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What are Airlines Doing Wrong?

Everything!

December 2006 By Denny Hatch
12

In the News

The Jumbo Airline-Stock Rally
Talk of a UAL-Continental Deal, Turnarounds at Other Carriers Build Confidence in the Sector
By SUSAN CAREY and MELANIE TROTTMAN
December 14, 2006; Page C1
As Wall Street welcomed news of more potential airline mergers, the latest round of consolidation could keep the wind behind airline stocks for some time. Investors piled into airline stocks yesterday, driving up prices even at carriers that could be possible acquirers. Shares of United Airlines parent UAL and Continental Airlines both rose on news that they are in preliminary talks about a combination that would create one of the largest U.S. airlines. UAL gained $2.01, or 4.65%, in NASDAQ Stock Market trading to $45.24. Continental’s shares added $1.88, or 4.4%, to close at $44.76 on the New York Stock Exchange.
—Susan Carey and Melanie Trottman, The New York Times, Dec. 14, 2006
Merger talks—United and Continental and US Airways, with its $8.65 billion hostile bid for bankrupt Delta—have the investment community a-twitter.

When AirTran made a hostile bid for Midwest Air Group, its stock jumped 4.1 percent while Midwest’s skyrocketed to 22 percent.

The first commercial airline—the St. Petersburg-Tampa Airboat Line— was founded in 1914. The line carried a total of 1,205 passengers without a single accident. It never made money.

Call the St. Petersburg-Tampa Airboat Line a harbinger.

Since its beginnings, 92 years ago, the airline industry cumulatively has never made money.

The idea that “investors” are seriously looking at airline stocks is a joke. These aren’t investors; they’re riverboat gamblers.

The real value of studying airlines is not to invest in them, but to see all of the things they’re doing wrong and avoid doing them to your business.

An Investor’s Nightmare
“Never invest in anything you can’t illustrate with a crayon,” said Fidelity’s investment genius Peter Lynch.

On the surface, the airline industry is simple—the transporting of people and baggage from point A to point B. This easily fits Lynch’s dictum.

Or does it?

The airlines are shackled with near impossible handicaps from top to bottom: huge salaries, pension obligations and total dependency on the yo-yoing price of oil.

How the airlines—especially the big legacy carriers (American, Continental, Delta, Northwest and US Airways)—remain in business is a mystery. Basically, many different companies and industries are too dependent upon them to let them fold.

In a 2002 interview for the Sunday Telegraph (UK), Warren Buffett was asked if USAir was his worst investment. Buffett replied:

I made the comment that if a capitalist had been present at Kittyhawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money.

But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in.

You’ve got huge fixed costs, you’ve got strong labor unions and you’ve got commodity pricing. That is not a great recipe for success.

I have an 800 number now that I call if I get the urge to buy an airline stock. I call at two in the morning and I say: “My name is Warren and I’m an aeroholic.” And then they talk me down.

Takeaway Points to Consider:

* If you absolutely, positively must cut costs, look well to your internal operations before taking it out on your customers.

* It costs five to ten times as much to acquire a new customer than to sell an existing one.

* An old rule stated that a happy customer will tell three people about you, whereas an unhappy customer will tell 11 people. With the Internet, unhappy customers can make their anger known to the world. Take a moment right now to see if the following URL exists: [YOUR COMPANY NAME]sucks.com (or sux.com). If available, you might consider buying them from Network Solutions for two reasons: (1) An angry customer can’t own it and complain to the world and (2) If people log on, you have the opportunity to find out why they’re unhappy and try to make things right.

* Just as airlines are wildly overextended in terms of frequent flier mileage, you might consider doing an audit of every product and service in your company to see whether or not the possibility of one of these liability problems exists that could come back to haunt you in the future.

* Once, every six months, have a brain storming session to figure out innovative and inexpensive new ways to make your customers happier.

* Never start a company—or invest in one—that you can’t illustrate with a crayon.

From Denny, Peggy and all the gang at The Target Marketing Group of Publications:

Thank you for reading “Business Common Sense” and for taking the time to write us.

We are taking a short break.

