Discuss how an organization can utilize incentive pay to achieve organizational goals and propose the best option for Longhorn Airlines. What challenges m

Case

Learning Outcomes

Students can use this case to:

· Consider change management issues in a crisis environment.

· Investigate new technologies to improve operational efficiencies in a service organization.

· Understand how process improvements can increase operational efficiencies, but can also have a negative effect on workforce staffing requirements.

· Assess potential compensation strategies associated with achieving business goals in process re-engineering.

· Evaluate effectiveness of restructuring work processes and compensation policies on employee satisfaction.

Introduction

Longhorn Airlines is a Dallas, Texas-based airline that flies regional flights utilizing smaller jet aircraft produced by Bombardier. The company contracts with United Airlines (NYSE: UAL) and provides service under the United logo but operates as an outsourced third party. Customers book flights through United’s website, the plane logo is that of United Airlines, and the flight crew wear United uniforms, but they are in fact employees of Longhorn Airlines. “The only way the customer notices the distinction between the two airlines is that on the ticket or website the customer sees some type of notice such as ‘UAL 1590 operated by Longhorn Airlines,’” said Katie Sutton, director of marketing for Longhorn Airlines.

“We are a fairly large company that very few people have ever heard of,” said Anna Gates, VP of operations for Longhorn Airlines. “We employ a little over 2,500 employees and have operations in 12 states. However, all of our flights are done under the United brand so we have very little brand name recognition with end consumers. Ninety-five percent of our company’s revenues come from our third-party contracts with United Airlines and the remaining 5% is derived from private charters of our aircraft.”

“Because so much of our airline’s revenues are derived from our long-term relationship with United, it is imperative that we do all we can to make them look good in the consumer’s eye,” said Thomas Cox, CEO of Longhorn Airlines. “Competition for passengers was intense before the [COVID-19] pandemic sent the industry into a freefall, but now it is fierce, to say the least. To that end, we need to do everything in our power to improve on-time performance and customer satisfaction. Everyone from the pilots, flight attendants, mechanics, luggage handlers, to the customer service representatives have to work together to get planes loaded, pushed away from the gate, in the air, and on the ground in a timely manner. In addition to speed, we don’t have much margin for error in our business so we have to be very thorough in what we do. We have two competing interests: speed and quality.”

History of the Company

Longhorn Airlines, LLC was founded in 1980 in Lubbock, Texas shortly after the airline industry was deregulated. At the time of its founding, the company primarily serviced small airports in West Texas that lacked commercial airline service at that time. “Back then Longhorn serviced communities such as Lubbock, Midland, Odessa, San Angelo, etc. with small, twin-engine aircraft. Over the decades, we expanded our geographic reach and upgraded our fleet. At first, we were using small prop planes that carried 10 to 12 passengers and had no flight attendant. Later we upgraded to larger turbo-prop aircraft that were able to carry 24 passengers. Beginning in the early 2000s we completely switched over to the even larger Bombardier regional jets that can hold up to 36 passengers with two pilots and a flight attendant. Not only are these planes larger, but they are more fuel-efficient, quieter, and have a longer range than the older turbo-prop aircraft we were using in the 1990s,” said Cox.

“In 1999 we took advantage of the then booming tech economy and relocated to Dallas, Texas, where we could better leverage financial resources and develop a presence in the Dallas-Fort Worth (DFW) market. By 2004, we landed a contract with United Airlines, based in Chicago, Illinois, to provide contract service for smaller regional airports that feed into their larger hub airports such as DFW, Houston Intercontinental, Chicago O’Hare, etc. We operate flights out of smaller airports in Texas such as Tyler, San Angelo, College Station, to name a few, and deliver those passengers to the larger airports where they connect with flights departing for larger airports. It doesn’t make financial sense for a company to run a flight from Tyler to St. Louis because there simply isn’t enough demand. However, if you run one flight a day from Tyler to Houston or Tyler to DFW then those passengers can connect with larger aircraft going to places like New York, Miami or St. Louis. Then the regional flights not only make economic sense, but they help feed the larger system providing the volume of passengers needed to make the airlines profitable.”

“United contracts with us,” Cox continued, “because they don’t have to maintain the fleet of aircraft and don’t have to hire the employees. Instead, we do all that for them. Also, because our flights utilize smaller aircraft and are shorter duration flights, we can specialize in what we do best while allowing United to do what they do best. We don’t have to worry about marketing, because that is United’s job. We just focus on making sure the ‘bus’, so to speak, leaves on time and arrives on time. Everything we do is about improving operational excellence. That’s where our true value-added capabilities factor in.

