Question

What tools could AA leaders have used to increase their awareness of internal and external issues?...

What tools could AA leaders have used to increase their awareness of internal and external issues?

???ALASKA AIRLINES: NAVIGATING CHANGE

In the autumn of 2007, Alaska Airlines executives adjourned at the end of a long and stressful day in the

midst of a multi-day strategic planning session. Most headed outside to relax, unwind and enjoy a bonfire

on the shore of Semiahmoo Spit, outside the meeting venue in Blaine, a seaport town in northwest

Washington state.

Meanwhile, several members of the senior executive committee and a few others met to discuss how to

adjust plans for the day ahead. This group included Bill Ayer, president and chief executive officer (CEO);

Brad Tilden, executive vice-president (EVP) of finance and chief financial officer; Glenn Johnson, EVP of

airport service and maintenance & engineering; the company's chief counsel and executives from

Marketing and Planning, Strategic Planning and Employee Services. They were concerned that the airline

was steadily draining its reserves of customer loyalty and goodwill, which until recently had seemed

abundant — even boundless.

Alaska Airlines had recovered from an all-time operational low, where only 60 per cent of flights were on

time and seven bags per 1,000 passengers were reported as having been mishandled (defined by the

Department of Transportation as checked baggage that was lost, pilfered, damaged or delayed). The airline

was now back to the lower end of its pre-crisis status quo of 70 to 75 per cent on-time flights and four

mishandled bags per 1,000 passengers.1 Both these important metrics continued to vary from one day to the

next. Although the situation on the ramp was stable for the time being, it was still fragile, with the ground

crew handling baggage and also performing ground service in between flights. After focusing many

resources on operations to improve the airline's operational results, the executives wondered what might

happen if performance were to slip again. Would the airline slip farther and faster than before? What would

it take to again recover to the current status quo? Would customers continue to be forgiving? Would this

mediocre level of improvement be sufficient?

Below is the agenda created that night for the next day's discussions, when the full group would again

convene: 9:00-11:00 a.m. 2008 Plan Discussion

Setup: No room for failure; tiger by the tail; you have 12 months to fix the operation sustainably and no

severance. What would the Carlyle group do if it purchased Alaska Airlines?

? If you were the Carlyle Group, what proposals would you accept and why?

? What else would you do?

? How much benefit do you expect and how soon?

The following morning, the top executive team posed a tough question to the group, about 25 in all. One

executive recalled the framing of the activity the next day as follows:

What would a Carlyle2 or a Warren Buffet do? Imagine a big conglomerate has just come in and

bought the airline. We're a $3 billion3 company making little money; our reputation with our

customers has taken a beating; we've had major problems with Seattle, our main hub; and we've had

problems with two large groups of employees. What would Carlyle do because [it is] emotionally

unattached to this?

The assembled executives divided into groups to discuss different elements of the problem. One executive

recalled the experience and the outcome of that day as "one of the ugliest sessions I've ever been a part of.

Yet, we came out of there joined at the hip saying that the biggest challenge we faced was our operation

and it had to be fixed, and it had to be fixed now."

Indeed, a three-pronged recommendation emerged:

1. We need to fix the Seattle hub first before trying to fix the whole system.

2. We need a higher-level person to devote 100 per cent of time to fixing the Seattle hub.

3. This person needs to be able to cross boundaries and break through silos.

A few weeks later, the executive leadership did two things. First, it appointed the staff vice-president (VP)

of operations to the new role of VP of Seattle Operations. Previously, the Seattle station had been run by

the individual managers of each functional operational unit (e.g., ticket counter, maintenance, inflight, flight

operations), each working within his or her silo. As the executive leadership explained to the new VP of

Seattle Operations, "Carlyle would come in and assign someone to fix Seattle and [it would] say either you

fix it or you're gone." That was the message. Second, the executive leadership told everyone at the Seattle-

Tacoma International or Sea-Tac Airport that, in addition to reporting to his or her functional manager, each

now had a dotted-line reporting relationship to the new VP of Seattle Operations and were expected to fully

support him.

The new VP brought all the leaders of Seattle together and instituted a data-driven process, which involved

identifying standard processes: a detailed timeline for the time between aircraft arrival and departure, using

scorecards to measure how well Alaska was following its intended processes. Over time, standard work

processes were defined, and daily scorecards provided visibility about performance for each step in the

aircraft turn. Process improvement efforts were applied to remove wasted steps.

This rigour led to a dramatic and sustained turnaround in Department of Transportation rankings for ontime

departures, J.D. Power's standings,4 mishandled bag rates (MBR) and operating margins from 2005

to 2010 with 2008 being a pivotal year (see Exhibit 1). Indeed, Alaska Airlines achieved the number-one

ranking in J.D. Power for customer satisfaction in year one (2008) following the initiation of the change

effort and for the next five years. In year two of the change effort, under a company-wide oversight team

led by the new VP of Seattle Operations, the Seattle work processes were standardized throughout the

system. Financial and operational performance received an additional boost when the company transitioned

its MD-80 aircraft out of the fleet. Modelled after Southwest Airlines' aircraft strategy, an all-Boeing 737

fleet promised greater fuel efficiency and fleet reliability, and required only Boeing parts in inventory and

simplified training for maintenance staff and crew.

