Alaska air on time performance

Alaska Airlines Organizational Needs

ALASKA AIRLINES: NAVIGATING CHANGE Bruce J. Avolio, Chelley Patterson and Bradford Baker wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Copyright © 2015, Richard Ivey School of Business Foundation Version: 2017-07-20

In the autumn of 2007, Alaska Airlines executives adjourned at the end of a long and stressful day in the midst of a multi-day strategic planning session. Most headed outside to relax, unwind and enjoy a bonfire on the shore of Semiahmoo Spit, outside the meeting venue in Blaine, a seaport town in northwest Washington state. Meanwhile, several members of the senior executive committee and a few others met to discuss how to adjust plans for the day ahead. This group included Bill Ayer, president and chief executive officer (CEO); Brad Tilden, executive vice-president (EVP) of finance and chief financial officer; Glenn Johnson, EVP of airport service and maintenance & engineering; the company’s chief counsel and executives from Marketing and Planning, Strategic Planning and Employee Services. They were concerned that the airline was steadily draining its reserves of customer loyalty and goodwill, which until recently had seemed abundant — even boundless. Alaska Airlines had recovered from an all-time operational low, where only 60 per cent of flights were on time and seven bags per 1,000 passengers were reported as having been mishandled (defined by the Department of Transportation as checked baggage that was lost, pilfered, damaged or delayed). The airline was now back to the lower end of its pre-crisis status quo of 70 to 75 per cent on-time flights and four mishandled bags per 1,000 passengers.1 Both these important metrics continued to vary from one day to the next. Although the situation on the ramp was stable for the time being, it was still fragile, with the ground crew handling baggage and also performing ground service in between flights. After focusing many resources on operations to improve the airline’s operational results, the executives wondered what might happen if performance were to slip again. Would the airline slip farther and faster than before? What would it take to again recover to the current status quo? Would customers continue to be forgiving? Would this mediocre level of improvement be sufficient? Below is the agenda created that night for the next day’s discussions, when the full group would again convene:

1 Aviation Consumer Protection and Enforcement, U.S. Department of Transportation, Air Travel Consumer Report, 2012, http://airconsumer.ost.dot.gov/reports/, accessed July 7, 2013.

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Page 2 9B14C059 9:00–11:00 a.m. 2008 Plan Discussion Setup: No room for failure; tiger by the tail; you have 12 months to fix the operation sustainably and no severance. What would the Carlyle group do if it purchased Alaska Airlines?  If you were the Carlyle Group, what proposals would you accept and why?  What else would you do?  How much benefit do you expect and how soon? The following morning, the top executive team posed a tough question to the group, about 25 in all. One executive recalled the framing of the activity the next day as follows:

What would a Carlyle2 or a Warren Buffet do? Imagine a big conglomerate has just come in and bought the airline. We’re a $3 billion3 company making little money; our reputation with our customers has taken a beating; we’ve had major problems with Seattle, our main hub; and we’ve had problems with two large groups of employees. What would Carlyle do because [it is] emotionally unattached to this?

The assembled executives divided into groups to discuss different elements of the problem. One executive recalled the experience and the outcome of that day as “one of the ugliest sessions I’ve ever been a part of. Yet, we came out of there joined at the hip saying that the biggest challenge we faced was our operation and it had to be fixed, and it had to be fixed now.” Indeed, a three-pronged recommendation emerged: 1. We need to fix the Seattle hub first before trying to fix the whole system. 2. We need a higher-level person to devote 100 per cent of time to fixing the Seattle hub. 3. This person needs to be able to cross boundaries and break through silos. A few weeks later, the executive leadership did two things. First, it appointed the staff vice-president (VP) of operations to the new role of VP of Seattle Operations. Previously, the Seattle station had been run by the individual managers of each functional operational unit (e.g., ticket counter, maintenance, inflight, flight operations), each working within his or her silo. As the executive leadership explained to the new VP of Seattle Operations, “Carlyle would come in and assign someone to fix Seattle and [it would] say either you fix it or you’re gone.” That was the message. Second, the executive leadership told everyone at the Seattle- Tacoma International or Sea-Tac Airport that, in addition to reporting to his or her functional manager, each now had a dotted-line reporting relationship to the new VP of Seattle Operations and were expected to fully support him. The new VP brought all the leaders of Seattle together and instituted a data-driven process, which involved identifying standard processes: a detailed timeline for the time between aircraft arrival and departure, using scorecards to measure how well Alaska was following its intended processes. Over time, standard work processes were defined, and daily scorecards provided visibility about performance for each step in the aircraft turn. Process improvement efforts were applied to remove wasted steps. 2 Carlyle Group was a global asset management firm that began investing in corporate private equity in 1990 through investments in leveraged buyout transactions. These transactions involved finding and investing in underperforming, loss- making businesses that had potential for growth, then selling them after exercising management and financial restructuring to turnaround these “down-and-out” businesses. One of Carlyle’s turnaround strategies was to place its own choice of CEO at the helm of a troubled acquisition and to create greater ownership among management. 3 All currency amounts are shown in U.S. dollars unless otherwise noted.

