This essay will set out to answer the question: How can the differences in the human resource management of airline companies be explained? The essay will therefore be composed from two major parts. The first part will focus on the changes in the external environment, which influenced the HRM in the airline industry since late 1970s. Different approaches of HRM in the airline industry will be identified in the process. British Airways (BA) will be used as an example of “hard” and South West Airlines (SW) as an example of “soft” HRM approach. The second part will examine British Airways and South West Airlines methods of adaptation to the external pressures. Special emphasis will be made on how the management style adopted by BA and SW influences their HRM approach.
The need to understand the HRM approaches adopted by airline companies is even greater since airline industry is accounted among service industries. A clear linkage between the employee and customer satisfaction, in service industries, has been established since 1980s, when the term human resource management (HRM) started to replace the term personal management (Legge 2005, Graham and Bennett 1998). Since then authors point out that HRM should be incorporated in the business strategies of companies, as it could provide a market competitive advantage. The main characteristic of service industries is the importance of the “human factor” which delivers the customer service. Gilbert, Child and Bennett (2001) maintain that because airlines offer similar service, employees are a “single service-factor” that distinguishes them. However the way companies manage their HR can be subdivided in the views of managerial strategy, the “soft” and “hard” HRM approach (Truss et al 1997, Mabey, Salaman and Storey 1998, Legge 1995). Tayson and Fell (1986, in Legge 2005) describe the “hard” approach as viewing the employees as one of the expenses of doing business. On the other hand “soft” approach is defined as “treating employees as valued assets, where the stress is on generating their commitment trough communication, motivation and leadership” (Legge, 2005, p.106). To understand the reasons behind the HRM approaches adopted by airlines, the essay will start with a brief explanation of factors, which are argued to have the biggest influence on the industry.
Authors collectively agree that the internal and external environment in which companies operate, determine their HRM style (Legge 2005, Boyd 2001, Beer 1997, Laszlo 1999, and Gilbert, Child and Bennett, 2001). The factors of the external environment are asserted to be globalisation, fast changing markets and technology, sectoral deregulation, liberisation, privatisation, economic conditions and crisis events (Legge 2005, Boyd 2001, Beer 1997, Laszlo 1999, and Gilbert, Child and Bennett, 2001).
According to Som (2003) and Appelbaum and Fewster (2004) deregulation of the United States Airline industry in 1978 triggered a chain of events that led to the liberisation of markets throughout the world. The latter had two major effects. First and immediate one was the entrance of low cost airlines in the market. The second, more gradual effect was the result of increased competition pressures from the low cost airlines. Competition forced bigger nationally owned airline carriers to redevelop the corporate strategies and adopt new cost saving measures, which consequently drove the need for their privatisation (Beer 1997, Boyd 2001, and Holtbrügge, Wilson and Berg 2005).
An assertion that can be made is that the time span between the US and EU airline industry deregulation played a vital role in determining the HRM style of airline companies. Blyton et al (2001) points out that before the deregulation airline market was stable, predictable and often State controlled. Because of the restrictions imposed by the State, companies did not need to cut costs or develop new products to compete on the market. The “monopoly” position of airlines meant market stability and the outcome was job security and good conditions of employment. That sharply changed for the European carriers with the deregulation of the EU market in 1997. BA tackled the problem of increased competition and consequently cost cutting by offering voluntary redundancy to 5,000 of their employees. However in the next six months it offered 5,000 new working positions, as a strategy of saving over a £1 billion by 2000 on lower starting salaries and benefits for the newly recruited employees (Boyd, 2001). Further personnel outsourcing finally resulted in a clash with trade unions and a strike that cost BA £125 million and ended with a low employee moral and lost of customers (Vedpuriswar and Ramachandran, 2003). Boyd (2001) also points out that BA are not the only EU company that decided to cut labour costs. Three other European airlines turned to the policy of recruiting under the “flag of convenience”, where staff does not need to fulfil the training requirements of EU laws, however can still operate UK flights under the “flag of convenience”. This consequently saves airlines additional money on training and pay for their employees.
On the other hand the US airlines went trough the deregulation process almost 20 years earlier, when airline industry was less as developed. That made their competition adaptation process more gradual. The latter could result in adaptation of the “softer” HRM approaches of some companies. Legge (2005) also maintains that due to the cultural differences US companies are more likely to lean towards the “soft” and UK companies towards the “hard” HRM style.