To understand the dramatic changes and root causes that were addressed between autumn 2007 and midyear

2010, it is necessary to go back before 2006, when passengers were angered by mishandled bags and

wait times at the carousel, sometimes to the extent that airport police had to be called to the baggage claim

area to intervene. Indeed, insight into contributing causes could be traced back prior to 2005, when the

pilots, demoralized as a result of pay cuts, resisted efforts to improve operational performance, were

comparatively slow to taxi and often reported maintenance problems at the last minute, resulting in what

some executives saw as an unnecessary work slowdown. Other contributing causes included rocky contract

negotiations with other labour groups, which affected the engagement of other employee groups, and ramp

management's hands-off approach to ramp operations oversight, which resulted in a lack of operational

understanding. One executive noted that root causes stemmed back to 1999, when the airline was

"succeeding despite themselves due to fortuitous fuel costs and a good economy." The following is an

overview of the history, culture and events leading up to the 2007 decision to create the role of VP of Seattle

Operations; also included is a more detailed account of what occurred between 2007 and 2010 to fix the

airline's largest hub, including a look at the root causes and subsequent solutions necessary for analyzing

the changes and leadership driving this rapid turnaround.

THE HISTORY OF ALASKA AIRLINES: EIGHTY YEARS IN THE AIR

Alaska Air Group traced its roots to McGee Airlines, founded in Alaska in 1932 by bush pilot Mac McGee.

The airline merged with Star Air Service in 1934, making it the largest airline in Alaska with 22 planes;

however, many of these planes were small bush planes and would eventually be decommissioned as the

airline grew. At the 10-year mark in 1942, the company was purchased and the name changed to Alaska

Star Airlines, with a final name change in 1944. By 1972, the company was struggling but was salvaged by

new leadership, which focused on improving operations and taking advantage of the rich opportunities that

came with the construction of the trans-Alaska Pipeline. The following year, 1973, marked the first of 19

consecutive years of profitability, aided in part by industry deregulation in 1979, which enabled the 10-

plane airline to expand throughout the West Coast, beyond its previous service to 10 Alaskan cities and to

Seattle, its single destination in the "lower 48 states." By the end of the 1980s, Alaska Airlines (Alaska)

had tripled in size, in part as a result of having joined forces with Horizon Air and Jet America. Its fleet had

increased five-fold and the route map now included flights to Mexico and Russia.

As of mid-2010, the airline employed roughly 8,650 with an additional 3,000 or so employed in Horizon

Air. Approximately 160 to 170 of the airline's employees were at the director level and above (including directors, managing directors and VPs). The two airlines, at this point, shared many backroom services such

as accounting and planning. Exhibit 2 provides some basic operating data for the period 2002 to 2010.

PERFORMANCE: A CULTURE OF "JUST GOOD ENOUGH"

Throughout the 1990s, Alaska was typically in the middle of the pack in terms of most airline performance

indices, such as on-time departures. Falling in the middle range of performance without significant

motivation for change appeared to be based on the mentality that, "it's OK to be late, so long as we're nice."

This viewpoint could partially be attributed to the leadership of Ray Vecci, the CEO from 1990 to 1995,

who openly fought the adoption of mandatory Departure on Time (DOT) reporting requirements, saying

that Alaska was different because of its operating environment. Vecci's attitude led to a general tendency

to "blame the system" rather than confront the fact that Alaska was rarely on time. Alaska's employees

prided themselves on having the best customer service in the industry, which they defined as being nice —

not necessarily as being efficient. Indeed, Alaska enjoyed a great deal of customer loyalty and a significant

reserve of goodwill from its customers.

LABOUR RELATIONS: A LONG AND HARRIED HISTORY

In 1945, the pilots were the first of Alaska's employee groups to form a union, followed in 1959 and 1961,

by the organization of mechanics and flight attendants, respectively. In 1972, customer service, baggage

handlers and other operational employees followed suit.

As for many of the major carriers and for smaller, older airlines, such as Alaska, labour negotiations

(sometimes marked by strong contentions, slowdowns, strikes and flight cancellations) were a routine and

costly aspect of the airline business. Even when settlements were reached through negotiation or binding

arbitration, resentments could last for years, affecting both morale and productivity. An airline could be in

almost constant negotiations as employment contracts lasted from three to five years (depending on the

union), and as many as six collective bargaining agreements could be in play.

For Alaska, despite a strong employee-customer bond, the relationship between labour and management

fell short of being ideal for many years. An International Association of Machinists (IAM) strike in 1985

lasted for three months, during which time replacement workers were hired.5 In 1993, a flight attendants'

intermittent strike, the suspension of 17 flight attendants and a subsequent federally ordered reinstatement

suggested the tip of a larger iceberg of labour-management problems looming ahead. The flight attendants'

strike was a unique form of "intermittent strike" called CHAOS (and still used today by Association of

Flight Attendants), which Alaska management viewed as illegal job action. In 1998, contentious contract

negotiations between the company and members of the Aircraft Mechanics Fraternal Association began

and were not settled until the middle of 1999. As in the case of the pilots' union agreement of the prior year,

this new agreement called for third-party binding arbitration in the event that future agreements could not

be reached in 120 days. In the fall of 1999, the IAM, representing clerical workers and customer service

agents, reached an agreement after more than two years of protracted negotiation.

By the end of 1999, contract settlements had been reached with four out of six unions, leading to a new

wave of contract negotiations beginning about 2003. Under normal circumstances, these negotiations could be daunting enough; however, no one could predict what would unfold in the industry or for Alaska over

the next 24 months.

ORGANIZATIONAL AND INDUSTRY SHOCKS: NO PAIN, NO GAIN?

At the turn of the new millennium, two successive airline-related tragedies affected Alaska in very different

ways. On January 31, 2000, an Alaska Airlines MD-80 jet carrying 88 passengers and crew from Puerto

Vallarta, Mexico, to San Francisco crashed into rough seas 64 km (40 miles) northwest of Los Angeles,

shortly after reporting mechanical problems. Among the passengers of Flight 261 were 12 working and offduty

employees and 32 family members and friends of Alaska employees. Because half the victims had a

connection with the airline, the event would forever and uniquely alter Alaska's collective self-concept.