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Page 3 9B14C059 This rigour led to a dramatic and sustained turnaround in Department of Transportation rankings for on- time departures, J.D. Power’s standings,4 mishandled bag rates (MBR) and operating margins from 2005 to 2010 with 2008 being a pivotal year (see Exhibit 1). Indeed, Alaska Airlines achieved the number-one ranking in J.D. Power for customer satisfaction in year one (2008) following the initiation of the change effort and for the next five years. In year two of the change effort, under a company-wide oversight team led by the new VP of Seattle Operations, the Seattle work processes were standardized throughout the system. Financial and operational performance received an additional boost when the company transitioned its MD-80 aircraft out of the fleet. Modelled after Southwest Airlines’ aircraft strategy, an all-Boeing 737 fleet promised greater fuel efficiency and fleet reliability, and required only Boeing parts in inventory and simplified training for maintenance staff and crew. To understand the dramatic changes and root causes that were addressed between autumn 2007 and mid- year 2010, it is necessary to go back before 2006, when passengers were angered by mishandled bags and wait times at the carousel, sometimes to the extent that airport police had to be called to the baggage claim area to intervene. Indeed, insight into contributing causes could be traced back prior to 2005, when the pilots, demoralized as a result of pay cuts, resisted efforts to improve operational performance, were comparatively slow to taxi and often reported maintenance problems at the last minute, resulting in what some executives saw as an unnecessary work slowdown. Other contributing causes included rocky contract negotiations with other labour groups, which affected the engagement of other employee groups, and ramp management’s hands-off approach to ramp operations oversight, which resulted in a lack of operational understanding. One executive noted that root causes stemmed back to 1999, when the airline was “succeeding despite themselves due to fortuitous fuel costs and a good economy.” The following is an overview of the history, culture and events leading up to the 2007 decision to create the role of VP of Seattle Operations; also included is a more detailed account of what occurred between 2007 and 2010 to fix the airline’s largest hub, including a look at the root causes and subsequent solutions necessary for analyzing the changes and leadership driving this rapid turnaround. THE HISTORY OF ALASKA AIRLINES: EIGHTY YEARS IN THE AIR Alaska Air Group traced its roots to McGee Airlines, founded in Alaska in 1932 by bush pilot Mac McGee. The airline merged with Star Air Service in 1934, making it the largest airline in Alaska with 22 planes; however, many of these planes were small bush planes and would eventually be decommissioned as the airline grew. At the 10-year mark in 1942, the company was purchased and the name changed to Alaska Star Airlines, with a final name change in 1944. By 1972, the company was struggling but was salvaged by new leadership, which focused on improving operations and taking advantage of the rich opportunities that came with the construction of the trans-Alaska Pipeline. The following year, 1973, marked the first of 19 consecutive years of profitability, aided in part by industry deregulation in 1979, which enabled the 10- plane airline to expand throughout the West Coast, beyond its previous service to 10 Alaskan cities and to Seattle, its single destination in the “lower 48 states.” By the end of the 1980s, Alaska Airlines (Alaska) had tripled in size, in part as a result of having joined forces with Horizon Air and Jet America. Its fleet had increased five-fold and the route map now included flights to Mexico and Russia. As of mid-2010, the airline employed roughly 8,650 with an additional 3,000 or so employed in Horizon Air. Approximately 160 to 170 of the airline’s employees were at the director level and above (including 4 J.D. Power is an American-based global market research firm founded in 1968 and purchased in 2005 by McGraw Hill Financial for inclusion in its Information and Media Group. The firm conducts consumer opinion and perception research about customer satisfaction with product and service quality in a variety of industries including travel. J.D.Power produces ratings and awards based on its research that aid consumers in making informed purchase decisions. Awards are sought after by corporations for their endorsement value.

