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Changing the Culture at DEI Airlines

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11/2002-5071

This case was written by John Weeks, Assistant Professor of Organisational Behaviour at INSEAD. It
is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective
handling of an administrative situation. It is based on materials provided by Jean-Francois Manzoni and
Jean-Louis Barsoux in INSEAD/CEDEP Case 01/98-4740.

Copyright 2002 INSEAD, Fontainebleau, France.

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Well aware of your experience and keen intuition, the newly appointed Chief Executive Officer
of DEI Airlines, Frank Rassemblent, is asking for your help.

The airline is troubled. Last year, a survey by the International Airline Passenger Association
showed that 33% of those polled rated DEI Airlines as the airline to be avoided at all costs
ahead of Aeroflot, Nigeria Airways, and even teetotal Arab carriers. The airlines internal service
numbers tell the same story. In the late 1990s, its punctuality record was dire: in summer 1999,
only 38% of its long haul flights left within 15 minutes of their scheduled departure time, making
DEI Airlines the least punctual airline in Europe.

Not only is the airline suffering from embarrassing service levels and a terrible image, but it also
has serious financial woes. Five months ago, Rassemblent's predecessor as CEO issued a special
bulletin to all staff:

DEI Airlines is facing the worst crisis in its history ... unless we take swift and re-
medial action we are heading for a loss of at least 350 million in the present
financial year. We face the prospect that by the end of this year we will have piled
up losses of close to 900 million in two years. Even as I write to you, our money is
draining away at the rate of over 650 a minute.

No business can survive losses on this scale. Unless we take decisive action now,
there is a real possibility that DEI Airlines will go out of business for lack of money.
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We have to cut our costs sharply, and we have to cut them fast. We have no more
choice and no more time....

DEI's top management has known for some time that the airline is overstaffed. Internal estimates
suggest that at least 20-25% of the company's 58,000 staff need to be let go if its costs are to be
brought into line with competitors. Benchmarking has revealed that, in terms of available
ton/kilometers per airline employee, DEI's performance is below 60% of the average of its main
competitors. DEI is competitive only by virtue of its low labor costs. However, as recently as
two years ago, management had been forecasting increased passenger volume which they thought
would be sufficient to absorb the overstaffing and allow them to avoid complicated and costly
employee reductions. Contrary to their plan, the expected growth in traffic volume failed to ma-
terialize. Though the plan forecasted passenger traffic growth at 8%-10%, the recession and
effects of 11 September left DEI struggling to survive on volumes that had instead fallen by 4-
5%.

As you can imagine, morale in the organization is at rock bottom. Hard economic realities have
inflamed tensions between the airlines two subcultures. DEI Airlines was the product of a
merger in 1992 between two airlines: the long-haul Flag Airways and the short-haul Europe Air.
Immense economies of scale should have been forthcoming but they were neither sought nor ob-
tained. Instead, the two airlines continued to issue separate financial reports until 1994, when
their full merger was announced. Even then, an integrated management structure did not come
into effect until 1997, and it failed to obliterate attitudes and rivalries inherited from the predeces-
sor airlines.

Today, two distinct cultures continue to exist within DEI, with Terminal A of their homebase air-
port dominated by former Europe Air people, and Terminal C by Flag Airways people. Each
terminal deals with very different passengers and time perspectives, and the relative isolation of

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each set of employees tends to perpetuate the contrasting cultures: the resourceful, high fre-
quency, quick turnaround (short-haul) vs. the cosmopolitan, flag carrier (long-haul) culture.
Rassemblent tells you:

The merger has produced a hybrid racked with management demarcation squabbles.
The competitive advantages sought through the merger have been hopelessly de-
feated by the lack of a unifying corporate culture. There hasn't been enough
management time devoted to managing the changing environment because it has all
been focused inwardly on resolving industrial relations problems, on resolving organ-
izational conflicts. How do you bring these very, very, different cultures together?

The one common legacy of the two companies is that they both suffered from inefficiency, over-
staffing, and a heavy dominance of former Air Force officers. Reflecting their military
background, the managers of DEI are very status-conscious, preserving traditions like the sepa-
rate Officers Mess and so forth.

Before Rassemblent arrived, the airline had already embarked on a Survival Plan that proposed:
cutting the workforce from 52,000 to 43,000 over nine months, freezing pay increases for a year,
selling assets such as properties and surplus aircraft, and closing 16 routes. The company offered
generous severance terms, for a limited period, to volunteers willing to leave the airline soon; so
generous, in fact, that the company found itself overwhelmed by volunteers, with close to 16,000
applications. The strength of employee demand, combined with changing governmental regula-
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tions slowly liberalizing the labor market, meant there was hardly any industrial unrest over this.

Though not outwardly charismatic, Rassemblent has had an impressive international career in
various service businesses. On leaving school at 18, he joined a shipping line as a cadet purser (a
ships purser being responsible for accounts and the comfort and welfare of passengers). Seven
years later he moved to the US and joined Hertz as a management trainee. Customer service and
equipment quality played an important role in the competitive car rental market. Hertz sent him
to Toronto, Mexico and New York as assistant to the president, then back to Europe to head up
the operation in his home country where he negotiated numerous fly-drive contracts with the
airlines.

In 1984, Rassemblent was poached by Hertzs rival Avis, just before Avis was acquired by ITT,
to start its European operation. He transformed Avis service image, giving staff (including him-
self) red jackets and badges marked We Try Harder. Rassemblent remembers being heavily
influenced at the time by working for Bud Morrow, head of Avis, who insisted that every execu-
tive in the company should occasionally spend time working on the frontline which, at Avis,
meant behind the rental counters and underneath car hoods.

Within eight years Rassemblent helped Avis overtake Hertz in European sales and earnings. His
reward, in 1996, after a series of senior appointments, was to become one of the few Europeans to
head a US corporation.

Rassemblent took over as chief executive of DEI Airlines a month ago. Well-known for his al-
most single-minded focus on customer service, his philosophy is rooted in the intensely
competitive car-rental business where the products offered are very similar to the airline travel
segment and the customers are also similar. As he tells you now, it is very simple: The initial

Copyright 2002 INSEAD, Fontainebleau, France.

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transaction and the after-sales service are what make the difference. For someone with that cus-
tomer service obsession, he knows DEI Airlines is going to prove quite a challenge. He tells you:

When I came here I was stunned to find that there was no one who had the word
marketing in his or her title at all. There seems to be a general view in the
organization that marketing is about sales and advertising and thats about it. Really,
the orientation is very much to operations and the whole process side of the busi-
ness.
The challenge for Rassemblent is to change that while continuing to cut costs. He estimates that
another 7,000 redundancies will be needed over the next three years. He turns to you:

I am relying on your advice. The good news is that I sense a lot of support and en-
ergy for change among many of our younger managers. The problem really lies with
the layer of senior managers between them and me. I havent met them all person-
ally, but I estimate perhaps 30% of them arent going to be able to make the switch
from the old transportation culture to the new service culture we need to build if
we are going to save this airline.

He asks you to come up with some ideas in response to two questions:

1. What should I do to create this culture change? Help me by coming up with a plan, or
at least a list of suggestions of what I should do and in what order.
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2. What should I tell my board and my people when they ask how long this culture change
will likely take?

Copyright 2002 INSEAD, Fontainebleau, France.

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