One of the US companies that did not seek their market competitive advantage in cutting labour cost, but in investing considerable amount of time and money in recruiting and training the employees, is the South West Airlines (SW) (Benchmark Communication Ltd. 2001, Laszlo 1999 and Brown 2003). SW maintains that self-motivation, work ethics and right attitude are a characteristic of an employee that will benefit the company on the long-term basis; therefore no expense should be spared on recruiting the right person for the right position (Benchmark Communication Ltd., 2001). It could be further asserted that recruiting the right personnel and training them should be of even grater importance for the BA, since SW are a low cost airline and their level of service is expected to be lower than BA’s.
In addition to service orientation of the industry and competition pressures among airlines, safety-sensitivity is argued to be the third factor that has a strong influence on the HRM of airline companies (Holtbrügge, Wilson and Berg, 2005). Crisis events, especially terrorist attacks in September 2001 raised the level of safety-sensitivity and resulted in a sharp 32 percent drop in the number of the passengers carried (WTO, 2006). Consequently many of the major US Airlines, such as United Airlines and US Airways went into Chapter 11 bankruptcy, which gave them the opportunity to reorganize and cut HR costs without negotiating with the trade unions (Brown, 2003). Although it must be mentioned that airlines outside US were not protected by such laws and had to find other drastic cost cutting measures. According to Howard (1998, in Boyd 2001) air companies could not do much to reduce the cost of fuel and new aircrafts, however were able to save on labour costs. Labour is asserted to account for between 25 and 40 percent of all operational costs of airlines and three quarters of its controllable costs (Aharoni, 2005).
As it was mentioned the crisis events, such as terrorist attacks, virus SARS and the Tsunami had a major impact on the airline industry and consequently the HRM styles of airline carriers. Because of the sharp drop in the revenue, airline companies further reduced the number of cabin crew to the minimum requirement, increased their working hours and put pressures on staff to overlook the safety hazards in order to speed up the turn around time of airplanes (Boyd 2001, Holtbrügge, Wilson and Berg 2005). Although the labour relationship between the BA employees and management improved from 1997 and the management started investing in training and working conditions with the “Putting People First” initiative, September 11th attacks forced the BA to once again adopt the “hard” HRM approach. BA cut 13,000 jobs or 23 percent of their workforce in years from 2001 to 2004 and eliminated the Christmas bonuses for their employees (Vedpuriswar and Ramachandran, 2003). It has to be pointed out that in 2004 BA still employed 159 employees per airplane. This number is extremely high in comparison to SW (84) and Ryanair (32) (Freiberg 1998, Bandeira 2004). On the basis of latter an assertion can be made that redundancies were necessary for the BA to adapt to the new competitive conditions on the market. However, BA management also further lowered the standard of working conditions for the remaining staff. In 2005 BA’s cost per employee was £35,330 and SW’s was £45,280 (calculated from Grossman 2005 and Rigby 2005). A conclusion that can be drawn is that BA either did not develop a long term plan which would anticipate a possibility of crisis events, and had therefore resort to drastic labour cost cutting measures, or has sought their competitive advantage in adopting the “hard” HRM approach.
Boyd (2001) maintains that economical and political environment provided airline companies with the freedom to adopt the” hard” HRM approach, however the example of SW proves that, with the efficient strategic management, companies are able to cut costs in other areas than labour and therefore retain the “soft” HRM style.
SW was founded in Texas, USA and has with the exception of first year generated profit since its creation in 1971. Surprisingly not even crisis events on September 11th and SARS epidemic managed to seriously affect them. An argument that could be made is that their success is a result of “What if….?” scenarios, cost savings measures and product innovations (Laszlo 1999, Medved 2001, Milliman 1999 and Brown 2003). SW acknowledges that airline industry is a highly competitive and fast changing environment. Therefore to enable the company to respond to situations quickly and efficiently they work out many yearly scenarios of “What if….?” and incorporate them into their strategic and financial plans (Laszlo, 1999).
