The Airlines' Fatal Mistake

 
 

Carrot or Stick?

Never known for their finesse, the major airlines are trying to bully us into paying more than we should for their despicably poor services.  Making their lower priced fares unattractive, while doing nothing to make their full fares more palatable, is surely a fatal mistake.

Why can't they learn from the lower cost airlines, that are successfully using a positive service and value based approach to winning increasing business?

The majors are reducing themselves into generic no-frills products, but still hoping to charge premium prices.  This policy will not succeed.

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With an ineptness that only airline executives can achieve, the airlines are adopting the totally wrong strategy to reverse their present death spiral. And, inevitably, the main victims of their errors are us, their long suffering customers.

Here, in simple language - intended to be understood even by airline executives - is an analysis of what went wrong and what needs to be corrected.

Airlines Destroy their Own Fare Credibility

The US Government has just negotiated new fares with 14 of the US airlines for 2003.  The tickets are unrestricted, and can be as much as 72% LESS than comparable business fares offered to the general public.  Yes - if you buy a full fare ticket for $700, the government is buying the same ticket for under $200.  I've seen corporate discounts for companies that buy millions of dollars of travel a year go as high as 40%, but I've never seen 72% in regular commercial contracts.

Can anyone explain why it is that the airlines are complaining at not making money and needing to charge more, when they can simultaneously discount their tickets a stunning 72% to the government?  If it makes commercial sense to transport government employees on tickets with no restrictions, no advance purchase, no penalties, no Saturday night stay, at these rock-bottom discounted rates, why can't the airlines offer the same rates to other travelers?

The airlines have been desperately trying to spin the story about why business travelers are now refusing to pay 'business' fares every which way, but the secretive government discounts illustrate the underlying ugly reality the airlines wish we didn't know.  Their so-called 'business fares' have no credibility.  The truth is out.  Only fools pay full business fares.

They Totally Misunderstand the Problem They Created

The airlines are puzzled about why their business has collapsed.  They offer various analyses and are trying to implement various responses. But they are getting it all wrong.  For proof of this, let's look at a quote from former American Airlines CEO Bob Crandall.  On  'Meet the Press' last Sunday he said

The public has been offered a choice, in effect, between quite high levels of convenience and service on the one hand and very low prices on the other.

This analysis is dead wrong!  The airlines have not offered 'quite high levels of convenience' to any of their travelers for many years!!!

Bob Crandall's comments were echoed in the massive changes announced by US Airways earlier this week, greatly increasing the restrictions on tickets and greatly reducing the frequent flier benefits.

And this, in a nutshell, represents their fatal mistake.  US Airways had a simple choice - should they make the services they offer full fare passengers more appealing, to boost their revenues in a positive manner (the 'carrot' approach), or should they make their discounted tickets even more difficult to use and less appealing (the 'stick' approach).

Sure enough, they chose the negative approach.  But their full fares are still as unappealing as ever before.  All they have done is make their discounted fares even less palatable, while doing nothing to positively encourage their customers to spend more.

They can not bully people to pay unnecessarily high fares.  This truly will be a fatal mistake.

The Airlines' Five Worst Mistakes

In total, there are five reasons why the traditional carriers are spinning in a death spiral down into bankruptcy at present.  They are stunningly obvious and simple.  They did (and still are doing) five things wrong :

  • They increased the spread between discounted fares and full/business fares.  Only a few years ago the spread from highest to lowest fare was a factor of three, but when the airline industry collapsed, the spread had widened to six to one.  At the same time, discount carriers have been narrowing the spreads between their highest and lowest fares.

  • Secondly, while increasing the cost of unrestricted fares, they reduced the benefits associated with full fares, making the so-called 'no frills' airlines more and more attractive on a service (as well as cost) basis.

  • Thirdly, they pretended that the new low cost carriers such as Southwest were not 'real competitors'.  Rather than learn from and respond to these airlines, they ignored them and what they implied about their customers' real needs.  But now, the discount carriers that the majors used to laugh at are worth very much more than the former 'majors'.

  • Fourthly, they have allowed the hassle factors and time costs of air travel to make it cheaper, more pleasant and quicker to travel longer distances by car not plane.  The airlines estimate that security hassles alone will cost them $2 billion in lost revenue in 2002, but are spending none of their own money to help solve these problems - how stupid is that?

  • Lastly (and it might well be the last thing that some of them do as they go into potentially terminal bankruptcy) they insist that the only cure to their problems is to cut back on services, cut back on staff wages, and to increase fares, way beyond the point that anyone will pay for.  Their competitors - the lower cost airlines that are stealing massive market share - are succeeding by doing exactly the opposite - increasing the quality of their service while reducing their fares!

Lessons from the Real World

Now for a lesson from the real world - the place that airline executives never seem to inhabit.  These days the service on Southwest is generally better than the service on a so-called 'full service' airline.  By taking away every possible perk of 'full service', and while allowing (or, it seems, encouraging) surly service and an anti-customer attitude to pervade every level of their organizations, the big airlines have nothing left in their favor, except, perhaps frequent flier programs.  But they're even strangling the benefits of their frequent flier programs by making qualification to premium levels harder, making redemption more difficult, and adding fees to what should be fully free award tickets.