“Unfortunately, we and United both have room for improvement. As you can see by the information below, our on-time flight record and our customer satisfaction scores could be improved. In fact, we are below the industry average on customer satisfaction and that has to change.”

On-time Flight Information

According to a report in  USA Today, analysts at OAG ranked on-time performance (OTP) for carriers and airports (Baskas, 2016). Of the North American carriers, they ranked as follows:

· 1.

Hawaiian Airlines (89.1%)

· 2.

Alaska Airlines (86.38%)

· 3.

Westjet (85.88%)

· 4.

Delta (84.5%)

· 5.

Southwest (82.12%)

· 6.

Virgin America (81.58%)

· 7.

American (80.1%)

· 8.

Air Canada (79.46%)

· 9.

United (79.0%)

· 10.

JetBlue (78.26%)

On-time flight information is important, especially for business travelers. Being delayed can negatively influence meetings with clients, participating in conferences or trade shows, and spending time with family. “Business travelers increasingly make airline punctuality part of their decision making,” said OAG senior analyst John Grant (Baskas, 2016).

Customer Survey Responses

J.D. Power ranks customer satisfaction of the major airline carriers in North America utilizing criteria such as airfares, on-time performance, lost luggage, flight crews, bump rates, and availability of overhead storage, to name a few (J.D. Power, 2017). “Airlines still have significant room for improvement (in customer satisfaction scores). Airlines still rank among the bottom tier of most service industries tracked by J.D. Power, far lower than North American rental car companies or hotels.”

Figure 1  shows the ranking of North American airline carriers according to the J.D. Power 2017 North America Airline Satisfaction Study.

Figure 1. J.D. Power 2017 North America Airline Satisfaction Study

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Long Description

Technological Enhancements

Cox knows that technology propels organizational operations worldwide, offering increased efficiencies and deeper insights into customer preferences across all industries. The airline industry is using predictive analytics to improve maintenance, safety, fuel performance, and reduce operating costs. Cox asked Anna Gates, Operations VP, to investigate ways technological enhancements can improve operational efficiencies and, most importantly, customer satisfaction.

Recognizing the need to improve Longhorn’s operations and at the same time its customer satisfaction, Gates has been looking into technology that could help the airline improve its processes, particularly baggage handling. Research shows that baggage handling is second only to punctuality in importance to airline customer satisfaction (Kalemba et al., 2017). “Technology enhancements can help provide a more efficient baggage handling process for Longhorn Airlines, which will go a long way toward improving customer satisfaction as well,” said Gates.

Already, airlines have decreased lost baggage incidents 50% by switching to radio frequency identification (RFID) tags in addition to current bar scanners. But even with that improvement, lost bags still cost the industry over USD 2 billion annually in time and expense to return them to customers and lead to customer dissatisfaction (Guah & Joseph, 2012). Gates wants to implement RFID tags at Longhorn Airlines and explore the possibility of mobile technologies designed to give ground crews access to technical manuals, to improve workflows, and to reduce downtime for each aircraft.

“There is never any reduction in competitive pressures in the airline industry, so the need for continuous improvement is always staring us in the face,” said Gates. “Today, mobile devices and mobile apps provide faster access to data analytics so we can see where our bottlenecks are, what is causing them, and be more responsive in correcting those areas.” SAM (Simplified Aircraft Maintenance) and FlyPal are two iPhone-based apps Anna has heard about; both require monthly subscription fees under USD 50, but she knows there are others to consider as well.

“We already know that we can improve baggage handling with RFID tags, but mobile apps also promise faster response if a bag gets separated from its owner and can even track the customer through the airport. Flight notifications can be sent directly to the customer and if they aren’t at the gate when their flight is ready to leave, their baggage can be quickly and easily located and removed from the plane. Then the flight can still leave on time and the customer doesn’t have to wait to be reunited with their luggage. If Longhorn can improve its processes, then United Airlines in turn sees an improvement on their connection times and we strengthen our relationship with our partner.”

Request for Proposal

Gates wants her team to investigate the use of RFID tags and available mobile apps for improving not only baggage handling, but also maintenance and repair to improve operational efficiency. Additionally, CEO Thomas Cox requests a human resource compensation team to submit a proposal about how Longhorn Airlines should structure an incentive compensation plan to help the organization achieve its stated goals of wanting to improve on-time performance and customer satisfaction scores. Presently the company utilizes no form of incentive pay and each employee receives a salary or hourly wage competitive with the market.