The accident truly shook the morale of everyone working for Alaska.

And then came 9/11. Ensuing changes in security and boarding procedures in the third quarter of 2001, and

into 2002, interrupted airline operations industry-wide. Demand for travel plummeted. Exhibit 3 shows the

epidemic of airline bankruptcies from 2002 to 2008. Though Alaska was not immune to the nationwide

grief and industry turmoil in the wake of 9/11, the impact on Alaska may have been tempered because of

the prior tragedy of Flight 261. The following is one executive's reflection on the two events:

From an employee perspective, no matter where you were in the organization, [the accident was] a

failure. The press wasn't awfully kind, so from an employee basis there was probably a little bit of

shame associated with it. I think it had a greater impact than 9/11. 9/11 was shocking, but it was

that way for everyone. Even if you didn't work for an airline, if you worked in an office building,

9/11 was shocking. [The Flight 261 accident] was more personal.

Perhaps a testament to Alaska's resilience in the face of adversity, when almost all other airlines across the

United States began immediate furloughs, Alaska's leaders intentionally chose not to lay off employees.

This strategic move by management restored much of the faith employees had in the company, as it

appeared that the leadership was betting on its employees to keep the airline aloft. Alaska was able to bank

away from the disaster in 2001 because of two actions: the airline's cutting of the flight schedule by 13 per

cent as a cost-cutting measure and the injection of $79.9 million in compensation from the federal

government as part of an industry-wide program to cover losses related to September 11th. Alaska's annual

passenger traffic dropped 5.6 per cent in 2001 compared with the industry-wide decline in domestic

passenger travel of 19 per cent. The airline attributed this difference to its dominant market position; strong

customer loyalty and less falloff in demand for air travel by people living on the West Coast and in the state

of Alaska (see Exhibit 4).

SOARING COSTS — WORRISOME LOSSES

Partly the result of Organization of the Petroleum Exporting Countries (OPEC) supply management

policies, oil prices had been on the rise since 1999 (see Exhibit 5). Crude oil prices affected the airline

industry directly through higher fuel costs, which could account for 15 to 35 per cent of the cost of operating

an airline, and indirectly through the resulting global economic downturn of 2000/01. Alaska Airlines'

annual fuel and oil expenditures peaked in 2008, as did its fuel expense as a percentage of operating revenue

for the years 2002 to 2010. With the added economic impact of the dot-com debacle and post-9/11 travel

slowdown, Alaska lost $118.6 million in 2002.

In 2002, salaries and benefits accounted for 39 per cent of costs, which was the biggest proportion of the

typical airline's operating expenses.6 Several major and competing airlines filed for bankruptcy, which

allowed them to renegotiate their labour contracts and thereafter operate with a lower overhead than Alaska.

This situation created a potentially significant competitive disadvantage for Alaska.

Meanwhile, some of Alaska's unionized employees — the pilots, flight attendants and ramp workers —

were among the highest paid in the industry.7 Alaska and Horizon Airlines had a combined annual payroll

of approximately $1 billion in 2004. Of that, Alaska pilots' pay and benefits (excluding Horizon) totalled

roughly $350 million. Management determined that the pilots at Alaska alone earned in the range of $70

million to $90 million over other airlines, when taking into account the industry restructuring in the years

since 9/11. Alaska's salaries represented a considerable labour cost disadvantage, relative to the industry

average.

Analysts projected that if losses and costs continued unabated into 2003 and 2004, the entire company could

go under. Alaska could have taken the route of filing for bankruptcy, as many other airlines had done, and

then undergone restructuring. However, Alaska chose not to pursue this option for several reasons.

Fundamentally, the Alaska executives, led by Bill Ayer, viewed filing for bankruptcy as being

reprehensible. Alaska was committed to its shareholders, and filing for bankruptcy would mean wiping

them out. Bankruptcy was tantamount to admitting defeat, an act utterly incongruent with Alaska's

courageous spirit. Furthermore, Alaska executives believed, perhaps naïvely, that management could

convince employees of the need for reductions, and those employees would voluntarily agree to make

personal sacrifices to save the company. Moreover, executives had other ideas for reducing costs that

represented a viable alternative. They were willing to trust that, if a collective bargaining agreement could

not otherwise be reached between the pilot's union and the company, a contract reached through binding

arbitration would be a better alternative than bankruptcy.

LABOUR: THE 2010 PLAN

Forging ahead in difficult times, Alaska's strategic planning efforts in 2003 resulted in leadership creating

the 2010 Plan, a long-term restructuring agenda focused on employees, customers and shareholders. As

part of this plan, in the fall of 2004, the company took several actions to reduce its biggest expense, labour

costs: offering a voluntary severance package to management, the closure of a maintenance base in

Oakland, the closure of the Tucson station, consolidation of operations in Spokane,8 the outsourcing of

three small work groups (fleet service, which performed aircraft cleaning; facilities maintenance; and

ground service vehicle maintenance) in several cities and closing Alaskan ticket offices in Juneau and

Anchorage and Washington state ticket offices in Seattle and Bellevue. Because the company felt that it

was crucial to have Alaska employees in customer-facing roles, non-customer-facing work groups were the

focus for attaining possible savings. In those cases, a cost-benefit analysis was performed. Combined, these

moves cut nearly 900 of the roughly 10,000 employees.

The challenge with the 2010 Plan was that each action had a different driver:

? The management voluntary severance package, launched in August 2004 and offered through spring

2005, was implemented to reduce the number of managers by about 9 per cent and aimed to improve

communication and cut between $5 million and $10 million in overhead expenses.9

? At the same time, several management replacements were made in response to an "FAA Action Plan"

that flowed from investigations into the tragedy of Flight 261.10

? The Oakland maintenance site closure and elimination of 350 jobs in September 2004 was part of a

decision to increase efficiency by outsourcing heavy maintenance checks at the Oakland location and

consolidating the remaining in-house maintenance in Seattle.11

? The outsourcing of fleet service, aircraft cleaning and facilities maintenance was pursued to allow the

company to focus on its core competencies with customer service at the forefront.

