January 14, 2011
Overbooking a flight enables airlines to ensure that they fly with as much capacity as possible – given that 8-10% of passengers do not show up for a flight, you want to make sure that there are not too many empty seats on the plane. But if you overbook, you must be ready to find yourself in a situation in which you have more paid passengers than seats. Since sitting in the aisle is probably against FAA regulation, that means the airline might need to bump one or more passengers off of the flight. How should this be done?
The standard method is to offer a fixed benefit – say a $400 flight voucher – and hope that enough people take the deal. If that doesn’t work, the airline sweetens the deal. As a last resort they have to involuntarily bump a passenger (which costs them more).
According this WSJ 1/14/11 article, Delta has another idea – when passengers check-in, ask them how much they are willing to accept to be bumped from a flight (a $ amount) and choose the lowest bidding passengers if necessary. They have apparently be trying it out for one month.
This is an interesting idea. There are two obvious advantages: (i) it reduces the time and effort to solicit passengers off of a flight when you discover that you need to bump some people and (ii) it is hard to imagine that they would end up paying more to bump passengers. I suspect that passengers are willing to accept less cash to be bumped when they check in than when they are about to walk onto a plane – the cost of getting bumped is more tangible when you are watching the plane pull away from the gate. Furthermore, I think some passengers will bid less than the $200 or $400 that the airline would normally pay. (There are many ways to run this auction, but it seems that passengers receive their bids, rather than the highest clearing bid or the bid of the lowest non-bumped passenger.)
However, as an airline, do you want to ask every passenger to report how much they want to be paid if you fail to serve them? Imagine booking a vacation at a Four Seasons Resort and receiving an email like this: “We are excited that you will be staying with us and we look forward to catering to your every needs so that you will have a relaxing an memorable visit with us. On occasion, we are unable to accommodate all guests with reservations. If that were to occur, could you please let us know what the minimum cash you would accept to be booked into a partner hotel nearby to our facility?” It doesn’t scream customer service. But “customer service” may not be the first thought when people think of airlines these days. Air travel is a commodity and efficiency matters. I wonder if this experiment – like charging passengers for bags – will stick.
April 21, 2010
Predictably, there are stories in the news about how the volcano in Iceland is disrupting world supply chains (e.g., BBC story on Nissan and BMW).
One of the trends over the last 20 years is to source globally and to source from fewer suppliers. The reasoning is good. By sourcing globally you find the supplier with the lowest costs and best skills/technology. By sourcing from fewer suppliers you avoid variation in your products and you are better able to concentrate improvement efforts, both in the design of the component as well as in the manufacturing process. But the strategy also means that you become more vulnerable to idiosyncratic risk.
As risks go, this one is relatively mild (that a volcano erupts under a glacier sending ash into a big cloud that blankets Europe). Assuming the volcano stop spitting ash into the sky soon, the consequences of this disruption are rather limited – about 7-10 days of lost production. This is a significant disruption, but nothing compared to the disruption that would occur if your supplier’s facility were buried in ash. Put another way, the risks to really worry about are ones that disrupt your supply chain for a much longer period of time – hurricanes, floods, earthquakes, lightning/fire, and domestic unrest all come to mind as potentially more severe in the sense that they can knock you out for months. Thus, I would be much more concerned about sourcing from a supplier in Indonesia (earthquake and volcano prone) than a supplier in Ireland.
The first step to managing these risks is to identify them – you can’t manage what you don’t know. (Or put another way, it is harder to manage “unknown unknowns” than “known unknowns”.)
The second step is to establish a monitoring system – when would you know if a supplier in your network has been disrupted? We all heard about the volcano in Iceland, but when would you hear if a key Tier 2 supplier had a fire in their facility? The sooner you know, the sooner you can get to step 3…
The third step is to have a contingency plan in place. Do you have potential second sources of supply? What assistance can you provide to shorten the length of the disruption?
To conclude, disruption risk is real, but it doesn’t mean that you shouldn’t source globally for a limited set of suppliers.
August 13, 2008
Although airlines in general are having a hard time turning a profit now, there remains brisk demand for new aircraft from Airbus and Boeing. (Possibly because new aircraft are more fuel efficient.)
With a full backlog and a price tag around $200 million per aircraft, these companies do not want to delay delivery of any new aircraft. But apparently they have had to park nearly finished aircraft due to some missing parts. For example, Boeing couldn’t deliver several 777s to Emirates because they didn’t received customized galleys from Snell, a German producer.
The problem is that Snell didn’t anticipate the increase in volume and consequently didn’t build enough capacity. This is a good example of how a supplier’s capacity decision can have significant financial consequences for a buyer.
Wall Street Journal, Aug 8, 2008 – Lack of Seats, Galleys Delays Boeing, Airbus
August 5, 2008
Believe it or not, US Airways is now a lot better with on-time performance, even better than all of the other airlines (and this is hard to believe if you live in Philly, one of their hubs). Apparently they are doing this with some good old basic process improvement techniques. For example:
– They have created a “rallying cry” to emphasize the importance of on-time performance.
– They support their rallying cry with financial incentives when goals are met.
– They have installed electronic displays for the baggage handlers so that they can monitor flight status and prioritize effort. A good example of providing workers with the necessary information needed to achieve a goal.
– They have runners that move bags between connecting flights when necessary. This can be controversial. On the one hand it creates another process, which adds to variability. On the other hand, it prioritizes service where most needed.
– Buffer times has been added to schedules. And instead of doing this haphazardly, they appear to be adding buffers where buffers are most needed – on routes that experience the most uncertainty. This makes for a more efficient use of buffers.
To summarize, they are applying behavioral techniques (goals, incentives) and process changes to demonstrate that good on-time performance can be achieved by anyone.
Wall Street Journal, July 22, 2008 – How US Airways Vaulted to First Place