W15049

EURO-AIR (REVISED)

Professor Paul Beamish wrote this case solely to provide material for class discussion. The author does not intend to illustrate either
effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying
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Copyright © 2015, Richard Ivey School of Business Foundation Version: 2015-03-05

As Herman Miller read through the newly arrived email letter, he swore quietly to himself. Minutes later,
he asked Elizabeth Gold to join him. Miller and Gold were two of the senior regional representatives in a
major city in the eastern half of North America for Euro-Air. Euro-Air, a major European-based
commercial airline, operated daily service to its European hub from 14 cities in North America and
onward service to more than 300 locations in 90 countries around the world. The letter (see Exhibit 1)
suggested that Euro-Air had recently caused a lot of problems for at least one of its passengers. Passenger
complaint letters were not unusual at any airline. What was unusual was the litany of problems described,
the fact that a quick check had revealed that virtually all the listed complaints were valid, and the nagging
question at the end of the letter that asked “What would Euro-Air as an organization learn from this
saga?”

During this meeting, Miller and Gold agreed that Gold should probably take the unusual step of paying a
personal visit to Peter Boyd, the passenger who had written. For Gold, the issues were: “If I do visit,
what do I say to Mr. Boyd in response to the questions he’s raised?” “What, if any, compensation should
be offered?” “What can we do from a regional office perspective to learn from this experience?”
“Should we even bother trying to change operating practices at Euro-Air at the headquarters (parent
company) level?”

THE WORLD AIRLINE INDUSTRY

Air transport was the largest component of the world’s largest industry (travel and tourism). The world’s
airlines carried about 3.5 billion passengers annually. Each day there were about 100,000 flights. One in
four flights was to an international destination. Most airlines, including Euro-Air and its alliance partners,
belonged to the International Air Transport Association (IATA). The approximately 250 members of
IATA were responsible for nearly 85 per cent of international scheduled air traffic.

For the past 15 years, the return on capital invested in the airline industry has been 2-3 percentage points
below the cost of capital. In the decade of 2001-2010, the global airline industry lost an average of $5
billion a year. Because aircraft such as a Boeing 767 or Airbus 330 cost in the range of US$200-250

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million, airlines had large fixed costs, and worked very hard to fill their planes. In 2013, flights operated
at an average of 79 per cent of available capacity (referred to as load factor).

The marginal cost to an airline of carrying an additional passenger was very small. Airlines tried to
increase load factors by such activities as brand definition and promotion, loyalty programs, strong route
systems, revenue management, etc. Airline managements had only limited control over costs of
production/operation, 1 which reduced their ability to compete solely on price. Thus schedule, in-flight
service and loyalty were the subjects of intense rivalry between airlines, and especially with the increase
in interfirm collaboration. The most frequent flyers (such as Mr. Boyd) represented one half of one per
cent of passengers, but provided 40 per cent of an airline’s profits.

EURO-AIR

Originally state-owned, by the late 1990s, Euro-Air was privately owned and profitable. Euro-Air had a
reputation for being safety-oriented and technically reliable. It had a stable work force, with union
representation on the Euro-Air board of directors. In contrast to competitors such as Singapore Airlines,
it was not known for its service culture. It had a fleet of over 200 aircraft, and was a member of the
Crown Alliance network. According to its in-flight magazine, this global partnership (one of several
major groups which existed) had been formed to “make global travel easier and more convenient for its
passengers.” Euro-Air also operated a pilot training school, a catering service, and a major cargo freight
business.

AIRLINE PASSENGER RIGHTS

In response to the high volume of complaints from outraged travelers, various consumer advocacy groups
in the United States and elsewhere had sprung up. Industry critics after the 1990s had observed that the
current laws were punishing passengers in cases of airline mismanagement. The consumer groups were
demanding compensation when passengers were inconvenienced. The U.S. Department of Transportation
as well as groups in other locales such as Europe required airlines to give passengers who were bumped
from flights a written statement describing their rights.