Second characteristic of SW are their cost saving measures. They are saving money by flaying in and out of airports that are located close to the city centre. This strategy enables to retain clients that do not want to travel 45 minutes to an airport to board a flight that only takes 40 minutes. SW also developed a network of point-to-point flights, with 20 to 30 minutes turn-around time. No seating order helps to speed up the boarding time and helps shortening the time plane has to spend on the ground. They do not connect with other airlines; therefore do not need to spend extra money on waiting for connecting passengers. Company is flying to the less crowded airports, where it is less chance for delays and at the same time airport taxes are lower, which lowers the price of the airline tickets. They use only the Boeing 738 airplanes, which stay in the air 12h (competition 8,6h) and make over 7 flights daily. Using only one type of plane reduces the cost of maintenance and cost of staff training. The loyalty to the Boeing Company has ensured SW the bargaining power when negotiating for prices (Laszlo 1999, Medved 2001 and Appelbaum and Fewster 2004).
The third way that SW retains its competitive advantage is with constant product innovation. They were the first air-company with their own Internet site and have started to sell paperless tickets, as one of the first bigger air companies, in 1995. SW was the first airline that did not serve food on the plane. Serving food in the waiting room in the airport has again saved turn-around time of airplanes, because they did not to be cleaned as thoroughly. SW also considers rail and train transport as competition. It is its policy to keep prices low even if the demand for certain routs increases. They are constantly investing in marketing, over 4 million people are subscribed to their weekly Internet publication “Click ‘N Save e-mails” (Laszlo 1999, Medved 2001, Milliman 1999 and Brown 2003).
The management style and strategy adopted by the SW has enabled them to make long-term investments in their employees, with profit sharing, no redundancy policy, extensive training and career promotion opportunities (Benchmark Communication Ltd. 2001, Tsui and Wu 2005).
It has to be acknowledged that some of the above mentioned costs saving measures could only be adopted by the low cost airlines, because of the lower quality of service expected by customers, although other non-budget airlines developed other approaches to costs savings. One of the responses of airline carriers to competition pressures was forming of alliances, which helped the companies to retain competitive advantage and cut costs by sharing facilities and routs (Boyd 2001, Som 2003, Beer 1997, Laszlo 1999, and Gilbert, Child and Bennett, 2001). Boyd (2001) asserts that four major alliances that were formed in late 1990s now account for 46 percent of world market. If forming the alliances proved as a good marketing strategy, two-thirds of all merges and acquisitions in global aviation, majority of them in the US, failed because they did not succeed in integrating the organisational HR culture (Appelbaum and Fewster, 2004). This again demonstrates the importance of the HRM in the airline industry.
Another example of how a diversification of product could help airlines to increase their revenue is BA’s establishment of the low cost airline GO, in 1998. GO has made a net profit of £4,2 million in 2000, however BA decided to sell the company in June 2001 for £110 million to 3i. With the new leadership GO increased their net profit to £17 million and was sold in August 2002 to Easy Jet for £347 million. With this acquisition Easy Jet became the largest low coast airline in Europe (Bandiera, 2004), which further increased the price competition. An argument can be made that selling of GO was a bad management decision of BA. The revenue generated by GO could help cover the losses made as a result of unstable economical and political conditions and would therefore reduce the need for drastic cuts of labour costs adopted by BA.
To conclude, this essay has tried to identify the reasons behind the different HRM approaches adopted by airlines. The political, cultural and economical environments, in which airlines operate, have been identified as the external factors that influence companies HRM styles. Deregulation of air space has significantly increased the competition and resulted in a development of new, fast growing, low-cost carrier market. Time of the deregulation is argued to play a vital role in the differences of HRM styles adopted by airlines. Airline industry has since become a highly competitive environment, where cost savings are one of the prime concerns and a necessity for the survival of the airline companies. The need to cut costs has even increased after the sharp drop in the number of passengers carried, as a result of September 11th terrorist attacks and virus SARS. Many airline companies have adopted the “hard” HRM style to cut labour costs, which are asserted to contribute to up to one third of all expenditure of airline carriers. However example of SW has been made to demonstrate that with efficient management drastic labour cost saving measures could be avoided. It can be concluded that the differences in HRM approaches adopted by airlines are mainly a result of the company’s management style, which determines whether employees are treated as a valuable asset or a cost to the organization.
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