Hyperefficiency is bad business | financial times

did you have a nice christmas time Probably not if you’ve traveled on Southwest Airlines. The budget airline stranded thousands of passengers in the 10 days between December 21 and 31, causing the vast majority of flight cancellations during the busiest travel season of the year.

While severe weather and outdated crew scheduling software have been cited as reasons for the meltdown, the problem reflects a much larger problem for Southwest in particular, the airline industry in general, and even the American business landscape as a whole. The “efficiency” model of corporate management of the last 40 years is being exhausted.

Southwest is at the sharp end of this spear. The company rose to fame as one of the first airline industry disruptors in the US, offering cheap, no-frills flights and bypassing the usual hub-and-spoke model. Instead of flying through major airports to get to smaller cities, travelers could travel directly from place to place. For years, under Managing Director and co-founder Herb Kelleher, the airline has been a showcase for innovation, delighting customers and employees alike.

But in 2004, when Gary Kelly took over the helm, the employees (later referred to as “cost bearers”) took a back seat to capital management. Kelly financed the operation with a fuel hedging program and focused everyone’s attention on increasing the return on invested capital. Why invest money in updating technology systems when you could do more share buybacks instead? Wall Street rewards companies far more for downsizing and returning profits to investors than for capital expenditures that may not fully pay off for years.

Southwest wasn’t alone in returning as much money as possible to investors rather than investing more in the business. When airlines received a Covid-related bailout early in the pandemic, it did so with a ban on buybacks and dividend payments, as well as layoffs. Both had increased in recent decades as airlines tried to do more with less, hire cheaper staff and sideline older workers with higher pensions.

Even amid the buyback and layoff ban, Southwest continued with a voluntary retirement plan (which incentivized higher-paid employees to leave) and quickly resumed dividend payments after the federal ban on it was lifted in September. And this despite the fact that the pilots’ union was demanding wage increases and better working conditions. Captain Casey Murray, the president of the Southwest Airlines Pilots Association, did a podcast weeks before the holiday disaster and said: “I’m afraid we’re one thunderstorm, one [air traffic control] event, one IT router failure removed from a complete meltdown.”

The same is true of numerous US companies that have worked to increase “efficiency” rather than resilience over the past half-century. Consider the rise and fall of Jack Welch, the former CEO of General Electric who transformed the manufacturing company into a financial institution too big to fail. Or the cost-cutting that led to crises like the Boeing 737 Max crash, Pacific Gas & Electric equipment that caused wildfires in California, and General Motors’ ignition switch recall. All of this related to the balance sheet form of management: being lean and mean, cutting all excess costs, and treating people as metrics to be squeezed.

Certainly, this type of management brought prices down after airline deregulation in the late 1970s and introduced new low-cost competitors. But it also increased concentration (only four airlines own 80 percent of US business), exported repair jobs to less well-regulated countries like El Salvador, Mexico and China, and led to lower salaries and heavier workloads for airline employees. This is one of the main reasons why flying is so troublesome these days (especially in the US).

The financialization of airlines in general, and the South West in particular, may have peaked. It’s hard to imagine efficiency going much further when seats are barely big enough for the human body, companies charge for snacks and even drinks, sell more tickets than they have to service planes (another financial engineering tactic often backfires) and dealing with technological failure infrastructure.

I expect Transport Secretary Pete Buttigieg, who has already said he will make “extraordinary efforts” to allow consumers to be reimbursed for canceled flights, will also come under greater pressure from things like technological capacity and price-gouging in the industry to investigate. But airlines are not alone in pushing the efficiency model too far. President Joe Biden was forced to block a railroad workers’ strike in the US last month after complaints about no paid sick leave. There has also been a backlash to productivity software that tracks workers’ every move.

There is some anecdotal evidence that post-pandemic American workers are less likely than Europeans to want to return to work because of a desire for a better work-life balance. I’ve heard that myself from several multinational CEOs. I can’t help but wonder if some of the reluctance is due to managerial styles that are driving people, customers and businesses to the abyss.

rana.foroohar@ft.com

https://www.ft.com/content/121357f6-d9f2-4262-accd-82f5c406052c Hyperefficiency is bad business | financial times

Adam Bradshaw

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