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Page 4 9B14C059 directors, managing directors and VPs). The two airlines, at this point, shared many backroom services such as accounting and planning. Exhibit 2 provides some basic operating data for the period 2002 to 2010. PERFORMANCE: A CULTURE OF “JUST GOOD ENOUGH” Throughout the 1990s, Alaska was typically in the middle of the pack in terms of most airline performance indices, such as on-time departures. Falling in the middle range of performance without significant motivation for change appeared to be based on the mentality that, “it’s OK to be late, so long as we’re nice.” This viewpoint could partially be attributed to the leadership of Ray Vecci, the CEO from 1990 to 1995, who openly fought the adoption of mandatory Departure on Time (DOT) reporting requirements, saying that Alaska was different because of its operating environment. Vecci’s attitude led to a general tendency to “blame the system” rather than confront the fact that Alaska was rarely on time. Alaska’s employees prided themselves on having the best customer service in the industry, which they defined as being nice — not necessarily as being efficient. Indeed, Alaska enjoyed a great deal of customer loyalty and a significant reserve of goodwill from its customers. LABOUR RELATIONS: A LONG AND HARRIED HISTORY In 1945, the pilots were the first of Alaska’s employee groups to form a union, followed in 1959 and 1961, by the organization of mechanics and flight attendants, respectively. In 1972, customer service, baggage handlers and other operational employees followed suit. As for many of the major carriers and for smaller, older airlines, such as Alaska, labour negotiations (sometimes marked by strong contentions, slowdowns, strikes and flight cancellations) were a routine and costly aspect of the airline business. Even when settlements were reached through negotiation or binding arbitration, resentments could last for years, affecting both morale and productivity. An airline could be in almost constant negotiations as employment contracts lasted from three to five years (depending on the union), and as many as six collective bargaining agreements could be in play. For Alaska, despite a strong employee-customer bond, the relationship between labour and management fell short of being ideal for many years. An International Association of Machinists (IAM) strike in 1985 lasted for three months, during which time replacement workers were hired.5 In 1993, a flight attendants’ intermittent strike, the suspension of 17 flight attendants and a subsequent federally ordered reinstatement suggested the tip of a larger iceberg of labour-management problems looming ahead. The flight attendants’ strike was a unique form of “intermittent strike” called CHAOS (and still used today by Association of Flight Attendants), which Alaska management viewed as illegal job action. In 1998, contentious contract negotiations between the company and members of the Aircraft Mechanics Fraternal Association began and were not settled until the middle of 1999. As in the case of the pilots’ union agreement of the prior year, this new agreement called for third-party binding arbitration in the event that future agreements could not be reached in 120 days. In the fall of 1999, the IAM, representing clerical workers and customer service agents, reached an agreement after more than two years of protracted negotiation. By the end of 1999, contract settlements had been reached with four out of six unions, leading to a new wave of contract negotiations beginning about 2003. Under normal circumstances, these negotiations could

5 “Mechanics Pact Ends 3-Month Strike against Alaska Airlines,” Los Angeles Times, June 4, 1985, http://articles.latimes.com/1985-06-04/news/mn-6533_1_alaska-airlines, accessed July 7, 2013.

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Page 5 9B14C059 be daunting enough; however, no one could predict what would unfold in the industry or for Alaska over the next 24 months. ORGANIZATIONAL AND INDUSTRY SHOCKS: NO PAIN, NO GAIN? At the turn of the new millennium, two successive airline-related tragedies affected Alaska in very different ways. On January 31, 2000, an Alaska Airlines MD-80 jet carrying 88 passengers and crew from Puerto Vallarta, Mexico, to San Francisco crashed into rough seas 64 km (40 miles) northwest of Los Angeles, shortly after reporting mechanical problems. Among the passengers of Flight 261 were 12 working and off- duty employees and 32 family members and friends of Alaska employees. Because half the victims had a connection with the airline, the event would forever and uniquely alter Alaska’s collective self-concept. The accident truly shook the morale of everyone working for Alaska. And then came 9/11. Ensuing changes in security and boarding procedures in the third quarter of 2001, and into 2002, interrupted airline operations industry-wide. Demand for travel plummeted. Exhibit 3 shows the epidemic of airline bankruptcies from 2002 to 2008. Though Alaska was not immune to the nationwide grief and industry turmoil in the wake of 9/11, the impact on Alaska may have been tempered because of the prior tragedy of Flight 261. The following is one executive’s reflection on the two events:

