Business 101: Finnair

The employees of Finnair are at it again. This time the flight attendants are on a strike protesting their apparently harsh and cruel working conditions and whatnot. And I'm sure everyone can agree that flying long haul flights requires time to adapt to the timezones and so on. But most people will also acknowledge that the people who have to fly for work will often not get these types of resting times. When the plane lands, off to the meetings you go. So should the flight attendants have their extra time and continue to work 90 hours a month and receive an above average salary (on the Finnish scale)? I don't know, but I do know the following...

Pricing is quite crucial in business. If you price too low, you forgo potential profits. If you price too high, you don't sell. If you price way too low, you sell at a lower price than with which you can sustain the business. Now, the first caveat of pricing is that many people think pricing has something to do with costs. It doesn't. Period. You charge what the customer is willing to pay and you reverse engineer your costs from that amount to see if it's possible to make business out of it. In some cases you will see that even with the highest amounts that you can charge you still can't make up the costs. Hence you should call it a game and move on: there's not business there.

What does this have to do with Finnair or aviation in general? Well, the trend has been changing ever since Southwest came along and made a value innovation and changed the rules of the game. To complement the traditional premium strategies, Southwest created a low-cost competitor: no frills, but the cheapest prices and you still get to go from point A to point B. And lo and behold, there was room in the marketplace for this type of maneuver. This is course leaves the mid-level companies, such as Finnair, in the unfortunate position in which it has to decide what kind of animal it wants to evolve into. The wealthy people will either fly their own planes, charter planes and do the Netjets thing or fly first class in luxury. I on the other hand will optimize the costs associated with the travel and get the cheapest possible ticket. Being in the middle is difficult: you may be able to target the business crowd, but let's face it, in these economic times companies are more than ever before looking at how to reduce travel and where it isn't possible try to get the absolute best rates. It's often cheaper to buy a couple of no frills flights from a low-cost carrier than to get a flexible ticket from the likes of Finnair.

So, the environment has changed and Finnair will need to reinvent itself and think about how to position the company into the marketplace. Based on this, the company will then need to think about its cost structure: if it chooses the low-cost route, the name of the game is scale and minimizing costs as much as possible. Look at Southwest or RyanAir or what have you: standardized fleets, quick turnaround times, optimized costs by flying to remote airports at unattractive time slots to avoid airport fees, and so on. Is Finnair fit to play a game like this? At the current cost structure the answer is definitely not. Can Finnair play the premium game? Well, the premium market in Finland is very limited, i.e. there aren't that many truly rich people (*cough* taxation and the whole shebang). So this may also be a rocky road. And as most people who have flown Finnair will know, the flight attendants never smile. So I'm definitely not going to pay premium prices for grumpy service.

Already the situation is looking quite grim for Finnair. The fact that the different employee groups are trying to suck an already declining company dry may actually be a good thing: my thinking is that the sooner Finnair declares bankruptcy and gets killed off, the sooner we can start from a clean slate and establish a brand new national carrier for Finland which is better positioned in the modern world. This would also take care of the path dependency issues as long as the culture is killed thoroughly enough in the transition. But will this happen? My forecast is no. The Finnish government still has a majority stake in the company and letting a flag carrier fail and at the same time have the staff laid off is something that no politician is willing to do. That is why I am guessing that if the situation gets worse, the government will step in to prop up the company. Mind you, Finnair's brand has already been diluted as a result of the frequent strikes and inability to reliably operate its flights.

So, it doesn't look too promising for Finnair or the tax payers of Finland. The net winners will most likely be the employees in the short-term as they will not need to adapt to the changing world as long as the government continues to bleed money and fight gravity. In the longer term we're all net losers, however, as we are only making a bigger space into the marketplace for foreign competitors to gobble up the space in Finnish aviation and establish routes to compete with the dinosaur that is Finnair. Oh well...