Insight June 16, 2009, 1:43PM EST

What You Can Learn from the Airlines

(page 2 of 2)

Story Tools

An outsider to the industry may not be aware of the many "handcuffs" on his or her hands, such as scope clauses in labor contracts that strictly forbid certain otherwise logical commercial actions. Subtle details can make or break service, profitability, or labor peace in an industry that teeters on the brink.

While outsiders can and do provide fresh thinking, just as often they can stumble when they fail to grasp what makes a complex business such as the airline industry function well. The most recent high-profile CEO appointment in the industry—Delta's (DAL) Richard Anderson, who was the architect of the successful merger with Northwest Airlines—goes to show the benefits of appointing a seasoned industry veteran. A board should ask how easy it is for an outsider to master the details of its own industry or company when searching for the right leader.

• Anticipate and overcome barriers to growth. The airline business unites the globe, yet it hasn't become a truly global business. Regulatory restraints on ownership inhibit the type of global industry consolidation we see in other large sectors such as automotive. There are even limitations on the movement of leadership capital—one must be a U.S. citizen to run a U.S. airline. Add to this that the airline industry is the most regulated in the world, especially when it comes to safety.

To circumvent such limitations, airlines have resorted to quasi-consolidation measures such as global alliances: Star, Oneworld, SkyTeam. Boards in other sectors may need to be equally creative and resourceful when they encounter barriers to growth of the companies they govern.

• Balance talent renewal with continuity. The natural cycle of the airline business is aggravated by the economy. In the airline industry, it takes 18 to 24 months to become a good director and a complete five-year cycle to become a great one.

It is hard to fully grasp the industry until a director has been through a complete cycle. This suggests directors should not turn over frequently. Yet shareholder activism is causing more frequent turnover than might be ideal. While annual election of directors is designed to give shareholders more voice, boards in any industry should consider as well the depth of experience needed for directors to function effectively as well as the benefits of director continuity.

• Seize the moment. Sometimes companies are presented with extraordinary opportunities to make fundamental change, and too often they don't capitalize on them. In the airline industry, at least in North America, that "opportunity" is Chapter 11 bankruptcy protection. The only large North American carrier not to have tasted Chapter 11 is American Airlines, and it, too, has been "on the court steps" more than once.

Yet despite the opportunity to fundamentally reshape the company within the cocoon of Chapter 11, many carriers fail to take a deep enough bite, only to falter again when the next industry shock comes their way, often sending them right back into bankruptcy. Directors should keep their antenna up for such sea-change moments of opportunity in their own industries—a change in regulations, a deep recession, a technological innovation—and urge management to seize the moment and make real, lasting, and fundamental change while the time is ripe.

The intensity and frequency of board meetings, fear of liability, reputational issues of being associated with a perennially money-losing industry, and intense and complex regulation combine to give some candidates for airline directorships pause. Such concerns are now emerging in other industries as well, especially in financial services.

Directors today work harder than they ever did before, and the work will only intensify, especially with the continued rise of shareholder activism and intrusion into the boardroom. From a governance perspective, the airline industry is one of the most challenging in the world. But hard lessons make for better training in what can and will go wrong in an organization despite the best-laid plans. For that alone, the airline industry is worth closer study.

Michael Bell is a consultant in Spencer Stuart's Miami office and leads the firm's transportation and third-party logistics practice, specializing in the aviation and aerospace sector.