From an employee perspective, no matter where you were in the organization, [the accident was] a failure. The press wasn’t awfully kind, so from an employee basis there was probably a little bit of shame associated with it. I think it had a greater impact than 9/11. 9/11 was shocking, but it was that way for everyone. Even if you didn’t work for an airline, if you worked in an office building, 9/11 was shocking. [The Flight 261 accident] was more personal.

Perhaps a testament to Alaska’s resilience in the face of adversity, when almost all other airlines across the United States began immediate furloughs, Alaska’s leaders intentionally chose not to lay off employees. This strategic move by management restored much of the faith employees had in the company, as it appeared that the leadership was betting on its employees to keep the airline aloft. Alaska was able to bank away from the disaster in 2001 because of two actions: the airline’s cutting of the flight schedule by 13 per cent as a cost-cutting measure and the injection of $79.9 million in compensation from the federal government as part of an industry-wide program to cover losses related to September 11th. Alaska’s annual passenger traffic dropped 5.6 per cent in 2001 compared with the industry-wide decline in domestic passenger travel of 19 per cent. The airline attributed this difference to its dominant market position; strong customer loyalty and less falloff in demand for air travel by people living on the West Coast and in the state of Alaska (see Exhibit 4). SOARING COSTS — WORRISOME LOSSES Partly the result of Organization of the Petroleum Exporting Countries (OPEC) supply management policies, oil prices had been on the rise since 1999 (see Exhibit 5). Crude oil prices affected the airline industry directly through higher fuel costs, which could account for 15 to 35 per cent of the cost of operating an airline, and indirectly through the resulting global economic downturn of 2000/01. Alaska Airlines’ annual fuel and oil expenditures peaked in 2008, as did its fuel expense as a percentage of operating revenue for the years 2002 to 2010. With the added economic impact of the dot-com debacle and post-9/11 travel slowdown, Alaska lost $118.6 million in 2002.

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Page 6 9B14C059 In 2002, salaries and benefits accounted for 39 per cent of costs, which was the biggest proportion of the typical airline’s operating expenses.6 Several major and competing airlines filed for bankruptcy, which allowed them to renegotiate their labour contracts and thereafter operate with a lower overhead than Alaska. This situation created a potentially significant competitive disadvantage for Alaska. Meanwhile, some of Alaska’s unionized employees — the pilots, flight attendants and ramp workers — were among the highest paid in the industry.7 Alaska and Horizon Airlines had a combined annual payroll of approximately $1 billion in 2004. Of that, Alaska pilots’ pay and benefits (excluding Horizon) totalled roughly $350 million. Management determined that the pilots at Alaska alone earned in the range of $70 million to $90 million over other airlines, when taking into account the industry restructuring in the years since 9/11. Alaska’s salaries represented a considerable labour cost disadvantage, relative to the industry average. Analysts projected that if losses and costs continued unabated into 2003 and 2004, the entire company could go under. Alaska could have taken the route of filing for bankruptcy, as many other airlines had done, and then undergone restructuring. However, Alaska chose not to pursue this option for several reasons. Fundamentally, the Alaska executives, led by Bill Ayer, viewed filing for bankruptcy as being reprehensible. Alaska was committed to its shareholders, and filing for bankruptcy would mean wiping them out. Bankruptcy was tantamount to admitting defeat, an act utterly incongruent with Alaska’s courageous spirit. Furthermore, Alaska executives believed, perhaps naïvely, that management could convince employees of the need for reductions, and those employees would voluntarily agree to make personal sacrifices to save the company. Moreover, executives had other ideas for reducing costs that represented a viable alternative. They were willing to trust that, if a collective bargaining agreement could not otherwise be reached between the pilot’s union and the company, a contract reached through binding arbitration would be a better alternative than bankruptcy. LABOUR: THE 2010 PLAN Forging ahead in difficult times, Alaska’s strategic planning efforts in 2003 resulted in leadership creating the 2010 Plan, a long-term restructuring agenda focused on employees, customers and shareholders. As part of this plan, in the fall of 2004, the company took several actions to reduce its biggest expense, labour costs: offering a voluntary severance package to management, the closure of a maintenance base in Oakland, the closure of the Tucson station, consolidation of operations in Spokane,8 the outsourcing of three small work groups (fleet service, which performed aircraft cleaning; facilities maintenance; and ground service vehicle maintenance) in several cities and closing Alaskan ticket offices in Juneau and Anchorage and Washington state ticket offices in Seattle and Bellevue. Because the company felt that it was crucial to have Alaska employees in customer-facing roles, non-customer-facing work groups were the focus for attaining possible savings. In those cases, a cost-benefit analysis was performed. Combined, these moves cut nearly 900 of the roughly 10,000 employees.

