Risk Rap

Rapping About a World at Risk

Flying Unfriendly Skies

It’s hard to make sense of the mass grounding of American Airline jets this past week. The decision by AA management to implement an immediate review of its MD 80 aircraft caused great hardship to thousands of its customers, lost tens of millions of dollars in revenue, damaged customer loyalty and put a dent in the company’s brand. Readily apparent are two interpretive perspectives on the American Airlines grounding.

One interpretation is of a public company taking dramatic risk mitigation action to protect its brand and franchise through a rapid deployment of a full coverage compliance initiative. The other perspective is the growing political tension between commercial markets and the perception of regulatory incursion by a Federal Government Agency the FAA.

Some may argue that the thrust in the scope and enforcement power of Federal regulatory agencies have eroded over the past two decades. American Airlines failure to follow FAA compliance guidelines is an example of company’s dismissive approach to regulatory compliance. Further, the political zeal of regulators was tempered by a republican administrations Laissez Faire ideology and commitment to free markets. The AA grounding was a regulatory over correction by the FAA due to its lax standards when it failed to detect cracked fuselages on some Southwest Airlines jets.

The dance of regulating markets and the political will and apparatus to do so are issues of growing prominence due to the sub-prime mortgage debacle and the banking crisis. But we must give AA management credit for realizing the risk that non-compliance posed to the reputation of its brand. Some companies never recover from brand damage caused by a reputational risk event. This is particularly damaging when the risk event threatens a core value or perception associated with the brand.

Consider the accounting firm Arthur Anderson. Anderson’s could not recover from its lack of sound judgment and objectivity in signing off on fraudulent financial statements of Enron and Waste Management. The damage led to the extinction of a trusted and venerated brand. Trust, sound judgment and objectivity were core values associated with the Arthur Anderson brand and once those values were compromised the brand lost its value.

Same goes for American Airlines. As a premium provider of air travel services, clients expect the brand to offer enhanced assurance of safe travel due to superior operational expertise and resource devoted to service delivery. American Airlines admission of laxity in compliance practices with FAA inspection and wiring safety standards and the actions it took to rectify compliance deficiencies is a dramatic affirmation of the company’s desire to protect brand value.

Last weeks travails need to be incorporated into the branding story of AA. Its marketing message will convey its uncompromising commitment to the safety of its clients. In so doing AA’s management made a wise investment decision to protect the long term equity value of the company.

Risk: reputation; compliance; market, regulatory

You Tube Video: Eastern Airlines Commercial, Wings of Man

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April 15, 2008 - Posted by | marketing, regulatory | , , , , , , , , , , ,

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