Cox tells Gates, “Right now our employees don’t understand how their actions positively or negatively impact the overall operations of the organization. I need the mechanics, flight crews, cleaning crews, luggage handlers, refueling technicians, food service crews, and customer support staff to all work as one unit. A delay in one area or a sloppy job in another area impacts all of us. But I’m not sure what we should do. Do we utilize individual, team/group, or company-wide incentive programs to achieve our desired goals? If so, what should those plans be and how should they be structured? Should they be introduced overnight or gradually phased in?

“I know we have to change things up if we want to see results. But the what and how are what I’m presently struggling with. I need help on what behaviors we are going to measure and how. What is critical for your proposed plan to work? I would also like to know the limitations/weaknesses of your plan. Last, I need to know how much your plan is going to cost our company.”

Gates tells Cox that with technological enhancements, the company stands to improve operational efficiencies by at least 50% in baggage handling and reduce expenses related to returning any lost bags. However, a potential consequence of such enhancements is that some employee positions may become obsolete. Recognizing that a frequent result of automation in the workplace is job displacement, Cox also wants the report to consider potential costs associated with severance packages.

Considerations in Designing Incentive Pay Programs

The following factors should be considered when designing an incentive pay plan (Martocchio, 2015):

· Should the plan be based on group or individual employee performance?

· What level of risk are employees willing to accept in their overall compensation package?

· Should incentive pay replace or complement traditional pay?

· What criteria should be utilized to assess individual and/or team performance?

· What time horizon should be used for goals? Should they be long-term, short-term, or a combination?

· How will you account for factors outside the employees’ control (e.g. weather delays or heavy traffic on airport tarmacs) that delay OTP?

Gates realizes there are several considerations to evaluate before making her recommendations to Thomas Cox. In order to finalize the report, she must first investigate the potential impacts of implementing an incentive pay plan and research the use of new technologies to improve operational performance in plane maintenance, baggage handling, and customer satisfaction. Finally, Gates must assess the potential human resource impacts resulting from any recommendations leading to the elimination of any employees’ positions. She knows there is a lot of work to do, but she is ready to explore her options.

Discussion Questions

Compensation Theme

· 1.

Can an organization utilize incentive pay to achieve organizational goals?

· 2.

Utilizing the information provided in this case along with assumptions you may need to make about number of employees and their salaries and wages, develop an incentive pay plan for individual employees that would accomplish the organizational goals outlined in the Request for Proposal section. As part of this activity, address which factors a company should consider when designing an effective incentive pay plan. Students should identify the behaviors or actions that will be measured and explain the linkage between those actions and the incentive rewards. Last, develop a budget that shows the projected total cost of this incentive plan.

· 3.

What are some possible disadvantages to utilizing an incentive pay plan?

· 4.

Under which circumstances would a group or company-wide incentive pay plan be most effective? Would that work better for Longhorn Airlines than an individual incentive plan? If so, how would that incentive pay program be developed? And what would be the projected total cost of that plan?

Information Systems Theme

· 1.

What are some emerging technologies that are enabling airlines to increase operational efficiencies in luggage handling/maintenance and repairs/on-time performance/check-in processes?

· 2.

Which of the technologies identified in your answer above do you recommend for Longhorn Airlines at the current time? Explain your answer.

· 3.

What are some potential impacts to the labor force at Longhorn Airlines of implementing these new technologies and improving their operational efficiency?

General Management Theme

· 1.

What factors may be impacting the company’s current performance?

· 2.

How might compensation and information systems be used in combination to address these organizational performance problems?

· 3.

What challenges might the top management team encounter in implementing the changes you are recommending? Special emphasis should be given to how a large organization coordinates activities across functional areas such as HR, information systems, and operations management.

References

Baskas, H. (2016, January 7). Report reveals the best airlines and airports for on-time performance.  USA Today.  https://www.usatoday.com/story/travel/flights/todayinthesky/2016/01/07/airline-on-time-performance/78407958/

Guah, M. W., & Joseph, R. C. (2012). Analysis of RFID technology usage for luggage management in the airline industry.  International Journal of Information Technology & Management, 11(3), 240–255.  https://doi-org.libdatab.strayer.edu/10.1504/IJITM.2012.047828

J.D. Power. (2017, May 10). Despite inflammatory incidents, airline customer satisfaction keeps improving, J.D. Power finds.  http://www.jdpower.com/press-releases/jd-power-2017-north-america-airline-satisfaction-study

Kalemba, N., Campa-Planas, F., Hernández-Lara, A.-B., & Sánchez-Rebull, M. V. (2017). Service quality and economic performance in the US airline business.  Aviation (1648–7788), 21(3), 102–110.  https://doi-org.libdatab.strayer.edu/10.3846/16487788.2017.1378266

Martocchio, J. J. (2015).  Strategic compensation: a human resource management approach (

8th ed.

).

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