6 Scott Mayerowitz, “Airline Fuel Costs Force Fares Higher,” The Post and Courier, June 5, 2011, www.postandcourier.com/article/20110605/PC05/306059966, accessed July, 7, 2013. 7 Call centre employees, customer service agents, mechanics and dispatchers were also unionized but their wages were not under scrutiny at this time. 8 Idaho Transportation Department, “Alaska to Lay Off 40 in Spokane,” Today’s News Briefs, September 14, 2004, http://apps.itd.idaho.gov/Apps/MediaManagerMVC/NewsClipping.aspx/Preview/3569, accessed July 7, 2013.

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Page 7 9B14C059 The challenge with the 2010 Plan was that each action had a different driver:  The management voluntary severance package, launched in August 2004 and offered through spring

2005, was implemented to reduce the number of managers by about 9 per cent and aimed to improve communication and cut between $5 million and $10 million in overhead expenses.9

 At the same time, several management replacements were made in response to an “FAA Action Plan” that flowed from investigations into the tragedy of Flight 261.10

 The Oakland maintenance site closure and elimination of 350 jobs in September 2004 was part of a decision to increase efficiency by outsourcing heavy maintenance checks at the Oakland location and consolidating the remaining in-house maintenance in Seattle.11

 The outsourcing of fleet service, aircraft cleaning and facilities maintenance was pursued to allow the company to focus on its core competencies with customer service at the forefront.

Just as the drivers of each action differed, the downstream consequences also differed. For instance, the Oakland closure was a difficult and emotional exercise that left the remaining employees feeling bitter and concerned. The voluntary management severance, considered generous by the company, had two unintended downstream consequences:12 talented people with tribal knowledge left; and many of the vacated management positions were replaced over a short time, rather than cut entirely, so that the overall management labour costs began to rise again after 2007, though still remaining below 2005 numbers. LABOUR: THE PERFECT STORM In addition to the previously stated changes, the union contracts for the flight attendants, ramp workers (IAM) and pilots (ALPA) were all open for re-negotiation at the same time, creating a labour relations “perfect storm.” Management was working feverishly to reduce wages and gain agreement on other concessions in an effort to enable Alaska to compete with the other airlines that had already reduced their labour costs dramatically under the terms of bankruptcy protection. The flight attendants’ negotiations started in summer 2003, reached a tentative agreement that failed by a huge margin and ended in mediation the following summer. The pilots’ union (ALPA) negotiations, which focused on bringing wages down to the new market level, had a deadline of December 15, 2004. Although the pilots were attracted to the promise of growth, they did not agree to reduce their wages. Since the 1990s, Alaska’s pay scale for Boeing 737 pilots was one of the highest in the nation. Most pilots had built lifestyles dependent on this compensation level. Alaska remained firm that wage cuts were necessary. After long negotiations with no agreement in sight, the parties entered into binding arbitration as stipulated by contract. Ultimately, the arbitrator’s decision cut pilot wages significantly beyond the company’s last contract proposal, and pilots experienced a decrease of up to 30 per cent in their annual salaries with an average decrease of just over 16 per cent (see Exhibit 6).

