The right performance output measure at Alaska Airlines

In the previous post, I wrote about using meaningful performance output measures to trump biases.  In the Weekend Interview in the Wall Street Journal, Alaska Airlines CEO, Bill Ayer provides some good examples of this from the business world.

The Journal frames the discussion with Alaska Airline’s success:

Alaska shares rose 30% last year, making it the only major airline to show a full-year gain. The industry was down 25% on average.

Here Ayer mentions the common status quo bias:

It’s easy to justify the status quo. We fell into that trap. We always had a quick answer. Just that sometimes it was wrong.

It’s like an overweight person who has done the same exercise and diet routine for years. It obviously isn’t working.  Why aren’t they willing to try something new?  Because that’s the way they’ve always done it.  And, they rationalize things could be worse.

Here, Ayer talks about the right performance output metric for a business:

“[At] airlines that are profitable,” he says, “the business model is there to grow. If you’re not profitable you shouldn’t be growing. You don’t want to grow for growth’s sake. You don’t want to just grab market share from other people.” Note the implied dig at competitors like Delta and JetBlue that borrowed to expand. Mr. Ayer suggests that airline executives need to change their mindset. “If lack of profitability is the core problem, then the central metric ought to be about profitability.”

That’s a common mistake I see in business.  Managers desire to change some metric without bothering to understand if that will drive meaningful results.  They want to grow market share or client counts or they want to improve client retention or sales through ratio and they either assume profitability will take of itself or don’t consider profitability at all.

Often they succeed at improving whatever metric they’re measuring, but lose their job because it turns out that metric had an opportunity cost to profitability that they had not considered.  For example, they may improve client retention by 1% using the old business myth “it’s cheaper to keep a client than get a new one“, but hurt new client acquisition by 3% in the process and come out behind on profits.

This is another quote from Ayer that I enjoyed:

“Hope is not a strategy. We don’t spend a lot of time counting on things we can’t control.”

Surprisingly, all to often hope is the strategy and all too often we do try to control things that can’t be controlled.

Good Watching

A few good videos from Reason.tv

The 4-Minute Guide to the Seven Hour Summit I know Reason TV is biased, but I wonder if Obama said anything substantive during this event or did he just remind McCain that he won the election and reflexively repeat “it will work”?

What are profits? Many people think profits are evil.  They’re not.  If left to work in relatively free markets, they’re a signal that tells us what is in demand and what is not.  That way producers will be encouraged to produce the stuff we want and not produce the stuff we don’t want.  The problem with profits is that sometimes people use government power to make profit on things we don’t want.

Drew Carey talks about foreign labor.  Politicians love to save our jobs from going to foreign countries, but don’t try to save them from the might machine.  His point, either way we are better off.  Yes, we will all have to face the fact that what we are doing at some point in our lives may go away due to machine or foreign labor.  That’s rough.  But it’s real.