When D&e Doesn’t Work

Unfortunately, most of the time Defend & Extend behaviors don’t work.  They don’t improve revenues, cash flow, profits or returns for employees, suppliers and investors.  A case in point are the large U.S. domestic airlines. (This blog is focused on American, United, Delta – the hub-and-spoke "majors" – and specifically is not about Southwest and other point-to-point carriers that are doing far better with growth and profits.)

Today we’re learning that American Airlines is going to charge some fliers $15 for their first checked bag (read article here.)  Locked-in to old practices, even this is more of the same airline behavior.  In reality, not everyone is charged for checking, there is a complex set of circumstances that determines who pays and who doesn’t.  Just like airline fares, this fee is almost incomprehensibly complex for the typical customer – another typical airline practice (unbelievable, incomprehensible complexity driven by over-analysis of data and over-segmentation when addressing a problem.)  Even worse, at a time when we should be encouraging everyone to check their bags (and giving these bags very comprehensive screening) so we can smooth boarding and ease onboard congestion the airline institutes a practice that will create more problems than solution.

Why do this?  Because the airlines are desperate for revenue and are turning to fees (read article here).  As the cost of flying increases due to the largest cost component, jet fuel, skyrocketing their answer is to institute fees on bags, etc.  Wouldn’t the obvious answer be to raise price?  When your costs go up by a doubling, wouldn’t you simply say you have to charge more?  That may be easy for us to say, but not to the airlines.

The airline leaders aren’t stupid (even though it may appear that way to us travelers sometimes).  Instead they are Locked-in to the point they have limited their options for solutions to a very few – which may not save them.  When deregulated the airlines had many options.  But they very quickly Locked-in on a Success Formula – even before it was proven to make money or satisfy customers.

• They decided to use a hub-and-spoke system to move passengers rather than a more efficient point-to-point system.  This was based on the notion of low variable costs (such as fuel) allowing for efficiency losses to be overcome by volume.  This put all of the airlines into an intense volume-seeking game.
• They invested enormously into aircraft.  In excess of demand, they purchased aircraft in order to drive volume.  Very expensive aircraft that are high FIXED COSTS which then increased the demand for more volume.
• They invested heavily in airport gates, trying to get "mini-monopolies" in cities by having the most gates.  This again was a high fixed cost investment requiring them to seek volume.
• They built very deep hierarchies modeled on the military.  Most early airline executives, and pilots, had military backgrounds so they built their commercial operations on the Locked-in organizational systems they knew.  These large and deep hierarchies again became expensive and semi-fixed costs driving the need for more volume.
• They created antagonistic relationships with unions, based on industrial-era views of how to manage employees.  They treated employees like nearly fixed costs by relying on conflict-based union relationships, rather than creating a more variable cost approach being developed in most service industries.
• They relied on amazingly complex analytics (literally, the most sophisticated math available) to try finding ways to get people to purchase empty seats.  This led to phenomenally complex pricing schemes which trained customers that they should shop, shop and shop to find the lowest price – because there may well be seats for $100 available when the "list" price is $1,000.  Causing the complexity to only worsen.
• In the rush for volume, they relied on price as the primary competitive factor.  Customer Service was ignored as the airlines Locked-in on price, price, price to try filling airplanes.
• There was no White Space to try anything new.  When they launched "discount carriers" (Ted, Song, etc.) they made these subsidiaries use the same planes, gates, reservation systems, etc. as the parent, with the only change being lower pay for employees and less food for customers.

Amazingly, most of these Lock-ins were designed by extremely highly priced management consultants who used industrial-era manufacturing concepts to create the newly deregulated airlines’ business models.  These consultants believed that they could treat the airline like a manufacturer, with each plane a machine on the line that needed to be utilized and the hubs as distribution systems.  Neat concept, only within months it was clear this approach made no money in an information-intensive services business.  It created enormous fixed costs, but negative cash flow and no profits.  the airlines had to constantly go back to investors for more equity, and became enormously profitable customers for debt lenders.

With each passing year the airlines Lock-in produced no better results.  Some airlines, like Eastern, Braniff, National and Republic went bankrupt.  Yet, these "majors" kept doing more of the same, hoping if they just got fast enough, cheap enough and created enough volume somehow they would succeed.  Only, the more they did the worse things got!

Now the leaders of these airlines are facing an entire industry bankruptcy (read article here.)  Literally, we’re talking about all of the top 5 airlines running out of cash and failing in less than one year.  This would be a national disaster – even a national security disaster.  Yet, because of Lock-in these leaders see no options beyond hoping to save their airlines with tricks like charging for checked bags.  Uhm, "get real" comes to mind.  Baggage fees will not fix the horrible results of these airlines who have "been there, done that" as regards bankruptcy more than once.  In the past, they cut employee pay some more, refused to pay several debts in full, and wiped out shareholders finding a way to stay alive.  But this time, with their #1 cost (jet fuel) so high and showing no sign of coming down soon, they could well walk off the proverbial cliff of disaster with no solution.

D&E behavior has never worked for the airline industry.  Not since the first days of deregulation.  Yes, many more Americans fly than ever before.  But for the airlines themselves (and their employees, suppliers, investors and customers), their Success Formula has been an unmitigated disaster.  And this is far too often the result of Lock-in and D&E behavior.  D&E causes businesses to do more of the same until they eventually fail.

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