9 “Alaska Airlines to Reorganize Management,” August 20, 2004, www.airliners.net/aviation- forums/general_aviation/read.main/1707734/, accessed July 7, 2013. 10 Correspondence with General Council for Alaska Air Group, accessed November 14, 2013. 11 David R. Baker, “Alaska Air Shuts Oakland Base/340 Maintenance Workers Laid Off by Troubled Carrier,” San Francisco Chronicle, September 10, 2004, www.sfgate.com/bayarea/article/Alaska-Air-shuts-Oakland-base-340-maintenance- 2726556.php, accessed July 7, 2013; “Alaska Airlines Closes Oakland Maintenance Base,” San Francisco Business Times, September 9, 2004, www.bizjournals.com/eastbay/stories/2004/09/06/daily26.html, accessed July 7, 2013. 12 Effects have causes; effects can, and usually do, become causes of another effect(s); as a result, a large number of cause- and-effect “chains” can be created from a single casual event. Thus, cause yields effect. Effect becomes cause, which yields downstream effects (second-order effects).

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Page 8 9B14C059 In parallel with pilot arbitration, Alaska was working hard to negotiate a deal with the baggage handlers’ union (IAM). These “rampers” in Seattle were a powerful, senior group, and management had persistently struggled to set and enforce acceptable performance expectations. As a result, productivity was very low. Alaska initially sought to cut pay by 15 to 20 per cent, which was rejected by the ramp union. Anticipating the possibility of a strike, a third-party ground handler (ramp vendor) was secured to step in to avoid operational interruptions in the event of a strike. Ultimately, Alaska’s senior management concluded that the operational problems with the ramp could not be fixed with the current workforce, as old habits and mistrust were too ingrained. As Alaska’s senior managers examined the contingencies in place to manage the risks of a strike, they realized they had also created another option — to be proactive rather than reactive, by permanently outsourcing the ramp operations. A bold decision was made to replace more than 470 Seattle baggage handlers with contractors and to outsource the work to the ramp vendor. Both the decision and the action to implement the decision were accomplished in a 24-hour period with no interruption to operations. As the first shift of ramp employees arrived for work on May 13, they were met by security guards and members of management, and informed of their termination. Meanwhile, other management staff phoned employees scheduled for later shifts to deliver the news and instructions for attending a series of human resources information sessions. The decision to outsource the ramp came one week after the arbitrated decision in the pilots’ negotiations. In addition to lining up the ramp vendor for backup, Alaska had also trained management in ramp operation in anticipation of a work stoppage and strike. After the decision was made to outsource the ramp, these management personnel stepped in and supported the ramp vendor, working side by side with them for about a month on all shifts during the early days of the transition. Over the first year or so, Alaska kept some personnel trained so they could step in and help if needed. DOWNSTREAM EFFECTS The compounding effect of the 2004 closure of the heavy maintenance facility in Oakland, followed by the pilot wage arbitration decision and the ramp outsourcing (both within a month or so of each other) was not well anticipated by management. The latter two changes were not planned to happen simultaneously, but as is true of all strategic challenges, some of the timing was beyond the company’s control. In the months following the pilot arbitration decision, the pilots were angry and disengaged. Following the settlement, the company noted an increase in pilots’ sick leave and their irregularity reports, both of which created downstream effects for other areas of the operational system. Another metric that changed after the settlement was an increase in pilots’ hours spent in flight due to longer than average delays at the gate. These longer delays reduced the pilots’ ability to make other flight connections and created further delays downstream. The first few days after the ramp vendor was brought on to manage the ramp operations, everything went smoothly. However, as demand for Alaska bookings rose with the approaching holiday travel season, the ramp vendor proved to be unprepared to handle the volume associated with the Alaska contract. The ramp vendor’s group was understaffed and undertrained. They operated with an autocratic culture, where dissent was not encouraged. Front-line staff with the ramp vendor were poorly paid relative to industry standards, which resulted in very high turnover rates. Their inexperienced employees were trying unsuccessfully to operate a complex and demanding operational system that was fully understood by only the more experienced ramp workers.

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Page 9 9B14C059 Adding to the operational challenges emerging with the ramp vendor, the remaining Alaska employees were reluctant to trust and support the ramp vendor’s employees. Outsourcing to the ramp vendor created a ripple effect on the remaining employees who had working, familial or social relationships with the now- terminated Alaska ramp workers; the remaining workers experienced downstream effects on their morale and productivity. Indeed, some Alaska pilots even refused to pull into gates prepped by the ramp vendor or take off if their plane had been loaded by the ramp vendor. The ramp outsourcing left the so-called “above-wing staff” demoralized. As one employee stated:

We had to counsel employees who were in tears because their dad or their husband was suddenly out of a job. “How could Alaska do this to us?” they would keep asking. Everyone had survivors’ guilt and when multiple call center employees break down in tears throughout the day, you can just watch call volumes escalate within minutes.

