June 1, 2017

Given the current stability and sustained profitability of the U.S. airline industry, it’s easy to forget that the sector has been challenged for much of the nearly 40 years since Congress deregulated the business. Prior to 1978, the Federal Government managed competition by controlling the number of carriers authorized to fly, mandated the routes airlines could serve, and set fares with a cost-plus formula that sought to ensure reasonable but not excessive profits. The system worked, but the result was that flying was expensive and only for the rich. Since deregulation, the quest has been for equilibrium. Older airlines have reduced expense (largely through the blunt instrument of Chapter 11) to compete with new lower-cost producers; the process has been messy and difficult for a range of stakeholders, especially long-time employees.

Since deregulation, consolidation through merger has been a dominant, though often misunderstood, strategy. Unlike many industries, the goal is not economies of scale (reducing expense through greater mass) but economies of scope – larger networks generate greater revenues, and the function is exponential, not linear.

Immediately after 1978, the industry creed became “grow or die,” and North Central Airlines, a “local-service” provider in the Upper Midwest, became one of the earliest to expand through merger. In 1979, North Central acquired Southern Airways, another local-service carrier, creating Republic Airlines (not to be confused with the current Republic Airline, a franchise operator based in Indianapolis nor its parent, Republic Airways Holdings, Inc.) The following year, Republic bought Hughes Airwest, which itself was a late-1960s consolidation of three smaller airlines in the West (during the regulated period, scheduled airlines were designated trunk – larger firms like Eastern or United – or local service, serving smaller markets, often with federal subsidy in an effort to provide ubiquity).

Though conceptually sound, integration of the companies into Republic Airlines was troubled. The combined entity struggled with network realignment and rising costs, particularly for labor, and accumulated net losses of $220 million from 1980-83. Investors and lenders clamored for change, and recognized the limits of an executive team that led during the easier regulated era.

Under pressure in early 1984, the board hired Stephen Wolf, a young but experienced executive who had been at American, Pan Am, and briefly at Continental. Wolf had a reputation for decisiveness, keen understanding of the changing dynamic in the industry, the ability to work well with unions, and a strong moral compass. Republic’s board gave him broad latitude, and he set to work.

Wolf began building a new leadership team – almost exclusively from the outside – but his immediate priority was expense reduction. Within six months of arriving, he had secured agreement with all employees for a 15% pay cut, wage freezes, and other relief, in exchange for profit sharing and stock ownership. Union and management interests aligned in common cause, a huge early win.

Saving money gave Republic breathing room, but longer-term viability depended on increased revenue. Network realignment was the key. The old leadership mistakenly thought seven small hubs were sustainable with just 165 planes, but Wolf and his team began to shift flying and focus on just three, in Minneapolis/St. Paul, Detroit, and Memphis – away from the West, where low-cost carriers were growing. Proof of the new strategy came fast: traffic in May 1985 increased 31% on only a 7% increase in capacity. With the network rationalized, Republic added new destinations from the three hubs and ordered new aircraft. It also followed other carriers by contracting with lower-cost franchise operators to operate smaller aircraft to smaller communities.

Labor-cost savings and network restructuring were pivotal, but five other marketing initiatives also helped rebuild the airline:

• Better revenue management, using nascent techniques for selling the right seat at the right time at the right price
• Product and service improvements, including a much-better first class product and investment in customer-service training for airport and inflight teams.
• Enhanced loyalty program, renamed “Perks,” with new hotel and car-rental partners, as well as collaboration with Pan Am and Western Airlines to enable members to redeem miles for travel overseas.
• Brand modernization, with a new, contemporary logo, aircraft livery, and brand identity across the system.
• Energized distribution strategy, with a rationalized field sales team, focus on better travel-agency relationships and optimized sales presence in the computerized selling systems they used (but were owned by airline competitors), incentive commissions for top agency producers, and a big commitment to securing corporate business, like GM in Detroit.

The last element of the turnaround was an effort to transform company culture. In this case, change meant convincing longtime frontline and management employees that the regulated-industry mindset was obsolete, as well as focusing more broadly on ways of thinking and doing that have long hobbled airlines and other operational organizations. Republic promoted a simple “mantra” internally:

Consistency | Quality | Productivity | Change

Wolf especially recognized the destructiveness of hierarchy, and implemented a number of measures to empower frontline employees to improve service. “Ask why” became a rallying cry.

Within two years, the new leadership team had transformed a money-losing carrier to the nation’s second most profitable airline. What was the way forward? Working quietly, Wolf wrote a business plan and secured financing to acquire the much-bigger Northwest Airlines, focusing on their strong balance sheet, large long-range fleet, and transpacific franchise granted after World War II (before and after this attempt, a number of smaller airlines succeeded in acquiring larger companies; two recent examples are Continental-United and US Airways-American Airlines). Within two weeks of proposing the deal to Northwest CEO Steven Rothmeier, the exact opposite happened – the NWA board approved acquiring Republic for $884 million. The transaction closed in August 1986 and combined operations began on October 1. That consolidation took many years to succeed, but more than three decades later, the Republic turnaround remains an example of astute transport management.

The views expressed above are those of the author and do not necessarily reflect the views of the Eno Center for Transportation.

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Dr. Rob Britton is an adjunct marketing professor at Georgetown University, and principal of AirLearn, an aviation consultancy. He worked for Republic and Northwest, then for American Airlines for 22 years. This essay is based on his case study published by RealWorldLeadership, www.realworldleadership.org.