COMPENSATION

The commercial airlines varied widely in their compensation practices. Three examples illustrate.
Northwest Airlines had stranded passengers on planes for up to eight hours during a snowstorm. They
offered passengers they had inconvenienced for more than 2½ hours a free round-trip ticket anywhere in
the mainland USA, while Lufthansa merely provided a $125 credit on a future flight for a five-hour delay
it had caused. Air Canada provided a $100 credit if the personal television did not work perfectly. Most
passengers in North America were accustomed to receiving offers of $200 to $600 from airlines when
they oversold a flight and wanted volunteers to take a later flight.

1
Operating costs included fuel (28% of the total when oil is at about $100/barrel), ticketing, sales and promotion, cabin crew
and passenger service, station and ground costs, en-route charges, landing charges, maintenance and overhaul, equipment
insurance, depreciation and rentals, cockpit crew, and general and administrative costs.

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EXHIBIT 1: COMPLAINT LETTER

International
Consulting
P ractice

April 13, 2014

Mr. Herman Miller

Managing Director
Euro-Air Regional Office
L.F. Hansen Building

Subject: Euro-Air Flights from North America-Europe-Egypt

on April 8/9/10, 2014

I am taking the unusual (for me) step of writing to you in regards to my trip to Cairo, Egypt from North
America on Euro-Air. Euro-Air should be ashamed of the way it treated me. I have never seen so much
airline mismanagement and poor service in such a short space of time. Before I go into detail, you should
be aware of four things.

First, I am a very frequent flyer. I cross an ocean every month. I am a Platinum Elite (Crown Alliance
Gold) member, and sometimes fly non-Crown Alliance airlines also.

Second, I have never had cause to write any member of the Crown Alliance before, despite having
travelled over 1,000,000 flight miles in the past decade.

Third, I was travelling to Egypt for a very brief stay with only carry-on luggage. At my point of
embarkation, I politely (as always) explained to desk and lounge staff that there was no point in my
getting on the plane Monday night (or what became Tuesday morning) if they could not assure me that I
would be in Cairo in time for my scheduled presentation on Wednesday morning to Government
Ministers, and scheduled appearance on national television.

Fourth, I am the author of an International Business Newsletter. It is currently read by about 10,000
business people in over 20 countries. Thus, I have an abiding professional interest in firms operating
internationally. I have particular interest in and expertise in alliances; this, in fact, was the reason I was
asked to speak in Egypt. So my readers and I will be interested in your response.

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EXHIBIT 1 (CONTINUED)

The Events

On Tuesday April 8, 2014, I caught the 6:20 p.m. connector flight from my home town to your regional
hub. It arrived on time, and I proceeded through security to the Business Class lounge to await the 9:30
p.m. departure on Euro-Air (code shared with Air North-Am) to your European hub. The Euro-Air flight
was scheduled to arrive Wednesday April 9th at 11:00 a.m., with a two-hour and 50-minute hour layover
before the Euro-Air flight to Egypt, scheduled to arrive in Cairo at 6:55 p.m. I was travelling Business
Class. The cost of my ticket was $7,182.

By about 8:45 p.m., I asked the airline representative in the lounge why boarding had not commenced.
She explained that your plane from Europe was in, but that there was “a problem.” She did not know
what the problem was. The Departure screen both inside and outside the lounge did not indicate any
delay. (Despite the fact that this flight eventually left more than five hours late, the Departure
screens never indicated anything other than on-time departure!)

Over the ensuing hours, the passengers were kept in the dark about the nature of the problem, how long it
might take to rectify it, and whether the flight would even depart. The lounge staff were kept in the dark
as well. It was not until after 10:00 p.m. that we learned that the delay had been the result of a “Pilot
Error.” As you are no doubt aware, the inbound Euro-Air pilot, after landing, taxied the plane off the
pavement onto the grass and mud. There then was the need to have the plane towed back onto the area
which it should not have left, and then to check for air worthiness. (This explanation was confirmed by
the outbound Euro-Air pilot).

Your in-flight magazine April 2014 contained the following notice about delay information on page 50.

We plan to provide passengers with better information about delays. Monitors will be positioned
in central locations around airports and in lounges, and extra announcements about delays will be
made both at the departure gates and on board.

Such a “plan” seems overdue!

Recommendation #1 — Even if the news is bad, or the solution uncertain, Communicate Early
and Communicate Often.

