Introduction
We live in an era when the only constant is change. Everything in our lives, no matter how big or small important or not changes rapidly. Companies therefore wouldn t escape from this reality.
It is common in literature and as a saying that the organization, which will not adjust to its internal and external environment and moreover to its changes is doomed. As long as everything is working perfect and responds to the environmental challenges there is apparently no problem. However what happens when the company missed the evolution and remains in its old policies and practices? Then it is almost certain that one or more of its functions will soon prove to be ineffective and inefficient.
At this point the role of the good manager is crucial. To tell the truth these critical situations and his/her reactions reveal the potential of a manager and characterize him as successful or not.
To illustrate the meaning of the above we will use and examine the example of Olympic Airways, the Greek National Air-Transporter. It is a situation, which engages a number of inefficiencies that took place within a long time-range and finally resulted to a huge economic loss. We will attempt to reveal the causes of the problem, the people or the departments that are responsible for the loss and finally propose and evaluate a possible solution.
At this point it should be said that information was given by a number of managers in Olympic who kindly asked for the omission of their names, reasonably since the company is public.
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1. THE COMPANY S PROFILE*
Olympic Airways (OA) is the Greek National Air-Transporter. The company was established in 1957 by Aristotelis Onasis, one of the richest men in the world at that time. He owned the 51% of the company when the rest 49% were public. Initially its flights covered a big part of Greece as well as the major European countries. Successful management of all departments made OA a profitable company.
However the death of Onasis in 1974 resulted to the full transfer of OA to the Greek Government. This proved to be the start of huge problems for the organization. Although flights begun to cover more countries and continents, the loss-gap was continually opening.
In 1999 the management of the company passed to British Airways, which has the control until today. The organization employees 9,000 flight and ground personnel and its airplanes fly to 80 destinations (44 International).
2. THE PROBLEM
As referred in the previous paragraph, the transfer of OA to the Greek government marked the beginning of a dark period for the company. Its annual results appeared, in 1980, an 800 million loss for the first time in the company s history. However instead of systematically face the problem, substantial management mistakes aggravated the situation. Within the next 15 years the debts and losses of OA reached the almost unbelievable number of 150 billion drachmas, which turned the company to the biggest problem of the Government!
Thus in this report, the causes that resulted to this financial problem will be discussed. The most important will guide us in our try to find solutions that will maximize the income and at the same time minimize the expenses (fixed and variable costs) of the company. Hence, the organization will finally begin to have profits and not losses so that we can reach to a break-even point in a few years.
3. ASPECTS AND CAUSES OF THE PROBLEM
A financial problem like the one of OA probably has to do with every department in the company, e.g. the Marketing or the Personnel Department. Mistakes of the line managers in the departments finally are translated in numbers that is in losses in the Profit and Loss Account. At this point it should be emphasized that the Greek culture largely effected on the creation and the aggravation of the problem. The fact that everything started when OA were totally passed to the public is indicative for the cultural effect.
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Dyson (1997) argued that when we are about to make financial managerial decision making, non-financial factors have also to be taken into account (p. 339).
Thus in order to better identify the major causes of the problem we categorized them according to departments, into:
v Human Resource Management Factors,
v Marketing Factors and
v Financial Factors
In every category we will attempt to illustrate the cultural effect to the problem.
3.1 HUMAN RESOURCE MANAGEMENT FACTORS
In 1974, when the Greek Government took the management of OA, the company was employing 7,500 people, which are assumed to be an ideal number for covering all functions without substantial working costs. However, within the next 6 years the number of employees reached the 12,000! That was a result of that time s perception that is the political party, which was governing unfairly engaged their supporters to the various public positions. This perception in other words ignored the implementation of HR Planning (Torrington and Hall, 1998).
No evaluation of the present and the needed resources, no analysis of the environment, no Recruitment and no Selection Methods.