All good wishes to you and yours for a grand holiday season and a peaceful prosperous New Year.

We look forward to being back in touch with you in early January.

Web Sites Related to Today's Edition:

St. Petersburg-Tampa Airboat Line
http://tinyurl.com/wy3ww/
http://tinyurl.com/vjhzf/

Eurostar
http://tinyurl.com/y6fs8a/
 

Companies Mentioned:
12

COMMENTS

Click here to leave a comment...
Comment *
Most Recent Comments:
Larry Maher - Posted on December 22, 2006
Denny, I never thought that as I was traveling by military transport back in the 60?s, flying backwards while sitting on my parachute in a canvas jump seat, that someday I would get to pay hundreds of dollars for even less comfort. The only good news is that I can get a Chicago-style hotdog (or other local delicacies) and bag of fresh popcorn at the airport to take with me rather than eat the overpriced and tasteless food and snacks offered on board. I do miss the ?friendly skies? and the ?fly me? years of the 70?s. I never fly unless the car trip is over 12 hours anymore. Luckily I live in the Midwest so that covers a lot of territory! I am now trying like mad to loose some weight so it is more comfortable when I am forced to fly. I am not looking forward to the leg-shortening operation, however.
Mandy Minor - Posted on December 20, 2006
Right now I'm on Amtrak.com looking into fares for two wedding I am attending next year. I already dreaded air travel; this article makes me realize that if I never step foot in another airport I won't miss it at all!
Sean Giorgianni - Posted on December 19, 2006
I, for one, am thankful for the airline industry. Why? Because they prove that despite preternatural incompetence, it is still possible to build a multi-billion dollar business. With a little luck, I should be able to make it just fine :) Thanks for the laughs - and keep 'em coming!
Michael Rosen - Posted on December 19, 2006
While the article does not break any new ground, it certainly identifies what is wrong with the airline industry. As my wife is fond of saying, "If you can't serve as a good example, at least you can serve as a horrible warning." The airline industry is a warning to all of us about how we run our businesses.

While no airlines are fantastic, some are much better than others. Before any legacy carrier is permitted bankruptcy protection, the court should require the CEO to spend 30 days flying coach on their own airline and another 30 days flying on Southwest, Jet Blue or AirTran.

By the way, just over a year ago, I promised myself that I would fly twice as long and pay twice as much to avoid flying USAirways. So far, I've happily been able to keep my promise.
Richard Pearlman - Posted on December 19, 2006
Then there's Southwest Airlines, the main reason air fares aren't as bad as they were.

No seat assignment? True, but...just get a boarding pass online starting 24 hours before your flight. You're likely to get an "A", first-to-borad ticket and a good set.

Fares? Try beating them. They keep costs low by flying the same type of plane, getting deals on long-term fuel contracts.

On-time performance? Excellent.

Luggage? No problems in many flights.

One last note. I had Southwest stock for 3 1/2 years and it went up close to 40 percent. It's the only airline stock I've ever bought.

Best,
Rich Pearlman
David Garfinkel - Posted on December 19, 2006
Remember that little game, I think it was called Chinese finger-cuffs, that you played as a kid? At least I did. These brightly colored woven straw tubes went around a finger at either end. The harder your tried to pull your fingers out, the tighter the noose on each one became. That's the situation the airlines have put themselves into. I agree with David Culbertson about U.S. carriers and would add Midwestern Airlines to that very short list. I worked for another, major U.S. airline -- one renowned for its particularly nasty customer service -- in the 90s as a writing efficiency consultant. I could see from the moment I walked in the front door of their offices, the whole company was set up to pit management against labor in antagonism and distrust. As I think they say in the military, the ordures go downhill. So how does that automatically mean the passengers will HAVE to be treated? Flying used to be fun. Now, "necessary evil" is being very generous in describing it.
Rick Olson - Posted on December 19, 2006
As the client-facing guy in my company, it's an effort sometimes, when a problem occurs, to convince the inward-facing departments to devise a solution based first on how it will be perceived by our clients ahead of how easy will it be for internal staff. Everyone wants to take the path of least resistance and when you put the customer ahead of the internal-company, you add complexity internally. It is nearly inversely proportional. However, if the attitude is that we're going to do what's easiest for us and let the account managers deal with the blowback, we will lose business, guaranteed. I'm happy to say that a small company like mine understands that, and does a good job, but it's easy to see how the huge airlines, second only perhaps to congress, has not made the critical connection between self interest and delighted customers. P.S. Never fly to Europe on Iberia Airlines unless you are writing a story on how bad it can really be.

