IIC Partners

By IIC Partners
Jan. 9, 2013

New Zealand. 4.42 million people. 31.1 million sheep. The world's best rugby team. The world's most innovative airline.

The airline industry was one of the first sectors to be badly hit by the recent global financial crisis. Airlines around the world had their wings clipped permanently as profits were stung by consumers with less money, higher fuel prices, and astonishing rises in airport and government taxes.

Airlines have a unique challenge when it comes to evolving their proposition to meet changing market demand and conditions. Airlines generally do not embrace innovation, because inextricably linked to innovation is risk. And airlines, by definition, are risk adverse.

"Operationally, it's easy to understand why that would be the case. It's a very safety sensitive industry. Operational errors and mistakes can put lives in jeopardy. And it is an industry that is very process driven and that process driven psychology and culture tends to stifle innovation," says Rob Fyfe, who stepped down as Air New Zealand's CEO after seven years at the end of 2012. Until December he was also the inaugural Chairman of the Star Alliance network of airlines.

Rob was recruited from outside the commercial aviation sector, which is highly unusual and certainly not a risk adverse move. He was previously general manager of Bank of New Zealand and COO of ITV Digital in the UK. He has a degree in mechanical engineering and spent nine years as an engineer in the NZ Air Force. He says he "flipped through a whole range of industries".

"What has motivated or incentivised us to innovate is that we are a very small airline. And we have some quite unique characteristics: geographically our remoteness, the profile of customers.We lack some of the opportunities of other airlines. We have been forced by necessity to find our own answers to compensate for our lack of scale and we have developed a culture that has embraced innovation."

Air NZ was the first carrier to introduce Premium Economy in the Asia Pacific region back in 2005 - a class now copied by most other scheduled carriers. It's the first airline to introduce a revolutionary new way of travelling in Economy - Skycouch - a trio of three seats which adjusts into one flat flexible space between seat rows. It is the first airline to allow its Frequent Flyers to accumulate points that can be used to purchase any seat on the airline and at NZ domestic airports, 85% of Air NZ customers check in via automatic kiosks, tagging their own bags and placing them on the conveyor belt.

"The capability of an organization to innovate is much more of a cultural issue than it is a process issue. We have tried a whole range of innovation systems. We ran idea banks for a while, an idea that was the equivalent of 'Dragon's Den' [a UK television programme where budding entrepreneurs pitch their business ideas to potential investors], where people would win quite significant cash prizes and some of those things worked.

"Half our innovations come from within the company. We have created an environment where the CEO and the executive team are constantly communicating to a really engaged workforce, who come to work each day constantly wanting to make a difference at work. No idea is a dumb idea. We have 11,500 employees and anyone in the company can e-mail me or text or ring me up and I will respond personally. I do that with customers as well - I email about 100 people a day. People know I am enthusiastic and willing and open, and combined with having the access to me, that is enormously powerful.

"So the key for me in defining innovation is its two driving concepts: creating a work culture where people want to make a difference and have the responsibility and opportunity to do so, and the second driver is having an organisation which is supported and motivated to challenge the status quo. It's easy to say, but very hard to create."

Some processes are involved. When the company announces annual results, Rob spends the following three weeks on a road show around NZ, talking to groups of 50 to 100 employees at a time about the results, threats, aspirations and what is planned for the following year. Every week, 100 employees visit Air NZ's head office to have a 101 session about the business, how the company makes its network decisions, how its fares are priced.

"People need context. I see my main job as CEO is about communication efforts, staying connected with our customers, connected with our employees to organize and galvanise our common vision, mission and a common sense of direction.

"For a CEO it's about you setting the tone for the organization. You have to demonstrate innovation for the success of the organization. You have to be risk tolerant, to allow people to make mistakes and embed a culture where those coming to work genuinely want to come to work and make a difference, think outside the square, use their initiative and feel supported in doing so. If they make a mistake, don't punish or admonish. 

"One of our teams came up with an idea that would generate a lot more revenue, if we put an extra row of seats on our 737s domestically. So we reconfigured all the aircraft and we got a strongly negative reaction from our customers, who said they didn't have enough room to use their laptops! In the end, we decided to take the extra row of seats out and then we took out a further row of seats to increase the seat space at the front of the aircraft. And customers were prepared to pay a premium for this seating with extra space. The interesting thing is that if we hadn't try the first idea, we wouldn't have identified the fact our customers were prepared to pay a premium and none of our competitors dare to offer that extra leg room proposition.

"Disruption is a bit of a buzzword to me. Innovation can be stimulated by both positive and negative catalysts or by both threat and opportunity. I don't think in terms of disruption; I think in terms of stimulation with provocation.

"With Skycouch there was a provocative stimulus for that innovation. The majority of our customers are Economy class customers who on long flights want seat comfort and to be able to get a bit of a sleep. So we said, 'Let's see how we can get people as close as possible to lying down but the challenge is you can't have any extra space per seat'. Sounds impossible? I want someone to lie down but they can't have any extra space. We had all sorts of weird and wonderful ideas. The solution was technically simple but it was intellectually challenging to get there.

"But the vast majority of our innovations don't come from a negative imperative or the notion of the 'burning platform', but a far more positive stimulus or catalyst. Air NZ has been one of the best performing airlines in this region and the world and that acts as a stimulus to innovate, be more nimble and be able to adapt more quickly.  

"What I am most proud of some people might not even define as innovation, not things like Skycouch or Premium Economy but the innovations that happen on a daily basis when individuals use their initiative to take advantage of an opportunity or address an issue at a customer level. I hear these stories all time.

"We had a customer coming home from Sydney to Auckland. His bag went missing and his car keys were in the bag and he was going to miss the last ferry home to Waiheke Island. One of the cabin crew on his flight noticed him and said, 'Why don't you come home with me, we have a spare bed and we can sort your bag out in the morning?'

"It's about people knowing they can use their initiative, that they can make a difference in those myriad of situations, they know, 'I have permission, I have the opportunity, I have the responsibility'. If you have a culture where thousands of people are looking for those opportunities, those micro innovations far outweigh and are far more valuable that the big scale innovation that gets the big publicity."

However, there is one big scale innovation which Rob concedes is an innovation inspiration to him, as is the person who thought of it.

"When Richard Branson floated the idea for Virgin Galactic it looked outlandish. But that idea will succeed and not only will it succeed on an operational level and they will get people into space, but it looks like it will succeed commercially as well."

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