Just as the drivers of each action differed, the downstream consequences also differed. For instance, the

Oakland closure was a difficult and emotional exercise that left the remaining employees feeling bitter and

concerned. The voluntary management severance, considered generous by the company, had two

unintended downstream consequences:12 talented people with tribal knowledge left; and many of the

vacated management positions were replaced over a short time, rather than cut entirely, so that the overall

management labour costs began to rise again after 2007, though still remaining below 2005 numbers.

LABOUR: THE PERFECT STORM

In addition to the previously stated changes, the union contracts for the flight attendants, ramp workers

(IAM) and pilots (ALPA) were all open for re-negotiation at the same time, creating a labour relations

"perfect storm." Management was working feverishly to reduce wages and gain agreement on other

concessions in an effort to enable Alaska to compete with the other airlines that had already reduced their

labour costs dramatically under the terms of bankruptcy protection.

The flight attendants' negotiations started in summer 2003, reached a tentative agreement that failed by a

huge margin and ended in mediation the following summer. The pilots' union (ALPA) negotiations, which

focused on bringing wages down to the new market level, had a deadline of December 15, 2004. Although

the pilots were attracted to the promise of growth, they did not agree to reduce their wages. Since the 1990s,

Alaska's pay scale for Boeing 737 pilots was one of the highest in the nation. Most pilots had built lifestyles

dependent on this compensation level. Alaska remained firm that wage cuts were necessary.

After long negotiations with no agreement in sight, the parties entered into binding arbitration as stipulated

by contract. Ultimately, the arbitrator's decision cut pilot wages significantly beyond the company's last

contract proposal, and pilots experienced a decrease of up to 30 per cent in their annual salaries with an

average decrease of just over 16 per cent (see Exhibit 6).

In parallel with pilot arbitration, Alaska was working hard to negotiate a deal with the baggage handlers'

union (IAM). These "rampers" in Seattle were a powerful, senior group, and management had persistently

struggled to set and enforce acceptable performance expectations. As a result, productivity was very low.

Alaska initially sought to cut pay by 15 to 20 per cent, which was rejected by the ramp union. Anticipating

the possibility of a strike, a third-party ground handler (ramp vendor) was secured to step in to avoid

operational interruptions in the event of a strike. Ultimately, Alaska's senior management concluded that

the operational problems with the ramp could not be fixed with the current workforce, as old habits and

mistrust were too ingrained.

As Alaska's senior managers examined the contingencies in place to manage the risks of a strike, they

realized they had also created another option — to be proactive rather than reactive, by permanently

outsourcing the ramp operations. A bold decision was made to replace more than 470 Seattle baggage

handlers with contractors and to outsource the work to the ramp vendor. Both the decision and the action

to implement the decision were accomplished in a 24-hour period with no interruption to operations. As the

first shift of ramp employees arrived for work on May 13, they were met by security guards and members

of management, and informed of their termination. Meanwhile, other management staff phoned employees

scheduled for later shifts to deliver the news and instructions for attending a series of human resources

information sessions. The decision to outsource the ramp came one week after the arbitrated decision in the

pilots' negotiations.

In addition to lining up the ramp vendor for backup, Alaska had also trained management in ramp operation

in anticipation of a work stoppage and strike. After the decision was made to outsource the ramp, these

management personnel stepped in and supported the ramp vendor, working side by side with them for about

a month on all shifts during the early days of the transition. Over the first year or so, Alaska kept some

personnel trained so they could step in and help if needed.

DOWNSTREAM EFFECTS

The compounding effect of the 2004 closure of the heavy maintenance facility in Oakland, followed by the

pilot wage arbitration decision and the ramp outsourcing (both within a month or so of each other) was not

well anticipated by management. The latter two changes were not planned to happen simultaneously, but

as is true of all strategic challenges, some of the timing was beyond the company's control.

In the months following the pilot arbitration decision, the pilots were angry and disengaged. Following the

settlement, the company noted an increase in pilots' sick leave and their irregularity reports, both of which

created downstream effects for other areas of the operational system. Another metric that changed after the

settlement was an increase in pilots' hours spent in flight due to longer than average delays at the gate.

These longer delays reduced the pilots' ability to make other flight connections and created further delays

downstream.

The first few days after the ramp vendor was brought on to manage the ramp operations, everything went

smoothly. However, as demand for Alaska bookings rose with the approaching holiday travel season, the

ramp vendor proved to be unprepared to handle the volume associated with the Alaska contract. The ramp

vendor's group was understaffed and undertrained. They operated with an autocratic culture, where dissent

was not encouraged. Front-line staff with the ramp vendor were poorly paid relative to industry standards,

which resulted in very high turnover rates. Their inexperienced employees were trying unsuccessfully to

operate a complex and demanding operational system that was fully understood by only the more

experienced ramp workers.

Adding to the operational challenges emerging with the ramp vendor, the remaining Alaska employees

were reluctant to trust and support the ramp vendor's employees. Outsourcing to the ramp vendor created

a ripple effect on the remaining employees who had working, familial or social relationships with the nowterminated

Alaska ramp workers; the remaining workers experienced downstream effects on their morale

and productivity. Indeed, some Alaska pilots even refused to pull into gates prepped by the ramp vendor or

take off if their plane had been loaded by the ramp vendor.