The consequences were soon apparent: although there was a need for flight personnel, most of the new employees were addressed to work on the ground. Hence the flight personnel was obliged to work overtime resulting to huge overtime-costs and also to their fatigue. Furthermore, a percentage of the ground personnel were unproductive, incapable of doing their job, sometimes not doing the proper job, and usually working too little and paid too much. It is not excessive to say that in 1994 there were 200 employees in OA, who were doing nothing in the company, although they were regularly paid and costing the company 180 million drachmas per month! Thus the company not only spared money for nothing but also lost money by disappointed customers.
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The salaries were another problem. Although the flight personnel were paid according to their flight-hours, the ground personnel had standard salaries usually not equal to their service level. The negotiations with the unions always resulted to a defeat for the government.
3.2 MARKETING FACTORS
Marketing has to do with customers and customers bring money. According to the Marketing concept as defined by Kotler (1997), the core of the organizational activities is the customer and every effort within the organization should aim to one and only target: the Customer Satisfaction.
OA totally failed at this point. Although its plane s safety was among the best companies in the world, the executive customers refused to prefer OA s Executive Class. The reason was simple: Executive class means Quality. OA had a terrible decoration in First Class, uncomfortable seats and generally the minimum of the requirements that Quality demands. At the same time ticket prices were too high. Thus there was no loyalty by the good passengers (customers) and the airplanes were usually empty in their Executive classes, with the consequence of losing money and good name.
However ticket prices were generally high in other classes too. The phenomenon of Greek passengers using foreign Airlines for domestic flights was usual in the 80 s. Thus the Marketing department should modify the ticket prices in order to gain back customers.
3.2.1 GROUND HANDLING
Ground Handling was the more profitable service for OA. It contains every service that is provided to the foreign planes when arriving in a Greek Airport. That for instance includes the follow me vehicle, the maintenance of the plane, the care for the plane s staff etc. However the last 5 years, most of the foreign airlines were dissatisfied of the Handling that OA provided and one by one begun to make contracts with other Handling Companies. That was a major wound for the profits of OA since Handling used to bring in 40 billion drachmas per year.
3.3 FINANCIAL FACTORS
Under the pressure of the continually growing loss OA made a number of unfortunate investments in order to win back some money. The rules of Capital Budgeting were not followed with disastrous consequences. For example, in 1987 there were massive airplane acquirements, when the schedule wouldn t need them. Hence some of those airplanes were sold. However the 1989 schedule needed more planes and apparently the company was forced to rent the same planes that were previously owned by OA with enormous costs! This proves that the Net Present Value (NPV) of the investment was totally ignored and the money were spent to clearly face short-term needs.
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Furthermore the company sometimes acquired airplanes that were improper for the trips they were to be used. Recently OA sold 3 JUMBOS and bought 3 AIRBUS to make the Athens-New York flight, although an AIRBUS will need one or two stops in other countries with the cost that a stop requires.
Except the major budgeting mistakes, the company never had a clear Cost-Accounting Method (i.e. Absorption Costing or Marginal Costing) or changed methods from year to year. This created confusion about which were the fixed and the variable costs and also about where the improving efforts should be concentrated.
4. CRITERIA FOR A SOLUTION
In order to find the best solution for the problem, we should carefully analyze the condition and find the key-points to mark and build on them an effective and efficient plan. In other words we should focus on some criteria of success. In our case we notice that there are three areas where most care should be displayed:
4.1 The identification, definition and positive adjustment of costs.
As described in the above paragraphs there are costs in all departments that are totally unreasonable and thus have to be eliminated. Attention should be given in both, the fixed and variable costs, obviously after identifying which are the fixed and which are the variable costs. On the clear view about this issue will depend the selection of a proper Cost-Accounting Method, which will be the guideline for a financial plan.
4.2 Control of investments
If the company had made the right investments the first 2 or 3 years of the problem, nothing would have happened from the first place. Capital Budgeting is a risky function. If planned in an organized way, taking account of the environment and its changes then it can be fruitful. Otherwise disastrous consequences can occur. Thus we should find the investments that will give us the maximum return (in terms of NPV) and thus bet on the for a multiple income.
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4.3 Use of existing resources
OA used to provide a number of profitable services such as Ground Handling as described in previous paragraphs. If the company uses its existing resources to upgrade these services it can gain back their rights and add a substantial amount of money to the total turnover.
