Classic Airlines Nine-Step Cost Reduction Plan

Introduction

Classic Airlines is currently the world's fifth-largest airline, 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, and rising costs of fuel and labor. Destructive press reports coupled with low employee morale have prompted Classic's Board of Directors to require a 15 percent cost reduction over the next 18 months. Management must act quickly to implement a nine-step problem-solving method to overcome these obstacles and deliver solutions that meet the cost-cutting mandate.

The nine-step problem-solving method consists of: (1) developing a problem statement; (2) identifying the potential cause of the problem; (3) verifying the likely causes by gathering data; (4) identifying possible solutions; (5) evaluating alternative solutions; (6) determining the best solution; (7) identifying and assessing the risks; (8) implementing the solution; and (9) evaluating the results. The following plan has been prepared using these steps.

Describing the Situation and Root Causes

Classic Airlines is distressed because of self-inflicted operational problems. The company expanded too quickly and produced a financial crisis with a domino effect, leading to falling stock prices, declining customer loyalty, and low employee morale. Additionally, the media has consistently focused on rising fuel and labor costs across the airline industry. As a result, the Board of Directors has called for a 15 percent across-the-board cost reduction over the next 18 months.

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

Classic's rewards program is more restrictive than those offered by its competitors. Frequent fliers are limited to only ten seats per flight, and some direct international flights are excluded from the program entirely. In addition, the program requires more miles for reward eligibility and 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 being included with every rewards flight.

Employee morale is deteriorating because of negative press and ongoing customer complaints about prices and other operational issues. Explaining the rewards policy to customers is nearly impossible for employees, resulting in frustration on both sides. The time and energy invested in employee training has not benefited Classic or its customers. Employees lack the authority to make provisions for loyal customers who struggle to redeem reward points.

The CRM system has also undermined the quality of customer service. The system was intended to reduce the amount of time representatives spend on the phone and to drive customers to the web to increase automation. It has the potential to seamlessly integrate the phone channel with the web channel; however, this feature has not been properly incorporated, leaving Classic unable to determine whether a customer has interacted through both channels.

Furthermore, Classic's leadership team is not aligned with the marketing department. The CEO and CFO have previously followed the marketing department's advice by reducing flight costs in hopes of winning customers back from competitors. The resulting slow price reductions eventually triggered a price war with competitors, and the leadership team's focus on numbers has produced tunnel vision and a lack of customer focus.

Verifying Causes Through Data

Classic is among the few airlines without an alliance agreement. The absence of an alliance limits the flight options available to customers and restricts their ability to accumulate and redeem rewards. Classic's high unit costs are directly related to this lack of growth. By remaining outside any alliance, the airline is forfeiting global presence. Additionally, Classic implemented a fuel-hedging program that locked in fuel prices for the next year without accounting for the group rates an alliance would provide.

Rewards customers were interviewed to assess service and membership perceptions and to rate the effectiveness of the program. The results showed that 51 percent were dissatisfied with the service upgrades they received and 38 percent were dissatisfied with the number of miles earned per flight. Customer interviews also revealed that 56 percent of rewards members were dissatisfied with the options available through the redemption program, and 68 percent 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 built around the wrong performance metrics and was generally ineffective. The system measures the amount of time a customer spends on the phone without any regard for customer satisfaction. Employees also believed that senior management was largely unaware of how frequently customers complained. Corporate management could have incorporated employee feedback to learn how to repair client relationships. Overall, employees were satisfied with their salaries but were easily persuaded to join other companies to escape the stress associated with their positions. A high turnover rate has consequently led to excessive recruitment and training costs.