The ramp outsourcing left the so-called "above-wing staff" demoralized. As one employee stated:

We had to counsel employees who were in tears because their dad or their husband was suddenly

out of a job. "How could Alaska do this to us?" they would keep asking. Everyone had survivors'

guilt and when multiple call center employees break down in tears throughout the day, you can just

watch call volumes escalate within minutes.

Furthermore, management, having only distantly supervised unionized ramp operations for years, were

unable to manage the ramp vendor because they simply didn't understand how to work with ramp operations

"below the wing." In the past, management had avoided even walking through the ramp; therefore, they

had little knowledge of ramp operations or how to avoid the operational failures that were becoming daily

events.

The backwash from the labour actions of 2004 and 2005 had a profound negative effect on the company's

operational performance. In 2005, on-time departures fell to an all-time low of 49.8 per cent, . The ramp

vendor was mishandling up to 20 out of 100 bags, and wait times at the carousel at times reached up to two

hours. All of this disruption made passengers livid. Several times, the airport police intervened with irate

passengers in the baggage claim area who became hostile toward Alaska employees. Pilots began reporting

minor maintenance problems at the last minute and were slower than normal to taxi, causing further

departure delays and extended flight times. The result was a devastating work slowdown that demonstrated

the pivotal role of pilots and crews in the towering success or failure of an airline.

In the face of these operational challenges, long-time customers were experiencing the brunt of these

problems leading one employee to complain that, "We were destroying customers' businesses. Agents were

breaking down crying in front of customers because, months into this, we still didn't have answers for

them."

With the overall meltdown occurring in operations and the ramp outsourcing imploding in front of

everyone's eyes, Alaska staff were overscheduled, running in every direction just to put out fires and keep

the airline going on a daily basis. All of these problems resulted in high levels of animosity exhibited by

the different employee groups; many simply asked, "Why won't corporate fix this?" However, since

management had wholly underestimated the negative impacts of outsourcing the ramp operations, they too

were unprepared to handle the increasing problems confronting all aspects of their business. Adding more

insult to injury, Alaska employees were now afraid they would be the next group to be outsourced, which

led to another unintended consequence, whereby employee turnover, which at Alaska had been typically

below airline industry standards, could rise unexpectedly. The existing turnover rates and operational

challenges were forcing Alaska to bring new hires up to speed faster, placing added pressure on everyone

within Alaska to perform, which was fuelling even higher levels of burnout.

Just one month after the Alaska ramp workers were locked out, the ramp operations had nearly imploded.

And these conditions continued from the beginning of the summer of 2005 throughout the end of that year

and into the critical holiday travel season. As one employee stated, "Seattle was on fire." The combination of extremely high labour distrust and burn out, highly siloed work units, pilot slowdowns and the ramp

imploding resulted in a perilous spiral downward for the airline.

TRANSITIONAL LEADERSHIP AND THE TROUBLED TASK FORCE

In response to the difficulties at the Seattle hub, a seasoned executive, Glenn Johnson, was placed on special

assignment as temporary VP of Customer Service for 90 days, from June through September 2005, to

diagnose the situation in Seattle. Following that, he set up a task force to begin trouble-shooting the

operational issues. The task force then became a forum for exchanging information among all the various

operating groups and taking a higher-level look at the situation in an effort to carve out some small chunks

of progress and make some headway. The task force was composed of managing directors and was known

as the Mad Dog Group or MD Group — a double entendre, as MD was the abbreviation for managing

directors and Mad Dog was a nickname for the MD-80 jet. Kevin Finan, VP of Operations, originally ran

the Mad Dog Group, with Glenn Johnson later stepping in to lead.

By 2007, the Mad Dog task force had still not fixed the operational problems to any significant degree. It

was making small and big changes, but not obtaining big results. The task force was only able to get Alaska

operations back to the low end of normal on such key metrics as on-time departures, baggage delivery and

baggage loss. The task force stabilized Alaska and took it out of day-to-day crisis mode; however,

operations were still fragile at best, the ramp was still highly volatile and pilots were still resistant to

requests to make changes.

The 2007 Planning Session

The last two decades of the 20th century were marked by profitability and growth due to low fuel costs and

a strong economy in spite of a culture within Alaska that tolerated mediocre operational performance. Yet,

the first seven years of the new millennium had presented new challenges with the fuel costs on the rise

since mid-1999, the crash of Flight 261 in January 2000, the dot-com bubble burst in early 2001 and 9/11

later that same year. The internal cost savings and restructuring under the 2010 Plan and the labour cost

savings from the new 2005 pilot wage agreement helped steer the airline clear of bankruptcy — a route

taken between 2002 and 2006 by US Airways, Aloha Airlines, United Airlines, Northwest Airlines and

Delta Airlines. The outsourcing of the ramp and the implosion of Seattle ramp operations, however,

contributed to a bumpy ride of losses and profits. Affording some cushioning along this bumpy ride was a

strong reserve of cash accrued over the years of profitability. Still, the downstream impacts of these events

took an unexpected toll on employee morale, operational efficiency and the customer experience. Thus,

gains that were expected from "right sizing" and other measures were not hitting the expected performance

mark when executives gathered in autumn 2007 for their multi-day annual planning session.

Since becoming CEO in 2002, Bill Ayer had worked intentionally to build an executive team that would

share their honest opinions and have "fierce" conversations, qualities counter to Alaska's corporate culture,

which had been built on being nice to people, and counter to the local Seattle culture known as "Northwest

Nice." Ayer's efforts were paying off during this retreat. The executives felt safe to ask hard, provocative

questions.