5. OBJECTIVES
After 20 years of loss the basic objective of the company could be no other but make a profitable year! Our objective therefore will be to make a plan for a profitable year. This plan will be used as a guide for making every year better and better. Our final Objective will be a Break Even Point after 2 years. That means that we will attempt to make a minimum 75 billion profit each year and thus 75×2= 150 billion which is the current loss.
In this attempt we decided to use the Marginal Costing Method. According to Dyson (1997) this method is ideal for short-term decision making like this one. Furthermore it is the method, which seriously takes into account the difference between fixed and variable costs allowing several options for action. Let s take the numbers of year 199x (in million drachmas):
Total Income 205,500
Variable costs (132,000)
————
Contribution 73,500 (1) I V= F + P (Dyson, 1997)
Fixed Costs (91,500)
————-
Loss (18,000)
Our objective shall be in the next year to have:
Total Income 285,000
Variable costs (125,000)
————
Contribution 160,000
Fixed Costs (85,000)
————-
Profit (75,000)
As we can see in order to make a profit (our objective) we have several options such as increasing the income or reducing the costs (variable, fixed or both of them).
These options will be discussed in the following paragraphs.
6. LIMITATIONS
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Looking at the 9-9 grid below and the T-shape drawn on it, The total number of the numbers on the inside of the T-shape is called the T-total 123456789 101112131415161718 192021222324252627 282930313233343536 373839404142434445 464748495051525354 555657585960616263 646566676869707172 737475767778798081 828384858687888990 The t-total for this T-shape is: 1+2+3+11+20 = 37 So 37 = T-total The number ...
In the data and methods that will be used, there are a number of constraints and limitations that should be seriously taken in to account when reading this report:
+ In order to increase or reduce some numbers we should take under serious consideration the reactions of the company s stakeholders. The most important of them are the employees and their Trade Unions. Possible dismissals will apparently meet enormous reactions, strikes etc. Generally the issue of the stakeholder conflicts should be considered and at this point a stakeholder map (APPENDIX 1) as suggested by Johnson and Scholes (1997, p.198) is recommended.
+ The numbers can sometimes be inaccurate due to confidential reasons of the company. Some numbers maybe even assumed. Another reason for this is the policy of the Greek Government that often gives wrong information in order not to be accused of bad management.
+ We will use a fixed budget basis when calculating the costs. This could give us misleading results. As Dyson (1997) implies, it s like using an elastic rule to measure distances . However the aim of this report is to illustrate the logic of the solution without details, which can be the subject of another more complete project.
7. POSSIBLE OPTIONS
In paragraph 5 we emphasized the fact that the Marginal Costing Method provides us with a number of options in order to achieve our objective. The two main option categories are:
I. Increase the total turnover
II. Reduce costs
At this point we have to say that the following solutions are some, maybe the most effective, from a number of other that may be used in order to finally achieve our objective.
7.1 INCREASE THE TOTAL TURNOVER.
Increasing the total turnover means making some investments that will bring in a substantial amount of money in short-term. Therefore we re looking for a high NPV in a small period with the minimum possible costs. After discussing with several managers and supervisors and asking them about their opinion on some solutions, we determined which are these with the best potential:
7.1.1. Exploitation of the Ground Handling
The Ground Handling as described in 3.2.1 always was the most profitable resource for OA. For many years the company s Handling was a monopoly in Greece, providing its services inside the Greek Airports to almost 90 Airlines from all continents.
The renewal of the service will attract new contracts and give a deep breath to OA. Obviously this will mean some costs in terms of materials and more specialized labour but according to the financial department, the Ground Handling will bring in about 40 billion drachmas per year.
7.1.2 Exploitation of Information Technology
Information Systems have nowadays become an imperative part of every modern company. OA possess the minimum of modern Information Technology. The purchasing and installation of a modern set for Information systems as well as the engagement of specialized professionals is something that should have already been done. We should not forget that IS are a basic presumption for implementing the Business Process Reengineering (BPR), a vital process when improving a company.
