Over the past decade, as competition in the airline business has intensified, traditional carriers have pursued strategies to spur growth, trim costs, and improve profits. To counter the threat from low-cost competitors such as Southwest Airlines and Ryanair, some have created their own budget or regional carriers. The result: today the world's 20 largest aviation groups operate about 50 airlines. In pursuit of higher profits, large traditional airlines have also diversified into related businesses. In doing so, they broaden their customer base to provide services (such as aircraft maintenance and catering) to other airlines and to other kinds of operators (for instance, air cargo space to freight forwarders and maintenance services to the defense sector). To reduce costs, these airlines have repeatedly sought concessions from their workers.

Such changes greatly increased the complexity of managing aviation groups, which have traditionally been organized along functional lines, with all operations from sales services to flight operations reporting directly to the CEO (Exhibit 1). As this complexity increased, decision-making bottlenecks at the top of some companies began to hinder their ability to respond rapidly to shifting competition. The focus of top executives on the core passenger airline often diverted attention from emerging opportunities...