As mentioned in the introduction, a turning point in the 2007 meeting came when a subset of officers

reviewed the group's progress at the end of a long day of discussions and then adjusted plans for the

forthcoming day. The following question, posed that night among a few and repeated to the larger group

the next day as a springboard for discussion, sparked a critical conversation:

What would a Carlyle or a Warren Buffet do? Imagine a big conglomerate has just come in and

bought the airline. We're a $3 billion company making a little money; our reputation with our

customers has taken a beating; we've had major problems with Seattle, our main hub; and we've

had problems with two large groups of employees. What would Carlyle do because [it is]

emotionally unattached to this?

To review, the new direction that emerged included three conclusions:

1. We need to fix the Seattle hub first before trying to fix the whole system.

2. We need a higher-level person to devote 100 per cent of time to fixing the Seattle hub.

3. This person needs to be able to cross boundaries and break through silos.

SELECTING A CHANGE LEADER

And who would be this new "VP of Seattle Operations?" A few people had expressed interest and were

intrigued at the prospect of this challenge. Among the interested was the current Staff VP of Operations,

Ben Minicucci. He had joined Alaska in May 2004, after having worked for six years for Air Canada,

running all the heavy maintenance for Canada's largest airline. Prior to that, Minicucci had spent 14 years

in maintenance and aerospace engineering at the Royal Military College of Canada (similar to West Point

or the US Air Force Academy), and had a bachelor's and master's degree in mechanical engineering, with

an emphasis on control systems engineering. This discipline looked closely at inputs in a dynamic system

and used measurement, comparison and correction to stabilize a system. Two classic examples of control

systems engineering in action are a car's cruise control and a home's thermostat.

Minicucci used the thermostat metaphor on a larger scale to consider how he might tackle the process and

people issues within the Seattle hub. He captured his ideas in a proposal, which he submitted to Johnson.

His approach involved three guiding principles:

? Leading with passion

? Driving process accountability

? Managing with data

What Minicucci had noticed was that, up to now, brute force (applying a lot of people and a lot of resources)

had been used to get the operation working. However, this approach had gained a limited amount of ground

and was neither sustainable nor repeatable. He also noticed people working hard, but pulling in different

directions. So the message he began to lead with and would continue to repeat — and which indeed became

his "passion" — was cross-divisional collaboration and alignment.

Glenn Johnson, Minicucci's boss and the seasoned executive who had created the original Mad Dog task

force, reviewed the proposal, and the executive team conferred.

The failure of the 2005 Mad Dog task force to address the root causes of Alaska's operational tailspin made

it clear and obvious that what was needed was large-scale systematic change that covered more than simply

fixing a few process problems. The dysfunctional aspects of the culture at Alaska needed to fundamentally

change to address the ongoing problems and threats. It was not just about fixing things that were broken; it

was about getting people to reset their expectations of what it meant to be a first-class airline.

The ineffectiveness of the Mad Dog task force could be traced to two reasons. First, the task force had been

given no real authority. The best the task force could do was to make suggestions, but it lacked the authority

to actually implement solutions. Second, the task force had focused only on outputs and outcomes. It had

not focused on inputs or upstream metrics on processes that would improve on quality, service and delivery.

It made sense to putting Minicucci at the helm because of his ability to look critically at the inputs of a

system and his grasp of the cultural aspects of the needed change. After his appointment to the new role,

Minicucci set out to achieve cross-divisional collaboration and alignment, steering his course using the

three guiding principles outlined in his proposal. Minicucci needed to act decisively as he set out to change

the structure, process and the culture.

PINPOINTING THE PROBLEMS

Contractor Relations

The contract with the ramp vendor allowed Alaska management to get "up close and personal" with

feedback and demands for performance improvement. Previously, the union-management protocol for

managers being hands-off had gone to such an extreme that managers would not even walk through the

ramp area, nor would they have known how to address the ramp's challenges and problems. This new level

of managerial involvement and insight into the details of the ramp operation, combined with the ramp

vendor's desire for a lasting vendor-airline relationship, were pivotal to achieving success. However,

reaching a positive outcome would require a significant change of mindset, both in management and the

ramp vendor, whose culture was command and control, not in developing ownership.

To initiate the strategic changes, Minicucci formed a Vendor Oversight Group, which produced a 180-point

change plan to be managed with the ramp vendor. In the early days, Alaska was hard on the ramp vendor,

implementing a system of penalties and bonuses. As one employee said, "We really took the boots to the

ramp vendor. But as we saw it, we were the customer and they had to meet our demands." In the first three

months, $150,000 in penalties were levied against the ramp vendor. The idea was that the VP of Seattle

Operations would begin to use data to inform the ramp vendor why operational debacles had occurred on

the ramp. Using this strategy allowed Alaska to teach the ramp vendor what was causing problems with the

ramp operations. However, the ramp vendor would not necessarily agree with the causes, nor would they

adopt the necessary changes. Simply using brute force to change was insufficient to develop exemplary

service.

Laser Focus on Hub Operations

Early on, Minicucci assembled a matrixed team of directors and managers who each had a personal stake

in a different aspect of day-to-day operations (e.g., line maintenance, cargo, airport customer service and

pilots). He also enlisted the support of a program manager from the Project Management Office and

resources from the Lean Process Improvement and IT departments. This cross-functional team met every

day for at least 90 minutes — sometimes for as long as three hours to analyze performance and identify

root causes for such failures as delays and mishandled bags. Attendance was mandatory. This level of

attention and commitment to results was a game changer.

These long meetings first thing every morning involved the director of Line Maintenance, the manager of

Cargo, the base chief pilot, the customer service airports director and the new program manager. Several of

these individuals had previously been part of the Mad Dog task force. What was different about these meetings was that they were daily and mandatory; when these staff were unable to attend, they were

required to send someone higher up (e.g., their VP) in their place, as the meetings focused on the prior day's

operational performance. Minicucci set out to make these meetings a safe and transparent space for people

to really dig in and honestly explore and discuss the fiascos that were occurring. Importantly, the meetings

were intended to allow people to have difficult, but necessary "fierce conversations" with each other.13

These conversations became affectionately known as "food fights" because of the heated, accusatory

climate that flared up in the early days, as attendees learned to have open and honest debate and to keep

their discussions about the issue and not make it personal.