Furthermore, management, having only distantly supervised unionized ramp operations for years, were unable to manage the ramp vendor because they simply didn’t understand how to work with ramp operations “below the wing.” In the past, management had avoided even walking through the ramp; therefore, they had little knowledge of ramp operations or how to avoid the operational failures that were becoming daily events. The backwash from the labour actions of 2004 and 2005 had a profound negative effect on the company’s operational performance. In 2005, on-time departures fell to an all-time low of 49.8 per cent, . The ramp vendor was mishandling up to 20 out of 100 bags, and wait times at the carousel at times reached up to two hours. All of this disruption made passengers livid. Several times, the airport police intervened with irate passengers in the baggage claim area who became hostile toward Alaska employees. Pilots began reporting minor maintenance problems at the last minute and were slower than normal to taxi, causing further departure delays and extended flight times. The result was a devastating work slowdown that demonstrated the pivotal role of pilots and crews in the towering success or failure of an airline. In the face of these operational challenges, long-time customers were experiencing the brunt of these problems leading one employee to complain that, “We were destroying customers’ businesses. Agents were breaking down crying in front of customers because, months into this, we still didn’t have answers for them.” With the overall meltdown occurring in operations and the ramp outsourcing imploding in front of everyone’s eyes, Alaska staff were overscheduled, running in every direction just to put out fires and keep the airline going on a daily basis. All of these problems resulted in high levels of animosity exhibited by the different employee groups; many simply asked, “Why won’t corporate fix this?” However, since management had wholly underestimated the negative impacts of outsourcing the ramp operations, they too were unprepared to handle the increasing problems confronting all aspects of their business. Adding more insult to injury, Alaska employees were now afraid they would be the next group to be outsourced, which led to another unintended consequence, whereby employee turnover, which at Alaska had been typically below airline industry standards, could rise unexpectedly. The existing turnover rates and operational challenges were forcing Alaska to bring new hires up to speed faster, placing added pressure on everyone within Alaska to perform, which was fuelling even higher levels of burnout. Just one month after the Alaska ramp workers were locked out, the ramp operations had nearly imploded. And these conditions continued from the beginning of the summer of 2005 throughout the end of that year and into the critical holiday travel season. As one employee stated, “Seattle was on fire.” The combination

For the exclusive use of M. RIVERA, 2019.

This document is authorized for use only by MANUEL RIVERA in OL-663 Leading Change 19TW3 taught by SNHU INSTRUCTOR, Southern New Hampshire University from Jan 2019 to May 2019.

Page 10 9B14C059 of extremely high labour distrust and burn out, highly siloed work units, pilot slowdowns and the ramp imploding resulted in a perilous spiral downward for the airline. TRANSITIONAL LEADERSHIP AND THE TROUBLED TASK FORCE In response to the difficulties at the Seattle hub, a seasoned executive, Glenn Johnson, was placed on special assignment as temporary VP of Customer Service for 90 days, from June through September 2005, to diagnose the situation in Seattle. Following that, he set up a task force to begin trouble-shooting the operational issues. The task force then became a forum for exchanging information among all the various operating groups and taking a higher-level look at the situation in an effort to carve out some small chunks of progress and make some headway. The task force was composed of managing directors and was known as the Mad Dog Group or MD Group — a double entendre, as MD was the abbreviation for managing directors and Mad Dog was a nickname for the MD-80 jet. Kevin Finan, VP of Operations, originally ran the Mad Dog Group, with Glenn Johnson later stepping in to lead. By 2007, the Mad Dog task force had still not fixed the operational problems to any significant degree. It was making small and big changes, but not obtaining big results. The task force was only able to get Alaska operations back to the low end of normal on such key metrics as on-time departures, baggage delivery and baggage loss. The task force stabilized Alaska and took it out of day-to-day crisis mode; however, operations were still fragile at best, the ramp was still highly volatile and pilots were still resistant to requests to make changes. The 2007 Planning Session The last two decades of the 20th century were marked by profitability and growth due to low fuel costs and a strong economy in spite of a culture within Alaska that tolerated mediocre operational performance. Yet, the first seven years of the new millennium had presented new challenges with the fuel costs on the rise since mid-1999, the crash of Flight 261 in January 2000, the dot-com bubble burst in early 2001 and 9/11 later that same year. The internal cost savings and restructuring under the 2010 Plan and the labour cost savings from the new 2005 pilot wage agreement helped steer the airline clear of bankruptcy — a route taken between 2002 and 2006 by US Airways, Aloha Airlines, United Airlines, Northwest Airlines and Delta Airlines. The outsourcing of the ramp and the implosion of Seattle ramp operations, however, contributed to a bumpy ride of losses and profits. Affording some cushioning along this bumpy ride was a strong reserve of cash accrued over the years of profitability. Still, the downstream impacts of these events took an unexpected toll on employee morale, operational efficiency and the customer experience. Thus, gains that were expected from “right sizing” and other measures were not hitting the expected performance mark when executives gathered in autumn 2007 for their multi-day annual planning session. Since becoming CEO in 2002, Bill Ayer had worked intentionally to build an executive team that would share their honest opinions and have “fierce” conversations, qualities counter to Alaska’s corporate culture, which had been built on being nice to people, and counter to the local Seattle culture known as “Northwest Nice.” Ayer’s efforts were paying off during this retreat. The executives felt safe to ask hard, provocative questions. As mentioned in the introduction, a turning point in the 2007 meeting came when a subset of officers reviewed the group’s progress at the end of a long day of discussions and then adjusted plans for the forthcoming day. The following question, posed that night among a few and repeated to the larger group the next day as a springboard for discussion, sparked a critical conversation:

