Economics

POST #25: If You Want To Be A Millionaire…

VIRGIN AEROPLANE.jpg

Hello again! I haven’t posted in a while; mainly due to the fact that summer has arrived and I’ve been enjoying writing poems and songs, having long conversations and playing guitar late into the night 🙂 In fact, I’ve just flown back from an awesome holiday in Spain, and was thinking on the flight about a few things I was reading to do with airlines and, (surprise, surprise!) Behavioural Economics.

Before we start; airline companies are classified as HROs – High Reliability Organisations. There’s risk and complexity involved with flying, which means much more money must be spent to avoid catastrophes.

Richard Branson (of Virgin airlines) once famously said:

If you want to be a millionaire, start out as a billionaire and launch a new airline.

Here’s why:

Airlines face lots of competition – think of all the different companies you could fly with: Easyjet, Ryanair, British Airways or Flybe for a few examples. This means there is constant pressure for companies to keep costs down and quality up – if you don’t have the right balance, money starts to be lost quickly!

Along with this, they also have very high running costs. These include those of fuel, upkeep and safety measures, the leasing of land, and the cost of employees. Fuel prices can swing wildly depending on the price of oil, so there have been many times when airline companies have needed to save money or face going out of business.

At this point, there might be a temptation for executives to issue drastic top-down instructions. This ‘innovation’ or big change, sometimes has adverse effects. With an HRO, a decrease in quality may save some money, but could lead to a major catastrophe.

In my last-post-but-one, POST #23: The ‘I’ Word, I put in a quote from Robert Maurer. His alternative to innovation is kaizen, whereby lots of small, gradual steps replace giant leaps of change, which, though ambitious, often fail. In his book, he mentioned this company:

In 1971, Herb Kelleher founded South West Airlines, a domestic American organisation. They quickly rose to success through their image of being a ‘fun’ company; with the flight attendants often singing the in-flight announcements. Yet in 2003, they were starting to lose their underdog status, and other, newer airlines were chasing at their heels.

Herb_Kelleher
Herb Kelleher

So Kelleher sent a letter to every one of his (roughly) 6,000 employees, asking them to save 5$ a day. One woman suggested using plain bin-liners instead of ones with the company logo on them. This then saved them $300,000 just that year! Other employees recommended small steps like taking the stairs instead of the lift to save electricity. Just through the simple act of sending a letter, Kelleher set in motion hundreds of thoughts and ideas that led to the cutting of costs by more than 5%. Cool, huh?


This next example is an experiment that occurred when some Behavioural Economists teamed up with Virgin Atlantic. The emphasis was on reducing fuel consumption, and the method was to give pilots a monthly assessment on whether they were meeting targets or not.

There were four different, randomised groups that pilots were put into. One group was the control group, who received only the information that a study was being performed on them. Even that was enough to make the pilots save a really noticeable amount of fuel. This is simple psychology; when you feel you’re being watched, perceived pressures tend to modify your behaviour.

The other three groups received feedback. One group just got that, another was given encouragement if they didn’t meet the target, and praise if they did, and another group, if they met their target was told that ten pounds would be donated to charity.

These three performed slightly better than the control group, but there was no difference between the group that gave to charity and the others.

Overall, the experiment saved the equivalent of 3.3 million pounds of fuel – a lot of money!   The small step of giving pilots monthly feedback had massive results for Virgin Atlantic.

I’d love to know your thoughts on this 🙂 Have you ever had a small change in your life that’s given out massive results?

FURTHER READING:

http://www.investopedia.com/ask/answers/040715/what-are-major-expenses-affect-companies-airline-industry.asp

http://www.wsj.com/articles/SB105787379839124300

https://www.washingtonpost.com/news/energy-environment/wp/2016/06/22/virgin-atlantic-just-used-behavioral-science-to-nudge-its-pilots-into-saving-lots-of-fuel/?utm_term=.d6d38a018ea2

The Spirit of Kaizen – Robert Maurer Ph.D.

 

 

Advertisements

4 thoughts on “POST #25: If You Want To Be A Millionaire…

  1. Have you listened to the freakonomics podcast ‘In praise of incrementalism’ which had the example of the British cycling team going from having no hope to winning loads of medals in the Olympics by improving everything by (I think) 1 percent such as always sleeping on the same pillow at hotels as they used marginal gains to improve their performance. I think the ideas there are similar to the ones here. Another airline example I saw was how American airlines managed to save $80,000 by not putting an olive in their in-flight salads.
    Here’s the link to the podcast:
    http://freakonomics.com/podcast/in-praise-of-incrementalism/

    Liked by 1 person

    1. Thanks for commenting Maya! Yes I have – it’s really interesting, just as every one of their podcasts is. I also love that the British cycling team used really tactical approaches designed to get to their peak performance every 4 years. You can see that because they never win much in the major events in between each Olympics.

      And I think the olive example is AWESOME! This whole topic really got me interested because ‘saving money’ doesn’t ordinarily sound like the best way to do it would be through imaginative thinking & an outside-the-box approach. But it seems like that way can often yield the best results!

      Like

  2. Really interesting article! I particularly liked the Virgin Atlantic example. I did however wonder if the “control group” are properly deserving of the name, given they were aware of the study. It would also be interesting to see if this effect was temporary or had a lasting effect: one of the issues with these kinds of nudges is that their effects can wear off over time.

    Liked by 1 person

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s