By about 8:00 p.m., Euro-Air knew they had a problem due to the Pilot’s Error, but they did not
communicate this to airport staff, or passengers. If I had known that the flight was going to be delayed, I
could have examined the feasibility of catching another flight across the Atlantic. The longer Euro-Air
waited to share any information about the problem, the fewer the choices it left premium fare-paying
customers like me.

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EXHIBIT 1 (CONTINUED)

As time passed that evening, it became increasingly evident that I would not be able to catch my
connecting flight to Egypt. Consequently, I asked the (North-Am) lounge staff to please start
investigating alternative routes. One member of the lounge staff said that the airline’s office in Europe
would work on a solution and have it for me when I arrived. I explained that this was not good enough
because if there was not a feasible solution to get me to my destination for the start of my meeting, there
was no point wasting money and time on the flight. Several possibilities emerged: (A) Euro-Air to Rome,
Alitalia to Egypt, (B) Euro-Air back to Amsterdam, KLM to Egypt. When checking options, it became
quickly evident that the lack of a Euro-Air route map, and timetable, in the lounge was slowing the search
process.

Recommendation #2 — For each and every Crown Alliance partner, provide a copy of the current
timetable and route map to the staff in each Business Lounge.

Eventually, the flight departed about 2:30 a.m. By then, most passengers were quite tired, in part from
the late hour and in part from the stress associated with the uncertainty. Prior to departure, I asked if there
was an airline telephone I could use to call my contact in Egypt and see whether I should even get on the
plane given the complete uncertainty about whether I would make it on time. The lounge staff said no
(but that I would be able to be reimbursed for the cost of the call I made).

When seated on the plane, and just prior to landing, all passengers received a very terse apology from the
pilot. I have received longer and more sincere-sounding apologies for 20-minute weather delays from
other airlines.

Recommendation #3 — In the case of delays — especially long delays caused not by weather or
mechanical problems, but Pilot Error – Apologize, Apologize, Apologize.

The perception of many of the premium fare customers (and I was clearly not the only one who held this
view) was that Euro-Air seemed almost indifferent to the trouble/disruptions they were causing.

After the flight was airborne, I immediately sought out the Chief Purser, and explained the difficult
situation I was in. I asked him to contact your hub and to have someone meet me upon landing with a
solution. When the flight landed, I again went looking for the Purser (he had not come back to me). He
assured me that there would be someone to meet me when the transfer bus dropped us at the arrival hall.

I was on the first bus off the plane. There were no Euro-Air staff to meet me at the arrival hall. I waited a
few minutes until all the passengers from my bus went upstairs — and still there were no Euro-Air staff.
The hall was empty. I then proceeded to the gate where the flight to Rome was leaving from because the
Purser had earlier indicated that this might, in fact, be the eventual solution. At the check-in counter they
had no knowledge of me, but were eventually able to tell me that I was booked on a flight to Amsterdam.
One of the women at the Rome check-in counter told me repeatedly that I must have been mistaken about
no one meeting my bus. I politely explained that I know what an empty room looks like.

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EXHIBIT 1 (CONTINUED)

I was directed to a different area where I was issued with new tickets (backtracking to Amsterdam, and
thence to Egypt). My new arrival time in Egypt was to be 1:20 a.m. The KLM (Martinair) flight arrived
in the Middle East a few minutes early. No offer had been made by Euro-Air to meet me in the Cairo
airport, or arrange ground transportation (since my own previously arranged transportation was no longer
available given the late hour.)

In fact, no offer of any form of compensation was ever made by Euro-Air. I find it incredible that an
airline’s highest fare-paying customers can be treated this way. Other airlines have such things as On
Board Compensation Forms — for travel voucher or frequent flyer points — for relatively minor
inconveniences such as reading lights that do not function.

Recommendation #4 — Compensate when the airline is at fault.

What Euro-Air caused me was not a minor inconvenience. It was a major inconvenience. I arrived
exhausted in Egypt. Further, I knew I would be able to get a maximum of three hours sleep before my
workday began there.

So, I leave you with the following questions.

1. If you were the passenger, how would you expect to be treated?

2. What, if anything, can Euro-Air and Crown Alliance learn from the saga?
3. Why should I ever fly Euro-Air again?

Sincerely,

Peter Boyd
Director, International Consulting Practice

cc North-Am

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