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.
Image
credit:
BBC News
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