The focus on operational issues from the prior day forced employees to do their "homework" about the

reasons behind a delay or other issue. The goal was to identify everyone's accountability in the issue — not

to pin it on just the pilots, just the crew, just the cleaning staff, etc. Another key element of the meetings

was that anyone could share or suggest anything, but at the end of the day Minicucci had decision rights on

everything. Thus, these meetings were characterized by both high participation and strong, authoritative

leadership with the high risks associated with each style. The strategy that undergirded these meetings was

contrary to Alaska's culture and operating style.

Balancing Priorities

While Alaska was sharpening its focus on operational efficiency at the Seattle hub, it also retained the

strategic priorities of safety, customer satisfaction and shareholder value. Ironically, the meltdown and

magnitude of annoyed and outright angry customer interactions during the operational efficiency trough of

2005 had forced executive leadership to abandon the tacit assumption that Alaska enjoyed a bottomless

reserve of customer loyalty and goodwill.

Alaska executives understood that increasing on-time departures and arrivals, minimizing lost or delayed

baggage and resolving other operational issues that affected the customer experience were essential to

increasing customer satisfaction value and retaining loyalty. However, these factors were not the only

drivers of customer satisfaction and loyalty. In the 2006 planning session, a dozen or so key initiatives were

identified, each including many supporting initiatives. For example, the planning session drafted the

following key initiative (KI 4) and its supporting initiatives relating specifically to customer service:

KI 4.1: Strengthen our relationship with customers by delivering an easy travel experience across all touch

points

? SI 4.1.a: Develop and achieve consistent service standards

? SI 4.1.b: Engage employees to simplify processes and to fix most persistent customer complaints

? SI 4.1.c: Build customer information infrastructure to better serve customers

? SI 4.1.d: Provide timely and accurate flight information to customers and operational information to

employees

These efforts were undertaken during the time the Mad Dogs were working on operational performance.

One of the organization's "aha moments" at the fall 2007 planning session, the following year, suggested

the need to focus on one thing (the operation) and to deprioritize all other efforts. Around this time, CEO

Bill Ayer was often heard saying, "We need to focus on a few things and do them well." In the fall of 2007, Alaska declared that "fixing Seattle" was the one-and-only key initiative. The other "running-the-business"

initiatives were demoted to a much lower priority.

One such running-the-business initiative that began at roughly the same time as the "Fix Seattle" operational

initiative was underway was the Voice of the Customer, which put customer emotions into real terms. This

effort included bringing in a cross-divisional group of front-line employees as subject-matter experts

familiar with customer concerns. This team was helpful in voicing several customer issues that evolved into

supported initiatives. However, as long as major operational issues remained, the organization understood

that customer service strategies could not be realized.

Report Cards: A Metrics Mindset

Among the root causes of the operational problem were the absence of standard work processes and

mechanisms for measuring interim performance goals (i.e., Alaska could measure on-time performance,

but did not measure such upstream events as boarding, catering and door closure). To address these

omissions, Minicucci implemented report cards, a practice he had used extensively at Air Canada. The

report card, which recorded and tracked operations metrics on a daily or even hourly basis, played a critical

role in the daily meetings; they were highly quantitative and, to the extent possible, reported the facts

associated with operational challenges. As such, if a report card showed that a plane pushed back from the

gate three minutes late, then the team could drill down into the events leading up to those important three

minutes at the gate, on the ramp, in the cockpit, with food service vendors and so on.

The report cards, implemented first for the ramp vendor and the ramp, where the most critical problems

occurred, held these areas accountable. Minicucci commented on the detail included in the report cards:

"They have over 70 elements and we take more than 50,000 observation points a month on 156 of the ramp

vendor operators, just to give you a sense of how scrutinized our ramp is, even today." The report cards

also promoted a system for coordinated metrics and company-wide goals based on those collectively

understood metrics. Previously, every department held its own data and metrics, making it difficult to

compare data across departments. This sharing of data not only involved an operational or process change

but also represented a fundamental change in culture and leadership.

Going Lean

Before Minicucci took charge of the Seattle hub in late 2007, lean methodology had been introduced by

Glenn Johnson, then the executive vice-president of Ground Operations over airport services, maintenance

and engineering, who had studied the lean methodology with Toyota in Japan and then hired a director of

Lean from Boeing. Gate and ramp operations had been improved by using the 5Ss, the workplace

organization method that applies five Japanese words: seiri, seiton, seiso, seiketsu and shitsuke. The English

rendering of these words also started with the letter "S": sorting, straightening, systematic cleaning,

standardizing and sustaining. The list describes how to organize a workspace for efficiency and

effectiveness by identifying and storing the items used, maintaining the area and items, and sustaining the

new order.

Starting in 2005 and continuing for the next five years, an increasing number and range of operational

improvement events took place (see Exhibit 7). An additional six Lean projects were implemented in 2010.

Improvements were implemented at a faster pace, when in June 2008, Alaska began applying lean

techniques extensively to the ramp and gate operations. Additional lean concepts and processes were introduced, and the outcomes of various operational improvement events were reviewed in the daily

operations meetings. The director of the Lean Six Sigma Office used videos and other observational

techniques to monitor live processes at the gate and on the ramp, in an effort to identify how to make the

activities smoother, faster and more reliable. So, in addition to the cultural change reinforcing direct

communication and shared accountability, Alaska invoked a totally new way of thinking about operations.

