Classic Airlines a Nine Step Cost Reduction Essay

Excerpt from Essay :

Classic Airlines

A Nine Step Cost Reduction Plan

Describe the Situation

Identifying the Potential Cause of the Problem

Verifying the Likely Causes by Gathering Data

Identifying Possible Solutions

Evaluating Alternative Solutions

Determining the Best Solution

Identifying and Assessing the Risks

Implementing the Solution

Evaluate the Results

Classic Airlines is currently the world's fifth largest airline which is operating a remarkable 2,300 flights daily to over 240 cities. In the previous period, net profits were roughly $10 million on $8.7 billion in revenues. However, Classic is experiencing negative publicity, declining stock prices, as well as the rising costs of fuel and labor over the past year. Furthermore the destructive reports coupled with low employee morale resulted in Classic's Board of Directors requiring a 15% cost reduction over the next 18 months. Management must quickly act to implement a nine-step problem solving method to overcome the obstacles and provide solutions to meet the cost cutting measures.

The nine-step problem solving method is defined as: step one, developing a problem statement; step two, identifying the potential cause of the problem; step three, verifying the likely causes by gathering data; step four, identifying possible solutions; step five, evaluating alternative solutions; step six, determining the best solution; step seven, identifying and assessing the risks; step eight, implementing the solution; and step nine, evaluating the results ( The following plan has been prepared using these steps.

Step One: Describe the Situation

Classic Airlines is distressed because of self-inflicted operational problems. The company expanded too quickly and produced a financial crisis with a domino effect. This led to falling stock prices, declining customer loyalty, and low employee morale. Additionally, the media has constantly slammed the prices within the airline industry because of increasing fuel and labor costs. Thus, the Board of Directors has called for a 15% across-the-board cost reduction over the next 18 months (University of Phoenix, 2011).

Classic also offers a rewards program to its frequent fliers, however the program is difficult to understand and frustrating for the employees to explain. Classic also recently purchased a Customer Relationship Management (CRM) system to capture valuable information about the customer's experience, but the services features are not well integrated. Poor communication exists between the system's phone and web channels, resulting in duplicate information from customers and collection of inaccurate data. If Classic does not increase sales or decrease costs; the company will be doomed.

Step 2: Identifying the Potential Cause of the Problem

Classic's rewards program is more restrictive than those presented by its competitors. Frequent fliers are apportioned only ten seats per flight and some direct international flights are banned entirely. In addition, Classic's reward program requires more miles for reward eligibility as well as imposes blackout dates during holidays. Rewards can only be redeemed for companion tickets once every two years and pre-boarding passes require the redemption of reward miles rather than accompanying every rewards flight.

Employee morale is deteriorating because of negative press and endless complaints from customers about prices and other operational issues. Explaining the rewards policy to customers is nearly impossible for employees and results in frustration from both sides. The time and energy invested in employee training has not benefited Classic or its customers. Employees do not have the authority to make provisions for loyal customers struggling to redeem reward points.

The CRM system has also obstructed a level of customer service. The system was supposed to decrease the amount of time the representatives spend on the phone or drive customers to the internet to increase automation. The system has the potential to seamlessly integrate the phone channel with the web channel. However, this feature has not been well incorporated in the system creating the inability for Classic to determine if the customer has interacted over both channels (University of Phoenix, 2011).

Furthermore, Classic's leadership team is not in sync with the marketing department. The CEO and CFO have taken the advice of the marketing department in the past by reducing the flight costs in hopes of luring the customers back from the competitors. As a result, the slow measures at price reduction eventually resulted in a price war with competitors. Their focus on numbers has resulted in tunnel vision and lack of customer focus.

Classic is among the few airlines without an alliance agreement. The lack of an alliance from clients limits the flight options available therefore also limits the customer's rewards accumulation and redemption options. The high unit costs for Classic are directly related to lack of growth. Since they are the only airline not in alliance they are forfeiting global presence. In addition, Classic implemented a fuel-hedging program locking in fuel prices for the next year without considering the group rate an alliance would offer.

Step 3: Verifying the Likely Causes by Gathering Data

Reward customers were interviewed to determine service and membership perceptions and rate the effectiveness of the program. The results demonstrated that 51% were dissatisfied with the service upgrades they received and 38% of them are dissatisfied with the number of miles earned per flight. Customer interviews also revealed that 56% of the rewards members are dissatisfied with the options available with the redemption program and 68% would not recommend the program to a friend or colleague.

Employee exit interviews identified a significantly high frustration level. Employees believed the crippled CRM program was designed around the wrong performance metrics and was generally ineffective. The system is used to determine the amount of time the customer is on the phone without any regard to the customer's satisfaction. The employees believed the CEO was oblivious to the frequency of customers' complaints. Corporate management could have considered feedback from the employees to learn how to repair the client relationship. Overall, the employees were satisfied with the salary but were easily swayed to join other companies in order to avoid the stress found in their previous position. Furthermore, a high turnover rate has led to an excessive recruitment and training costs.

Step 4: Identifying Possible Solutions

The Classic Rewards program should be redesigned. There should not be a restricted number of seats for frequent fliers or at least the number of seats should be expanded. The companion ticket option should also be available for redemption at any time and pre-boarding passes should be a complimentary service instead of requiring the redeeming reward points. All of Classic Airlines' flights should qualify for the loyal reward customers.

There are also not sufficient incentives between the three tiers of the program membership. Gold members receive a monthly statement, newsletter, and special promotions from Classic's partners. However, all members should receive the monthly statement, newsletter and special promotions. Another improvement would be to offer one complimentary upgrade to first class each year for silver members and three complimentary upgrades to first class each year for gold members.

Employees should have a process to submit feedback directly to the executive management, either by email or through a face-to-face meeting. Exceptional employee proposals should be recognized at quarterly and staff meetings. Continuing education for the employees, such as in customer service seminars, could work to increase customer satisfaction. In addition, the employees should have the authority to upgrade customers to first class for delays or canceled flights if the situation merits.

The CRM system should integrate both the phone and web channels. Implementing a more comprehensive system will allow Classic to identify the customer as the same person if they use both channels. The system should be revised to make the customer the main focus of the company by assimilating the reservation and customer service functions.

Classic's leaders should collaborate more with the marketing department. They should determine ways to cut costs from other departments to give the marketing department an opportunity to increase loyal customers. The top leaders should consider a leadership retreat or something similar to facilitate teamwork and communication.

Step 5: Evaluating Alternative Solutions

There are alternative solutions to the problems Classic is facing. The rewards program could also focus more on redeeming points for cash or online purchases. Members could also redeem one point per flight-mile with no minimum or maximum miles per roundtrip. To stay competitive with other airlines, a concierge baggage handling for gold members could become a popular alternative.

Employee satisfaction could be increased with weekly management meetings that were conducted effectively. Creating secession plans for management positions generally generates higher morale amongst employees. Finally, designate an employee of the month with special parking and free lunch or some other perk for good performance.

The CRM system should be monitored and managed by the marketing department. Understanding the data and implementing new processes should be their sole responsibility. This will allow marketing to make changes to their plan as needed to focus more on the customer rather than the phone call length.

Another solution would be to form an alliance with another airline that has brand recognition and customer loyalty in the U.S. Classic would be able to offer shared expenses and rally against environmental organizations as a…

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