It's do or die for diehards

David Robertson

Most companies get more resistant to change as they get older – just like people. New ideas become stifled by management teams that are locked into a certain way of doing things and corporations that were lean, mean fighting machines in their youth become old and flabby.

In humans, this creeping conservatism is eventually halted when the body expires but a company can be kept on life support indefinitely. Take, for example, the auto industry. The Ford Motor Company grew rapidly in the first half of the 20th century driven by innovation and the ambition of its owner, Henry Ford. For General Motors, it was the aggressive deal making of Charles Mott that turned it into the largest car company in the world.

But from the 1970s something happened to the US car industry. It hit middle age and vibrancy was replaced with conservatism. Car designs were boring and new ideas, new technology and new means of production were buried under layer upon layer of management. When companies such as these run out of steam, the result can be massive losses and, in the case of GM, Chapter 11 bankruptcy protection – the corporate equivalent of heart bypass surgery.

Looking elsewhere in the business world, there are many other companies that appear to be hitting this middle-age slump. Microsoft, Coca-Cola, Pepsico, McDonalds, all the large telecom providers… and, of course, the legacy airlines.

If you want fat, bloated and unimaginative institutions, look no further than the airline industry. To be fair, some are trying to tackle their problems: Delta and Continental are proposing to merge, creating the world's largest airline. However, I suspect that this deal will simply create a company that is very big but still tired and unimaginative.

British Airways is trying to fight its lack of dynamism by going through the equivalent of a midlife crisis. It is adopting ideas poached from younger competitors, going on a cost-cutting diet and forcing change upon a reluctant workforce. Indeed, so resistant to change is the workforce that they are scheduled to start a series of damaging strikes this week that threaten the airline's future – talk about turkeys voting for Christmas.

The tiredness of the older airlines was further emphasised last week when the youthful Emirates Group announced its results for the year to the end of March. While European and North American airlines have been reducing capacity and suffering huge losses, Emirates Airline increased its profits by More than 400 per cent to Dh3.5 billion.

This was a jaw-dropping performance given the global economic environment and highlights the difference between the new carriers and the old. For example, Emirates has pressed on with its growth plans and increased its passenger numbers by more than 20 per cent to 27.4 million at a time when the legacy carriers have been retreating into their hangars in the hope of riding out the economic storm.

Tim Clark, the Managing Director, told me last week that grounding planes was an anathema to the airline's business model. "We knew that people wanted to keep travelling but we had to create the environment for them to do so," he said.

Emirates has cut prices to keep its seats full and this has allowed it to tap into new markets. Businessmen in Africa and Asia who would not previously have considered flying business class can now afford to do so. As ticket fares creep up, these people will be unwilling to give up the nice seats and lounges and will stay Emirates customers.

Being a younger airline has also allowed Emirates to operate a more efficient business model. Mr Clark pointed out that the airline carries 354 passengers on its twin-engine Boeing 777-300s compared to 307 or 353 that Qantas flies in its four-engine 747s. Given that the 777 costs much less to operate than the 747, the potential profit margin for Emirates is far greater.

The performance of Emirates and many other companies in youthful, emerging economies is a warning that Western business leaders cannot ignore. Revolution is needed in the mature companies of Europe, the US and Japan and if that does not happen – if these businesses are not rejuvenated – they will be overtaken by more dynamic rivals.

The writer is Business Correspondent of The Times of London. The views expressed are his own

 

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