Let’s Talk About the Airlines

LTblog_Airlines_Embed_1200x628In March 2012, ASU hosted US Airways CEO Doug Parker for a talk. At the time, he was a busy guy. His organization was in a precarious spot – the 2008 financial crisis had left the airline industry decimated, so US Airways was in the process of merging with then-bankrupt American Airlines in order to create what’d eventually become the largest carrier in the world.

 

Partially out of curiosity, and partially out of a dire need for extra credit, I sat in on Parker’s seminar. His speech was a repackaging of talking points that had recently been delivered to the Economic Club of Phoenix, where he discussed the “new normal” for the industry. It basically boiled down to a need for the remaining airlines to consolidate in order to survive. The merger was well into negotiations by then, so this narrative was particularly top-of-mind.

 

I didn’t find that part of his spiel very memorable. There was, however, a more poignant moment that caught my attention during the session’s Q&A portion.

 

One student astutely asked: “What’s the biggest threat facing the airline industry today?” I expected to hear Parker spout something to the effect of: “The volatility of oil prices,” or maybe, “The rise of low-cost regional carriers,” or even the classic corporate babble about, “Finding the best people!”

 

But he went in a different direction. After thinking about it for a moment, he candidly responded (and forgive me, this is paraphrased; apparently ASU can’t afford to transcribe these events):

 

“The rewards programs. Everyone is conditioned to receive something back in exchange for flying, and it’s a loss for all of us in the industry. When someone offers a better deal, we have to match it. If we could unilaterally agree to all drop them, we would do so in a heartbeat.”

 

This anecdote sat in the recesses of my memory for years. That is, right up until the airline industry recently devolved into pure, unadulterated, social schadenfreude.

 

Recently here on the LT blog, when recounting the mess that was Pepsi’s Kendall Jenner ad, I remarked that at least they “didn’t egregiously beat anyone up this week.” This was meant to be a tongue-in-cheek reference to how United Airlines was suffering from the backlash over its awful video featuring a passenger dragged off a flight.

 

The man in said video is Dr. David Dao, who wasn’t necessarily thrilled after the algorithm United uses to balance its passenger count selected him to be removed from his flight. He happened to have patients waiting for him back home, and so he objected, as I think anyone would do given the circumstances. He then proceeded to get mugged as he was kicked off. It led to “a concussion, a broken nose, injuries to his sinuses requiring surgery and lost two front teeth.”

 

An odd contagion effect started in the media after this story broke. The following were also reported, all within the same month:

  • Deltaaudaciously kicked an entire family off a flight, even though they happened to be following the FAA’s guidelines for flying with children to a T. This is by far the tamest story you’ll be seeing in this post.
  • The Spirit terminal in Fort Lauderdale experienced a minor riot after over 300 cancellations were announced. However, I’m fairly certain this constitutes as a standard Tuesday in Florida.
  • United, apparently looking to see how they could one-up themselves after beating up a doctor, went and killed a famous rabbit.

 

In the case of Dr. Dao and those first two stories, the prevalence of smartphone video played a crucial role when it came to informing the general public (the rabbit thing, on the other hand, is just a really, really weird story). It’s key to keep this ubiquity in mind as we get to my favorite recent instance of sordid flight behavior: A rather, um, passionate embrace between two British strangers on their merry way to Ibiza. As Vice UK’s Joel Golby observes:

 

“In the olden days, if you shagged someone on a Ryanair flight to Ibiza, you’d more or less get away with it. No one beyond the three or four surrounding rows would really know. But now, with these smartphones, these youths. With this internet. Now you can’t.

 

The airlines happen to be the best example of how transformative social sharing has been to an entire industry’s concept of customer service. Twitter, itself, realized this years ago. As I mentioned back in February:

 

“If it’s faltering at best as a conversation hub, and simply not growing in terms of new people using it, where’s the value to a corporate giant like Salesforce? Simple: Twitter has the potential to be an unrivaled customer service tool.

 

“In many ways, it’s already doing plenty of things right. Twitter began pushing this narrative with a 2015 internal study focused on the airline industry. In examining over 600,000+ ‘questions, complaints, and comments’ sent to airlines over a six-month period, it determined that those customers were later willing to spend an average of $8.96 [more] on future purchases so long as their response came within the median time of 22 minutes.”

 

It’s not just a matter of how easy it is document over-the-line flight attendants or brazen couples, or how quickly these instances can be blared out to the virtual world with historic efficiency. It’s the fact that even doing something offensively stupid online, and then stepping on to a plane, can lead to viral peril. Remember the story of Justine Sacco?

 

As she made the long journey from New York to South Africa, to visit family during the holidays in 2013, Justine Sacco, 30 years old and the senior director of corporate communications at IAC, began tweeting acerbic little jokes about the indignities of travel. There was one about a fellow passenger on the flight from John F. Kennedy International Airport: “ ‘Weird German Dude: You’re in First Class. It’s 2014. Get some deodorant.’ — Inner monologue as I inhale BO. Thank God for pharmaceuticals.”

 

Then, during her layover at Heathrow: “Chilly — cucumber sandwiches — bad teeth. Back in London!” And on Dec. 20, before the final leg of her trip to Cape Town: “Going to Africa. Hope I don’t get AIDS. Just kidding. I’m white!”