For the exclusive use of M. RIVERA, 2019.

This document is authorized for use only by MANUEL RIVERA in OL-663 Leading Change 19TW3 taught by SNHU INSTRUCTOR, Southern New Hampshire University from Jan 2019 to May 2019.

Page 11 9B14C059

What would a Carlyle or a Warren Buffet do? Imagine a big conglomerate has just come in and bought the airline. We’re a $3 billion company making a little money; our reputation with our customers has taken a beating; we’ve had major problems with Seattle, our main hub; and we’ve had problems with two large groups of employees. What would Carlyle do because [it is] emotionally unattached to this?

To review, the new direction that emerged included three conclusions: 1. We need to fix the Seattle hub first before trying to fix the whole system. 2. We need a higher-level person to devote 100 per cent of time to fixing the Seattle hub. 3. This person needs to be able to cross boundaries and break through silos. SELECTING A CHANGE LEADER And who would be this new “VP of Seattle Operations?” A few people had expressed interest and were intrigued at the prospect of this challenge. Among the interested was the current Staff VP of Operations, Ben Minicucci. He had joined Alaska in May 2004, after having worked for six years for Air Canada, running all the heavy maintenance for Canada’s largest airline. Prior to that, Minicucci had spent 14 years in maintenance and aerospace engineering at the Royal Military College of Canada (similar to West Point or the US Air Force Academy), and had a bachelor’s and master’s degree in mechanical engineering, with an emphasis on control systems engineering. This discipline looked closely at inputs in a dynamic system and used measurement, comparison and correction to stabilize a system. Two classic examples of control systems engineering in action are a car’s cruise control and a home’s thermostat. Minicucci used the thermostat metaphor on a larger scale to consider how he might tackle the process and people issues within the Seattle hub. He captured his ideas in a proposal, which he submitted to Johnson. His approach involved three guiding principles:  Leading with passion  Driving process accountability  Managing with data What Minicucci had noticed was that, up to now, brute force (applying a lot of people and a lot of resources) had been used to get the operation working. However, this approach had gained a limited amount of ground and was neither sustainable nor repeatable. He also noticed people working hard, but pulling in different directions. So the message he began to lead with and would continue to repeat — and which indeed became his “passion” — was cross-divisional collaboration and alignment. Glenn Johnson, Minicucci’s boss and the seasoned executive who had created the original Mad Dog task force, reviewed the proposal, and the executive team conferred. The failure of the 2005 Mad Dog task force to address the root causes of Alaska’s operational tailspin made it clear and obvious that what was needed was large-scale systematic change that covered more than simply fixing a few process problems. The dysfunctional aspects of the culture at Alaska needed to fundamentally change to address the ongoing problems and threats. It was not just about fixing things that were broken; it was about getting people to reset their expectations of what it meant to be a first-class airline.