claiming that it is the best lounge in the world.

Basically, the lounge exemplifies everything that Pine and Gilmore recommended that you do if you wish to de-commoditize your business. The whole strategy works.

Besides remaining profitable and expanding rapidly there is also this:
Turkish Airlines has thrice won the Skytrax awards for Europe's Best Airline, Southern Europe's Best Airline, and the World's Best Premium Economy Class Airline Seat for three consecutive years in 2011, 2012 and 2013. 
Additionally, Turkish Airlines has been selected the Airline of the Year by Air Transport News at the 2013 Air Transport News Awards Ceremony.
Next time you hear some company executives complain about their labor cost being too high, tell them to work on their productivity and to de-commoditize their business.

1 comment:

  1. Great article. I appreciate your discussion about differentiation between Air France and Turkish Airlines. I really enjoyed reading your post. Thanks for sharing and keep it sharing with great discussions like this.
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