Discover more from Course Notes: Continuous Business Learning
Frequent Flyers and New CEOs
Why the Survival of the Airlines Depends on Frequent Flyer Programs, (Byrne Hobart, 2020-09-29)
Airlines shouldn’t expect things to go back to normal (whatever that might be) until several years later, as the damage done is just too big.
This poses a risk to their loyalty programs that were driving most of the profits and brought customers on planes. For the US airlines their loyalty programs are worth more than the entire firms, so technically the flying business is worth negative billions $s.
However, one can’t just ground all the planes forever and enjoy milking its loyalty program, as the value (i.e. why the users signed up in the first place) is gone.
People choose loyalty programs because of certain routes, and if these routes disappear or shrink, so do the members. And these routes don’t have to be to the business destination: many of them are paid for with miles earned by business travel in the working months.
With a typical (although outdated) hub-and-spoke model the network effect diminishes when routes are cut, and the value of the loyalty program goes down – a huge revenue risk.
When it’s “us vs. them” in the executive suite (S+B, 2020-10-01)
Two Schools of Thought
School 1. An incoming CEO should come with their team and clear the C-level ranks almost immediately. Enact operational and cultural changes, start from clean slate and get rid of those focusing on the status quo.
School 2. Don’t make changes unless you understand what’s going on and understand who knows what and who’s useful or not.
Succession usually causes a dip in performance, made worse by fighting “old boys” and the “new kids”. [MK: This is especially ugly when the firm’s financial performance is lagging, and the “new kids” look at themselves as “saviours”, permanently establishing the “us vs them” mentality instead of “we’re all in it together”.]
Incumbent execs’ value is in their knowledge of the established strategies and practices; newcomers are expected to come up with contributing new perspectives and fresh ideas. These are two opposite mandates that more often than not hurt the business.
But There’s Hope
The “warring” fractions can actually balance themselves for the benefit of the company, but it depends on the financial situation and whether the ex-CEO was fired or stepped down as part of the scheduled succession.
In stable circumstances when the new CEO is a follower of the ex-CEO, almost nothing changes and sometimes improves slightly. Even the “new kids” fraction doesn’t break things too much.
If the new CEO was just parachuted by the Board as part of the succession or after firing the ex-CEO, results are usually lower, and the fractional war in the times of financial difficulties leads to lower return on assets (RoA).
CEO succession is a shock to the company in itself, and replacing long-serving top managers doesn’t make things better in the high-pressure transition periods.