In comparison, the lower cost airlines are looking better and better.  Anyone who has ever experienced Jet Blue's planes, cabin crew, and ground staff will tell you for as long as you care to listen how amazing this carrier is.  Better planes, better seats, better service, better fares - better everything.  You'd be nuts to fly any other carrier if Jet Blue has a comparable schedule and fare.

And so what do the major carriers do?  Do they say 'we need to urgently respond to this new high service/low cost marketplace paradigm'?  No!  Instead they say 'we're going to cut back on our service even more.  We're going to operate fewer flights and longer connections.  We're going to increase our fares, and we'll make flying with us even more miserable than it already is.'

And so, you, the abused traveling public - but blessed with a ton more sense than a roomful of airline executives - do the obvious thing.  You cut back on your flying.  You refuse to pay ridiculous fares with no associated benefits.  You switch to decent airlines with decent fares and decent service.

Continental's Trivial Pursuit

Here's another example of the difference in approach.  Last week low cost/high quality Spirit Airlines announced it was increasing and improving its First Class service.  (Spirit is the airline that allows you to change the name to someone else on a ticket, something the majors claim would be impossible to allow!)

At the same time, Continental said that it is cutting out more customer service items - for example, there will be no more plastic knives served with breakfast trays in coach class. This will save the airline potentially $85,000 a year.  Continental had gross income of $8.15 BILLION dollars in the last twelve months - can you believe that they are obsessing over an item that is one thousandth of one percent of its income?

Is this the most important vital step they can take to return to profitability?

Is there nothing more valuable or important that Continental can focus their oh so highly paid management attention on (CEO Gordon Bethune's weekly earnings, in 2001, were almost exactly equal to this new savings)?  Well, yes, unfortunately there is.  No longer will you automatically get an entire can of soda if you ask for a drink!  You'll only get a small glass of soda (more available on request - if you're lucky).

Southwest Redefines 'A Fair Fare'

And while traditional airlines are desperately seeking to increase fares, adding on surcharges, and cutting back on 'waivers and favors' to preferred fliers and travel agencies (most recently United, this Thursday), guess what Southwest did last week?  Southwest reduced their no advance purchase one way fares, across the board.  Effective immediately, their most expensive fare is no more than $299 each way (down from a previous maximum of $399).  Senior VP of Marketing, Joyce Rogge, said 'we're saying that if you pay more than $300 each way, you're paying too much.'

And, showing that some airline executives do still live on Planet Earth, she added  'You shouldn't have to charge higher fares to your customers in order to offer them the level of service they deserve every day.  We consider "service" to be a great selection of frequent flights to 59 destinations, an ontime arrival, low everyday fares, an extremely lucrative frequent flyer program, the convenience of online booking, and Customer Service delivered with warmth and a smile. You shouldn't have to pay an arm and a leg for that.'  (By the way, consistently profitable Southwest can still afford to pay travel agent commissions, too!)

If Joyce Rogge ever wants to run for President of the United States, under any party banner, she's sure getting my vote!  Maybe she'd be a good CEO choice for United Airlines?

Inevitably, the major carriers have selectively matched Southwest's new fares on some of the routes they fly on, but if it isn't a route that they are actively fighting Southwest for, their old enormous fares remain in place and unchallenged.

Lessons Lost on the Majors

Yes, these lessons are lost on the major carriers.  They continue to nickel and dime their customers and their travel partners any which way they can, while not realizing that the penny they save is losing them a dollar in revenue.  For example, most of the majors have now started charging if you try to check a third piece of baggage.  Formerly it was common that you could check two bags and take one carryon with you, or check three bags and have no carryon.  Now a third piece of checked luggage will cost you $40 or more each way (and, of course, with draconian airline security, more people are having to check rather than carry on items).

The airlines are charging even more for paper tickets.  Most airlines now charge you $20, and they are now trying to up that charge to $25.  There is no way that this is an honest cost recovery on the part of the airline - honest cost recovery for what should be a totally automated task would suggest a fee of maybe $1 or at the most $2 (how much does it cost a theatre to print a ticket to a show?).

And, to add further insult to travel agents, Continental will charge $20 if a travel agent issues you a paper ticket (this was formerly a no cost item allowed by all the airlines).  Continental claims that this fee is to recover their costs of the travel agent issuing the ticket (and what costs exactly would those be, I wonder!!!) and what makes this charge absolutely ridiculous is Continental requires the travel agent to write out a laborious and usually manual charge form (which will be costly for the airline to process) to record the fee paid each time.

The Ugly Bottom Line

Value for money.  High quality product.  Good customer service.  Really simple concepts - Business 101.  The low cost carriers understand them and profit from their application, same as any other well run business does.

But the major carriers have turned their back on these concepts.

Their only hope to return to profitability is to improve their service and the value of the product they wish us to purchase, not to fatally destroy it.


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Originally written 30 Aug 2002, last update 15 Oct 2013
Copyright 2002 by David M Rowell.
You may freely reproduce or distribute this article for noncommercial purposes as long as you give credit to me as original writer.