- Rick Olson
Cathy Edgington - Posted on December 19, 2006
We all know about the "anti-destination league" and thier important role at the airports. It is the lack of respect that travelers recieve from the TSA that is worse than the actual delays themselves. I fly Continental whenever I can, and they spoil me so much that I dread flying on other airlines.
Michael Winicki - Posted on December 19, 2006
I just shake my head at the whole airline industry. I thought the railroad industry (as managed) was the most screwed up one in history.

Not so...

The airlines take top "prize" for their incredible combination of lousy management and a profitless business model.

I hardly travel at all but each trip I do take seems to promise it's own unique "adventure" when dealing with the airlines.

Last February I was suppose to fly out of Buffalo on Northwest. I get a call at 6AM (luckily before I was headed out the door) telling me that my flight had been canceled due to the Northwest crew logging too many miles-- and they had no replacement. And because the flight was canceled due to this lame excuse I couldn't be switched to a different flight. I couldn't believe it...

I ended up missing an important meeting in Denver due to Northwest's mismanagement of their "man-power" (or "woman-power" if you will).

Then came the challenge of getting my ticket costs refunded. Needless to say I never even received my full refund.

I'll never fly Northwest again-- hell the bastids never even sent me an email saying they were sorry. But I know all airlines suck. Even the good ones are like the "tallest dwarf in a circus"... Yeah they might be taller than the other dwarfs but they're still a dwarf.

Congrats airlines for having the worst managed businesses on the planet!
John - Posted on December 19, 2006
Sure, airline travel is miserable, but it is a necessary evil to get from point A to point B. I do not believe that the airline folks set out to make our lives miserable. We could have better flights if the airlines were nationalized and run by a benign dictator, but tickets would cost a lot more.
I have never heard you whine before...there is nothing new here and yet you are acting like it just started last week.
Carl Street - Posted on December 19, 2006
What Are Airlines Doing Wrong?
Asking a question like that is likely to overload the Internet and get you arrested for cyber-sabotage... :)
Carl Street
carl_street@cjstreet.com
David Culbertson - Posted on December 19, 2006
Hey Denny,

Unless you fly Southwest Airlines and JetBlue, my experience is that all domestic airlines stink. The employees are surly and don't care about you. When you fly to the UK next time, I recommend British Airways. My BA flights have always been excellent, from coach to first class.
Click here to view archived comments...
Archived Comments:
Larry Maher - Posted on December 22, 2006
Denny, I never thought that as I was traveling by military transport back in the 60?s, flying backwards while sitting on my parachute in a canvas jump seat, that someday I would get to pay hundreds of dollars for even less comfort. The only good news is that I can get a Chicago-style hotdog (or other local delicacies) and bag of fresh popcorn at the airport to take with me rather than eat the overpriced and tasteless food and snacks offered on board. I do miss the ?friendly skies? and the ?fly me? years of the 70?s. I never fly unless the car trip is over 12 hours anymore. Luckily I live in the Midwest so that covers a lot of territory! I am now trying like mad to loose some weight so it is more comfortable when I am forced to fly. I am not looking forward to the leg-shortening operation, however.
Mandy Minor - Posted on December 20, 2006
Right now I'm on Amtrak.com looking into fares for two wedding I am attending next year. I already dreaded air travel; this article makes me realize that if I never step foot in another airport I won't miss it at all!
Sean Giorgianni - Posted on December 19, 2006
I, for one, am thankful for the airline industry. Why? Because they prove that despite preternatural incompetence, it is still possible to build a multi-billion dollar business. With a little luck, I should be able to make it just fine :) Thanks for the laughs - and keep 'em coming!
Michael Rosen - Posted on December 19, 2006
While the article does not break any new ground, it certainly identifies what is wrong with the airline industry. As my wife is fond of saying, "If you can't serve as a good example, at least you can serve as a horrible warning." The airline industry is a warning to all of us about how we run our businesses.