It is calculated that the total benefit from using IT will reach at least the 30 billion drachmas per year.
7.1.3. Add Value to products and services
This is clearly a Marketing project. Better waiting-halls, more comfortable airplane-seats, available music for every seat, cinema or better lunch and dinner are some of the factors, which add value to the service. In this way OA can gain the loyalty of good customers adding 10 billion to the total turnover.
7.2. REDUCE COSTS
7.2.1 Exploitation of the Technical Base
Although OA possesses very good Technical Areas for its planes, the lack of the latest Technology and specialized personnel was usually resulting to delays even to simple repairs. Hence the company was forced to repair its planes in other Technical bases paying huge amounts of money. Renewing the existing bases will cost the company only half from what it will save from paying other bases. Furthermore other companies will be attracted to use OA s bases.
7.2.2 Creating a new fleet plan
When the company buys a new airplane, some basic issues should be clear. They include: the flights the plane has to be used for, the intensity of flights as well as the profitability of each plane. This is a fleet plan .
In this way the company will save the costs of wrong purchases and thus of the various rents of foreign line airplanes.
7.3.3. Reducing Personnel
Although it is referred last, reducing the personnel is maybe the most important and critical move that should be done. At the first stage, the personnel should at least be reduced to 9,000 people. Except the tremendous impact to the cost-reduction, the massive dismissal of unproductive employees will give a clear message to those who remain, that they should struggle and be productive in order to keep their positions.
Summary- Recommendations
The above report attempted to examine one of the most serious problems for the Greek Government, that of the loss of Olympic Airways.
We tried to reveal the most important causes of the problem and we discovered that within the last 20 years all the organizational departments made tremendous mistakes. Human Resource had lost control of the number and potential of the employees. The Marketing Department was far away from customer satisfaction and the Financial Department was rather confused when spending money or applying some accounting methods.
These mistakes gave us the guidelines and the framework of what should be more examined and improved so as to get to a Break-Even point in short-term. The proposed solutions aimed to increase the total income and at the same time reduce costs- fixed and variable. Hence, when we would finally reduce costs from income we can have a positive number that is a profit.
The numbers and methods used could probably be inaccurate, however numbers and methods can always adjust to effective solutions.
Changing the subject, it should be said that the company needs a vision. Solutions that may work today are many. The issue is to find new solutions for tomorrow and a long-term strategy to lead the company to long-term targets. Maybe the existence of a gifted leader like Onasis is at this time more necessary than never before.
The implementation of Business Process Reengineering (BPR) can be the initial point for success. BPR, when planned and implemented correctly, can provide the necessary foundation in the effort to achieve substantial improvements in efficiency, effectiveness and finally in quality.
Concluding, we could say that the evidence proves that the problem of OA is its public ownership. In Greece everything that is public has the reputation of functioning in an old, bureaucratic and inefficient way. The transfer of OA to the private sector is maybe the one and only solution for an efficient air-transporter. The competitors are already far ahead and what is to be done should be done as soon as possible.
Bibliography/References
1. Brigham, E and Gapenski, L (1997) Financial Management: Theory and Practice, 8th edtn, Orlando: The Dryden Press
2. Drury, C (1996) Management and Cost Accounting, 4th edtn, London: Thompson Business Press
3. Dyson, JR (1997) Accounting for Non Accounting Students, 4th edtn, London: Pitman Publishing
4. Hill, C and Jones, G (1998) Strategic Management Theory: An Integrated Approach, Boston: Houghton Mifflin Company
5. Johnson, G and Scholes K (1997) Exploring Corporate Strategy: Text and cases, 4th edtn, London: Prentice Hall Europe
6. Kotler, P (1997) Marketing Management: Analysis, Planning, Implementation and Control, 9th edtn, New Jersey: Prentice Hall
7. Robson, W (1997) Strategic Management and Information Systems, 2nd edtn, Essex: Prentice Hall
8. Torrington, D and Hall, L (1998) Human Resource Management, 4th edtn, London: Prentice Hall Europe
