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Chapter Five: Bain Airline Turnaround Study

Fifteen months after joining Bain I was promoted to senior associate consultant. Most people take about 24 months to make the jump from associate to senior associate consultant so I was doing well. I was by no means breaking the speed barrier with regards to my promotion speed but I was definitely on the radar as a consultant to watch. At this time I was really looking forward to do something a little different, an airline turnaround study. I had been on two large aviation projects and some smaller studies. The first large study was a disaster but the second was a huge success. I desperately wanted to be in another sector and closer to home.

Remember this was the era before the Smartphone.

A couple of reasons were driving my hopes for an assignment at home office. For one, baseball season was in full swing and this time I wanted to be there for as many home games as possible. I was tired of missing the games and catching the updates at the airport. Remember this was the era before the Smartphone. Second, my personal life was taking off. I met someone who worked very close to my office, within walking distance, but my excessive travelling was damaging that convenience. So hopefully I could secure something where I could spend more time at home. I was always excited about the work the media and banking teams were doing. There was lots happening in the technology space and while the San Francisco office commanded most of the technology work, my office and region had a lot going for it. I spoke to my mentor and the various partners. Given my recent project success, I had a good and growing reputation which I was hoping to leverage. There was certainly interest to use me on some of the technology work.

Ah. Fate had a different plan for me. Bain had been invited to do an airline turnaround project; this time in Europe. Unfortunately my name came up and I was off. With that went my love life and baseball. However, I did learn about the European love for football (we call it soccer). The project was definitely one of the most exciting I had ever been staffed upon. An Eastern European country was trying to pay down its debts and raise much needed foreign currency. A new president and team of advisors had hit on the idea of selling-off large chunks of the state run economy.

The thinking was that the sale would bring in immediate hard-currency, fix the balance of payments, inject western ideas and management into the economy, raise productivity and hopefully this would all lead to an increase in the standard of living. The state run airline sector, banks, chemicals companies, food companies, textiles, auto companies and so on were all slated to go. However, there was hesitancy that a rushed process could lead to a Russian-style fire-sale where all the prime assets where picked up on the cheap with no real short-term or long-term benefits to the country. Therefore, it was decided that the airline company would be the pilot. It would first be readied for sale and then taken into an initial-public-offering led by a consortium of US investment banks.

***

This turnaround project was again a great opportunity for me. The engagement was overseen by the same partner with whom I had worked with previously so he was aware of my skills and capability. That helped immensely since I was being given important roles which were above my level. They were clear stretch-roles which allowed me to grow significantly during my formative years. I really relished this role. It was exciting and I was happy the firm seriously looked at my interest in seeking a banking or technology project and gave me something as close as they could possibly find.

This was in the days before Chris Zook wrote his hugely successful book “Profit from the Core” but his ideas and thinking were already being tested and developed with clients.

I was working with a consultant to look at hundreds of different businesses within the state-run airline and determine if they should be retained. This was in the days before Chris Zook wrote his hugely successful book “Profit from the Core” but his ideas and thinking were already being tested and developed with clients. So our role was simple. Determine if the 70 or so businesses which belonged to the airline should be kept, and if not, make the case to divest them. Like all state-run businesses without a clear profit mandate, this company had really poor financial controls, reporting, asset registers and so one. It was really painful to construct all these items.

And this was normal since profits were never the target. It was all for the greater good. The government was also very, very paranoid about security and wanted the airline to backward and forward integrate to lock-in both raw materials and routes.

Moreover, strategy did not seem to dictate decisions. The main-office for the airline was in a suburb on the outskirts of the capital city. In the late 1980’s the national government had decided to build a prestigious, and expensive, new technical university very close to the head office. So what did they do; they asked the airline if they would “oversee” the university. “Oversee’ could have meant many things, but it eventually led to the airline funding the university, managing the university and even keeping the university on its own books. And this was normal since profits were never the target. It was all for the greater good. The government was also very, very paranoid about security and wanted the airline to backward and forward integrate to lock-in both raw materials and routes. So the airline owned, funded and managed the following:

• Pilot training school

• 4 different aircraft manufacturing companies

• 2 engine manufacturers

• 2 engineering training academies

• Several maintenance facilities

• Several aviation liquid fuel depots, refineries and distribution companies

• 2 Oilfields

• Several basic catering companies

• Road maintenance companies

• Airports

• Facilities management companies

• Airport management companies

• 6 Travel agencies

• A leasing company

These are just the big-ticket items and the ones I can name without giving away the clients identity. There was one particularly large investment totally outside their main business which I cannot mention. If you add in the smaller investments and their actual airline-critical investments, this list easily grows fourfold.