Additionally, the organization identified the customer experience value chain depicted in Exhibit 8,

beginning with the booking and reissue process, through to the baggage claim experience. Workshops, six

sigma projects and lean office consults took place up and down the value chain, resulting in numerous

process improvements.

Raising the Bar

Tacitly, Alaska's broad and long-standing acceptance of mediocrity from years of being in the middle of

the performance pack supported the airline's lack of accountability for monitoring and improving its

performance, which had existed before the efforts to "Fix Seattle." Employees had simply passed around

blame to each other with little risk of any consequences. For example, if a plane pulled out late, the gate

agents might blame the pilots, the pilots might blame the mechanics for not having the plane ready, the

mechanics might blame the ramp guys for not moving their equipment out of the way and so on. Just a few

years earlier, during an officers' planning session, in 2002, one of the top management team members

proposed, and the group agreed, that, "It would cost too much to be number one and wasn't worth it." Of

course, this attitude ignored the costs of delays and other operational inefficiencies at the hub and the

swelling ripple effects down the line for connecting passengers, crews and planes in other cities. By 2010,

this assumption had not only been challenged but had been proven false by Alaska's strong performance in

2008, which led to the airline achieving the number-one spot in the JD Power and Associates' North

America Airline Satisfaction Studies. Alaska would go on to rate the highest in "Customer Satisfaction

Among Traditional Network Carriers in North America" for six consecutive years, from 2008 to 2013. In

2009, TravelAge West Magazine awarded Alaska a Wave Award for Best Domestic Airline. In 2010,

Logistic Management magazine awarded Alaska its Quest for Quality award. In 2010 and 2011, FlightStats,

a flight and airport information services organization, named Alaska the winner of its North American

arrival performance award in recognition of sustained operational excellence. In 2011, Alaska Airlines

achieved an on-time performance record of 88 per cent, compared with the average on-time performance

of 76 per cent among other North American airlines.

In FlightStats's airport categories, Seattle-Tacoma International Airport (SEA), Alaska's hub, also won the

number-one spot for departure performance among major international airports for the second year in a

row. SEA achieved a 2011 on-time performance record of 86 per cent — due in part to Alaska Airlines'

stellar on-time performance. For all other airports in this category, the average on-time performance was

71 per cent.

However, even when things began to improve as a result of the focus on operational efficiency, the culture

of mediocrity continued to lurk in the background. As one interviewee said, "It was hard to get people to

see it's not just about getting back to where we were, but moving beyond. People were still OK with being

number five instead of number one." Minicucci's insistence on a concerted effort to work across groups

reset expectations and raised the bar.

Giving credence to this new way of thinking and performing, CEO Bill Ayer and other executives

repeatedly reinforced the importance of the "Fix Seattle" initiative at town hall meetings and in numerous

internal communications aimed at re-engaging employees. With the addition of new routes to Hawaii in late 2007, taking advantage of the impending gap in the market left by the struggling Aloha Airlines (which

had filed for bankruptcy in March 2008 and eventually discontinued passenger transport operations), Alaska

was showing further determination to do more than merely maintain the status quo — it was showing that

the airline could grow.

Some efforts were successful early on and were critical to keeping the momentum for the change initiative

moving forward. As noted by one employee, "We knew we had to get results in the first six months or the

entire initiative to fix Seattle would have failed." Stabilizing the ramp quickly was essential to the longterm

success of the "Fix Seattle" imperative. Fixing the ramp vendor structure, which some people thought

was impossible to improve, demonstrated that the approach Minicucci and his team were implementing

would work — i.e., focusing on incremental inputs and daily variances, not just the Department of

Transportation tallies of on-time departures and arrivals for a given week or month.

Improving the ramp vendor's performance also improved working conditions for the pilots, who slowly

began to stabilize around a new way of operating. Delays were reduced, and planes were spending less time

on the ground. Financially, this approach led to significant savings in terms of extra aircraft time. By 2011,

Alaska's flights, as measured by DOT (arrivals within 15 minutes), approached 90 per cent on time — up

from the pre-meltdown 75 to 80 per cent and well above the June 2005 level of 50 per cent. Losing two out

of every 1,000 customers due to service issues would be the new norm in 2011, down from five per 1,000

pre-meltdown and the peak of 20 per 1,000 in 2005.

Alaska showed that much improvement was possible in a fairly short period of time through both the

application of lean techniques and the power of accountability and focus. With the hub under control, efforts

in the second decade of the new millennium could focus on increasing profitability through improving

customer loyalty, increasing market share and maintaining control on efficiency and costs.

By 2010, the Seattle hub had finally stabilized. In many ways, Alaska had changed some significant and

core aspects of its culture and climate. Report cards had become a common point of reference. As soon as

a plane landed, flight attendants started thinking "tick-tick-tick," indicating their awareness of the time and

the coordinated effort needed to turn the plane around. The daily operations meetings no longer represented

a burden, and staff actually resisted the suggestion to reduce their frequency to only three days each week.

Challenging others in the meeting was seen as a focus on enhancing processes not on exacting blame or

being defensive. Bi-weekly supervisor meetings were scheduled because everyone realized the critical

importance of communication. "Quality control is in our DNA now," and new hires simply accept this

approach as the way things are, not as an intervention of initiative.

Homework Answers

Answer #1

The Alaska Airlines must employ the following tools to increase their awareness of internal and external issues:

  • Balanced Scorecard to have a business evaluation on 4 perspectives - financial, customer, internal business process, learning and growth
  • Porter’s 5 forces analysis to have an overall snapshot of external business environment
  • Better communication lines within the business to improve team collaboration
  • SWOT Matrix analysis to identify the areas in which an unit is performing well. The implementation of this model also highlights the areas of improvement and opportunities.
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