The Failing Airline Industry – Suffering from Self Inflicted Wounds?  
 

Hey Buddy, Can you Spare a Dime?
One minute flush with the promise of cash from the government, the next minute predicting that his airline will 'perish' within twelve months - ummm, that doesn't sound like a good investment for our taxpayer dollars, does it!
United's Chairman Goodwin provides the latest example of the airlines' amazing ability to always pursue the negative option and then wonder why business is so bad.
For this we pay them the big bucks?

 

United - an airline with a long proud history - is it soon to vanish from the no-longer friendly skies?

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Do the airlines have a lemming-like death wish? It sure seems so at present. Here’s three examples.

Hey, Buddy, Say it Ain’t So

On Wednesday United Airlines’ Chairman James Goodwin took the unusual step of sending a letter to his 100,000 or so remaining employees (UA keep announcing staff cuts, I’ve lost count) warning that the airline – the nation’s second largest – ‘will perish sometime next year’ unless something (apparently not specified and perhaps not even known) changes to counter its current massive losses.

What’s wrong with this picture? Apart from the sorry situation that UA most assuredly finds itself in.

I’ve owned and managed businesses myself, through good times and bad. But one thing I have never ever done is communicate, in a public manner to my entire staff and to my entire customer base as well, that I think my business is going to go broke sometime within the next twelve months! What sort of a message is that? It is a self-fulfilling prophecy message, that’s what it is.

How will you, as a frequent flier, respond to this news? Do you still feel good about your MileagePlus Premier Executive status? Or is it time to urgently switch to another airline’s program? And what about those hundreds of thousands of frequent flier miles you’ve been sitting on – probably time to quickly cash them in, isn’t it!

And what will United’s best and brightest staff be thinking? They’ll be thinking it’s time to jump ship, urgently quickly! Linda Farrow, President of United’s Flight Attendant Union claims that Goodwin ‘made a number of mind-numbingly irresponsible financial decisions over the past year’ and calls on him to now step down.

The net result is that Chairman Goodwin’s letter, rather than having any positive effect, will encourage both its best staff and its most profitable customers to abandon United and thereby hasten the demise of a once rock-solid seeming leading carrier.

Failing a First Year Marketing Course

Now let’s switch gears and pretend we’re in a first year Marketing or Economics lecture and learning about the ‘Elasticity of Demand’. This is really simple, which is why it is covered in a first year course - if you have too much of a product that isn’t selling, you reduce its price, which means (for most products with an ‘elastic demand curve’) demand will increase.

You’ll see this on seasonal pricing for produce – peak season fruit is cheaper than early season. It applies to airlines, too - if flights are going out full, you increase the price of tickets. If they’re going out empty, you drop the price. It can’t get simpler than that. Maybe this is too simple for the high powered MBAs that staff the airline’s marketing and pricing departments because they’ve only mastered the first part – you know, the bit about increasing prices. The second bit – lowering prices when demand is weak – eludes them.

A recent article by a transportation economist, no less, takes the airlines to task for their continued exploitive pricing on non-competitive routes. Professor Burton writes that, like many others, he decided he’d rather not travel when faced with $1000 for a roundtrip fare between Charleston, WV and Atlanta (a one hour 46 minute flight). This decision however penalizes a lot more people than just the airline. It means that the rental car company, the hotel in Atlanta, local restaurants and services, all such companies also lose business.

The airline for sure lost out – it got no revenue at all from this potential passenger. It could have made a fair profit selling the ticket at $250 and a massive profit selling it at $500, but instead it greedily tried for an ‘all or nothing’ jackpot at the $1000 price point, and ended up with – you guessed it, nothing.

This pricing situation isn’t new, but now the airlines are flying on taxpayer’s money. Seems to me that they have a moral obligation to sensibly price their tickets and to do all they fairly can to help people to travel and jump-start the American economy – a huge part of which relies on people flying as often as possible.

Making Travel as Unpleasant as Possible

Lastly, I’m reminded of a 30+ year veteran of the airline industry who often starts a speech by saying ‘We know that very few of our customers choose to take a flight just for the sheer pleasure of flying’ – a statement that usually draws polite laughter. Rather than joke about it, surely the airlines should do all they can to minimize the appalling unpleasantness to which we’re now being asked to meekly submit, rather than to exploit the situation for all they can, under the guise of increased security.

There is no reason why any security procedures need to have people checking in for a flight two or three or even four hours prior to departure. The airlines and the security screening people they contract with have a simple choice – employ more staff so as to process their passengers more efficiently, or lay off staff and cause their passengers to spend more time waiting to checkin than they actually spend on the flight itself.

As we now know, the airlines are choosing the less honorable course, and are trying to make us believe that taking two hours rather than twenty minutes to check us in for a flight somehow means they are doing a better job and we are safer! Get this – it is now quicker to check in for a long haul international flight (operated by a high quality and security conscious carrier such as BA) than for many short domestic flights. Something’s really wrong here, and it has nothing to do with security. It’s all about unacceptable service, not increases in security.

These ‘savings’ in service levels must be costing the airlines plenty of lost passengers. With an unknown but probably 2-4 hour checkin time, it makes quick one day business trips - such as we have all often done in the past - an impossibility. And for sure, if you’re like me, you’ll do a whole lot fewer overnight trips – more expensive in time and money and less convenient every which way - than you have done single day trips in the past.

As a quick rule of thumb, the profit on each short day trip ticket is sufficient to pay for one extra security person at both airports. Do the math yourself - if each airline is losing only two passengers per flight per day due to these new so-called ‘security’ delays, the industry as a whole could afford to hire as many as 50,000 extra security staff with the money they’d get if just these two passengers per flight returned to the skies! No need for extra ticket surcharges or fees - just a simple ‘think positive’ marketing approach.

I’m cutting back on my travel. Not because it is dangerous. Not because I’m scared. But because it is now so incredibly unpleasant, inefficient and overpriced. So perhaps United Chairman Goodwin is smarter than I give him credit for. Because, for sure, if United keeps acting the way it is at present, it definitely will go broke.

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Originally written 19 Oct 2001, last update 15 Oct 2013
Copyright 2001 by David M Rowell.