 

She chuckled to herself as she pressed send on this last one, then wandered around Heathrow’s international terminal for half an hour, sporadically checking her phone. No one replied, which didn’t surprise her. She had only 170 Twitter followers. Sacco boarded the plane. It was an 11-hour flight, so she slept. When the plane landed in Cape Town and was taxiing on the runway, she turned on her phone. Right away, she got a text from someone she hadn’t spoken to since high school: “I’m so sorry to see what’s happening.” Sacco looked at it, baffled.”

 

In that half-a-day spent in the air, Sacco’s awful banter had made her the #1 worldwide trending topic on Twitter. Amateur paparazzi, eager to revel in her virtual shaming, awaited her arrival at the Cape Town airport. She was branded the Internet’s racist-du-jour, and her job was obviously toast, yet strangely not for long. Sacco resurfaced months later as Director of Communications for struggling daily fantasy sports website FanDuel, which cemented her legacy as 2015’s expert in “really bad ideas on the Internet.”

 

I think it’s fair to say that traveling by air in 2017 leaves something to be desired. The process can be rather tedious, a tad too expensive, and now, apparently, physically and/or professionally dangerous. However, given the societal need for getting from one place to another (and a disappointing lack of teleportation technology) our options are either: A.) Abstain from flying entirely, or B.) Continue to use the service, but openly gripe about it. It shouldn’t be a shock which of the two we’re going to lean toward.

 

Here’s my roundabout way of getting to a point: I don’t think the airlines will ever truly give a damn about making things better.

 

There are a couple of factors at play here. The first and foremost is an unassailable public need. We don’t really have any other choices. You want to get from LA to NYC in the same day? Good luck on the bus or train. The airlines know this societal truth, and entire dockets of legislation exist to keep them from taking advantage of it.

 

The other is more of a cultural issue, in which a lack of incentives for airline employees to provide above-par customer service has led to a sense of bad blood with the public. Aside from that flurry of airlines-behaving-badly stories making the rounds after Dr. Dao’s beat-down, you know what also happened to arise?

 

A contingent of industry apologists were more than willing to go on the talk show circuit in order to explain how overbooking is a tried-and-true practice. Their reasoning was both defensive and irrational: If we didn’t like the idea of non-existent seats being sold on flights, we’d better be prepared to pay even more. I failed to find a coherent explanation for this.

 

Last is the most broad of theories, which can be a fun one if you’re the type who enjoys obscure financial conspiracies (*quietly raises hand*). Matt Levine over at Bloomberg View has had quite the field day exploring this when it relates to the airline industry’s mishaps. Without diving too deep into the weeds, it all begins with this idea that large institutions don’t select just one airline to invest in nowadays. They’ll spread a little love across the entire industry, preferring to ride the wave as a whole instead of picking favorites.

 

This can be problematic from a competitive perspective. If everyone owns a little bit of everyone else, and the modern-day definition of a corporation is to return earnings to shareholders, then why would the airlines want to jockey for market share against each other? It makes logical sense that everyone should want to succeed, and in turn, return profits on a macro level.

 

Here’s Levine back on April 12, after Dr. Dao’s situation was beginning its way through the media outrage cycle:

 

“United shareholders ended up losing about $257 million of equity market capitalization [on the day]. But if you’re actually a United shareholder, there’s a pretty good chance you’re also an American Airlines Group Inc. shareholder.

 

“According to Bloomberg, four of United’s top five shareholders are also top-five holders of American. Three of them are also top-five holders of Delta Air Lines Inc. United’s top 10 holders own about 49.8 percent of United Stock between them — and about 51.6 percent of American and 37.6 percent of Delta…If you owned all those airlines — as the S&P 500 Index does — in proportion to their market capitalizations, your airline holdings were up about 1 percent yesterday. Fortune did the math for Warren Buffett and found that he was up $104 million on airlines on the day, ‘illustrating once again the investor’s talent for making money even when the headlines are grim…’

 

“You know what I am getting at here. Bad news for United was easy for United’s shareholders to shrug off, because United’s shareholders are also shareholders in its competitors. To the extent the United fiasco leads to new airline regulations that crimp everyone’s profit margins, that’s bad for shareholders. To the extent that it leads to more people getting fed up with United and flying American instead, that doesn’t matter to shareholders. ‘Boycotting United to fly another airline is just what United’s index-fund owners want you to do,’ I joked on Twitter.

 

“Is there causality here? It’s a question we talk about a lot. It seems implausible that a gate agent in Chicago decided to summon police to beat up a passenger on the theory, ‘Well, this will be bad for us, but good for American Airlines, and our shareholders are mostly diversified quasi-indexers, so whatever.’ And yet there is a logic to it. Companies are supposed, in traditional corporate theory, to work on behalf of their shareholders….Meanwhile, United knows who its shareholders are. It can see that they mostly own other airlines too. If all it wants, deep in its corporate heart, is to make those shareholders richer, then why should it care whether they get richer on their United stock or their American stock?

 

“Why should it work hard to be the most-loved airline, if that’s expensive and customer love is zero-sum? Why not focus on pricing power and cost-cutting, which makes shareholders richer, even if it might lead to a public relations disaster for any particular airline?” 

 

The term “zero-sum” here nails it. Remember CEO Parker’s idea of how nice it would be for the airlines to drop all rewards programs, so long as it happens across the board? That wasn’t an “industry threat” – it was the mystical musing of an embattled executive who dropped his guard for a brief moment. I’m certain that was a topic of conversation, as he happened to be courting his largest competitor. When an entire industry subscribes to this type of veiled collusion, the biggest threat isn’t giving customers something for nothing. It’s all those little video cameras in their pockets.

Leave a comment

Your email address will not be published.


* indicates a required field.