After my rant on the airlines earlier this week, and to demonstrate that not all airlines are on the wrong track, here is an excellent article from Fast Company about Richard Branson, and how he has made Virgin Atlantic such an overwhelming success.
This article mentions Southwest Airlines as an exception to the failing airline industry by pointing to their historically high profit margins; however, what's missing from that equation is any mention that Southwest made a decision early on to hedge their fuel costs (The cost of jet fuel is second only to labor as the greatest expense for any airline). Southwest's was a gamble that paid off, enabling them to offer the lowest airfares in the industry. Over the years when their fuel costs were hedged, the resulting low airfares dramatically increased Southwest's market share. Most importantly, hedging allowed Southwest to associated their brand with consistent and dramatically discounted fairs.
Hedging strategies are risky, though...sometimes very risky--and often leave companies vulnerable to corrupt practices and even collapse when their bet doesn't pay off--Enron, stands as the most visible case-in-point. Southwest Airlines is now searching for more ways it can hedge jet fuel prices (there are many variations) to minimize and stabilize the cost of their fuel. For all of its apparent benefits, hedging isn't a good long-term strategy--it's a survival strategy that is artificial and inflationary. What happens, for instance, if the price of oil goes down rather than up? Here's the real lesson to hedging fuel costs and other artificial strategies (passenger bill of rights, etc.): the best long-term business models consistently focus on quality. If you focus relentlessly on your customer, you'll never need to roll the dice for market share.
So, back to Sir Richard--here is a CEO who understands what it means to lead a company to success by focusing on his customers (passengers) and the substantive reforms necessary to create a positive, memorable flying experience. Unless Southwest and the other domestic U.S. Airlines begin to follow some of these tenets found in Virgin Atlantic's playbook, their future, I'd venture to say, is precarious indeed.
In the meantime, Virgin Atlantic passengers will keep coming back for more....
My emphasis to the article below added
The Enlightenment of Richard Branson
In a world where companies routinely bedevil customers, the Virgin chief is an angel, because he truly puts customers first.
From: Issue 108 | September 2006 | Page 48 | By: Alan Deutschman
Sir Richard Branson still remembers how he was first received by the establishment powers when he started Virgin Atlantic Airways 22 years ago. "The head of American Airlines said, 'What does Richard Branson know about the airline business? He comes from the entertainment business.' But that was exactly what the airline business needed."
He has been right, of course. With the exception of Southwest, all of the look-alike U.S. carriers wound up filing for bankruptcy or going belly up. Meanwhile, Virgin, with its fun-loving flight attendants who seem to be hosting a party, is still thriving (Note: This article incorrectly implied that all the traditional major U.S. airlines have filed for bankruptcy or gone "belly up." American Airlines has done neither).
What Branson understood two decades ago is just now beginning to be embraced by other corporate leaders: We should be having fun when we're spending our money. In a sense, Branson has never left the entertainment business, and that's why he's kicking off our third annual Customers First awards. As his empire has expanded--from a recording label and a chain of music stores to what became his fiercest passion, airlines, as well as an astonishing array of some 200 other eclectic ventures worldwide--his method has remained the same. He takes on intransigent industries that treat customers inexplicably badly and shows that he can offer not only a better deal but a truly entertaining experience. The approach has made Sir Richard a multibillionaire and Virgin a beloved brand--as well as a $10 billion-a-year operation.
Throughout Virgin's history, many of its most propitious ideas, small and large, have sprung from Branson's wants and needs as a customer himself. "The reason I went into business originally," he says, "was not because I thought that I could make a lot of money, but because the experiences I had personally with businesses were dire and I wanted to create an experience that I and my friends could enjoy."
On one trip, he recalls, "I wanted to talk to the pretty girl in the next aisle, but I was stuck in my seat the entire flight." Branson's frustration inspired him to introduce stand-up bars in Virgin's cabins. After his wife's manicurist suggested offering nail treatments and massages onboard, Branson didn't bother with market research. "Sounds like a great idea," he said. "Screw it, let's do it." Now Virgin has 700 therapists on staff.
Putting customers first is hard in a corporate environment that understands only cost, efficiency, and business as it has always been done. That was the case when Branson thought flyers would love seatback video screens that would let them pick the movies they wanted to see onboard rather than having to wait for whatever film the airline had picked. "Seatback videos are complicated, expensive things to do," he recalls. "The cost was around $8 million, and the airline was quite stretched at the time. I went to the bank, and they wouldn't give us the money. So I rang up the head of Boeing and said that we wanted to order some new 747s and could he give us seatback videos, and he said yes. We were able to borrow $2 billion to buy a new fleet of planes, but not $8 million for seatback videos."
Airlines are not the only industry where the big players exist in a weird state of mediocre parity because they put their own interests ahead of their customers'. Virgin Active, Branson's European chain of health clubs, lets members pay when they go rather than locking them up with a contract. Similarly, in the mobile-phone business, Virgin Mobile USA has attracted 4 million customers by offering prepaid cards mainly to young people who couldn't afford costly long-term service plans. The lesson: Don't rip people off, and they'll happily stay your customer.
A lot of executives consistently do what's easiest or cheapest for the business rather than the people paying the freight. Branson offers an alternative: Take a look at your business and ask yourself, "Is this how I would want to be treated if I were the customer?"