***

My team worked really closely with the strategy group. They were working out what should be the new business and its retained assets, and our job was to then build the business case and determine the value created from disposing the non-core assets.

The country was going through so much financial and political risks that the risk premium, and discount rate was constantly changing. This dramatically affected the valuation.

Building the valuations for this turnaround project was incredibly hard. The basics of a valuation call for forecasting the future cash-flows, adding in a terminal value and discounting back to get the possible sales price. However, so many things drove the value of these businesses:

• The country was going through so much financial and political risks that the risk premium, and discount rate was constantly changing. This dramatically affected the valuation.

• Many of these non-core businesses were only valuable if they had the airline as a client. If they were cut loose, their value would plummet. So we needed to feed this back to the strategy team since it was their call to determine if the airline should continue using them. Choosing the incorrect or inefficient suppliers would dramatically affect the airline’s cost structure.

• Other Eastern European countries were about to embark on similar exercises. Therefore these assets needed to hit the market very quickly or the explosion of supply in similar assets would dampen prices and lower the asking price. Eastern Europe is highly fragmented. So all the assets were not necessary. Picking assets in a central location would allow the entire region to be served on the European side. Russia and the Asian nations of the Former Soviet Union were however different. We needed to get these assets out cleanly and quickly before the market became saturated.

Collecting all the necessary data to this was tough. Luckily we were already working with the investment bankers who were helping us with the analyses.

So we had to work with the strategy and operations teams as they crafted their solutions. Things changed wildly over this 4 month engagement. As new and critical data was discovered, entire recommendations changed.

I did feel cut out of many typical Bain events and cultural happenings. Bain did not have an office in this country and we were just starting off. I felt isolated.

***

Up until this stage I was still very, very excited about working in an exotic location. That enthusiasm was heavily dampened on this trip. While I really, really enjoyed the engagement, working with new people in an exotic country, it also forced me to rethink some things I took for granted:

• My freedom was heavily crimped. At the time kidnappings where a popular pastime and we were confined to our offices and hotel most of the day and night. We could only go out in groups which affected this night-owl for the entire 4 months.

• Being in a foreign country on vacation versus work is such a bizarre experience. On several gorgeous days we would see people strolling through the streets, sitting at cafes or going to the lake. We would be in the office and watching all of this behind tinted bullet-proof glass. That was depressing.

• Not speaking the local problem is a huge problem. Every interaction requires a translator and there is a lot that is lost in translation.

• Your social life and interaction takes a huge hit. My early days at Bain were also in the early days of the internet. Mobile phones were still taking off. Skype was a dream. Facebook and social networking were not even ideas at this point. AltaVista still ruled the search universe.

• Eastern Europe was struggling at this time. While we saw people having fun we also saw much more signs of poverty. Now it is much better, but then it was tough to watch.

• I did feel cut out of many typical Bain events and cultural happenings. Bain did not have an office in this country and we were just starting off. I felt isolated.

• I hated, hated, and hated being away from an office for so long. I felt I was drifting into some weird world where I was cast out with no link back to the real world. I realized how much I missed being part of something bigger.

***

To Bain and the client, the turnaround project was classified as a success. Over the years that followed as the client implemented the recommendations, they did do well. They won awards for their service and they have a healthy balance sheet. Many of the businesses linked to them were never going to be viable and simply folded. That could not have helped the exploding unemployment situation.

This airline turnaround project showed me the importance of operations and implementation. Like everyone else I was obsessed with being a “strategy consultant”. Over time as I saw the challenges of running a business and implementing ideas, I realized that I needed to understand how to take ideas and make them work. I resolved to get onto a juicy operations project, out of the aviation sector, as soon as possible.

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