While no airlines are fantastic, some are much better than others. Before any legacy carrier is permitted bankruptcy protection, the court should require the CEO to spend 30 days flying coach on their own airline and another 30 days flying on Southwest, Jet Blue or AirTran.

By the way, just over a year ago, I promised myself that I would fly twice as long and pay twice as much to avoid flying USAirways. So far, I've happily been able to keep my promise.
Richard Pearlman - Posted on December 19, 2006
Then there's Southwest Airlines, the main reason air fares aren't as bad as they were.

No seat assignment? True, but...just get a boarding pass online starting 24 hours before your flight. You're likely to get an "A", first-to-borad ticket and a good set.

Fares? Try beating them. They keep costs low by flying the same type of plane, getting deals on long-term fuel contracts.

On-time performance? Excellent.

Luggage? No problems in many flights.

One last note. I had Southwest stock for 3 1/2 years and it went up close to 40 percent. It's the only airline stock I've ever bought.

Best,
Rich Pearlman
David Garfinkel - Posted on December 19, 2006
Remember that little game, I think it was called Chinese finger-cuffs, that you played as a kid? At least I did. These brightly colored woven straw tubes went around a finger at either end. The harder your tried to pull your fingers out, the tighter the noose on each one became. That's the situation the airlines have put themselves into. I agree with David Culbertson about U.S. carriers and would add Midwestern Airlines to that very short list. I worked for another, major U.S. airline -- one renowned for its particularly nasty customer service -- in the 90s as a writing efficiency consultant. I could see from the moment I walked in the front door of their offices, the whole company was set up to pit management against labor in antagonism and distrust. As I think they say in the military, the ordures go downhill. So how does that automatically mean the passengers will HAVE to be treated? Flying used to be fun. Now, "necessary evil" is being very generous in describing it.
Rick Olson - Posted on December 19, 2006
As the client-facing guy in my company, it's an effort sometimes, when a problem occurs, to convince the inward-facing departments to devise a solution based first on how it will be perceived by our clients ahead of how easy will it be for internal staff. Everyone wants to take the path of least resistance and when you put the customer ahead of the internal-company, you add complexity internally. It is nearly inversely proportional. However, if the attitude is that we're going to do what's easiest for us and let the account managers deal with the blowback, we will lose business, guaranteed. I'm happy to say that a small company like mine understands that, and does a good job, but it's easy to see how the huge airlines, second only perhaps to congress, has not made the critical connection between self interest and delighted customers. P.S. Never fly to Europe on Iberia Airlines unless you are writing a story on how bad it can really be.

- Rick Olson
Cathy Edgington - Posted on December 19, 2006
We all know about the "anti-destination league" and thier important role at the airports. It is the lack of respect that travelers recieve from the TSA that is worse than the actual delays themselves. I fly Continental whenever I can, and they spoil me so much that I dread flying on other airlines.
Michael Winicki - Posted on December 19, 2006
I just shake my head at the whole airline industry. I thought the railroad industry (as managed) was the most screwed up one in history.

Not so...

The airlines take top "prize" for their incredible combination of lousy management and a profitless business model.

I hardly travel at all but each trip I do take seems to promise it's own unique "adventure" when dealing with the airlines.

Last February I was suppose to fly out of Buffalo on Northwest. I get a call at 6AM (luckily before I was headed out the door) telling me that my flight had been canceled due to the Northwest crew logging too many miles-- and they had no replacement. And because the flight was canceled due to this lame excuse I couldn't be switched to a different flight. I couldn't believe it...

I ended up missing an important meeting in Denver due to Northwest's mismanagement of their "man-power" (or "woman-power" if you will).

Then came the challenge of getting my ticket costs refunded. Needless to say I never even received my full refund.

I'll never fly Northwest again-- hell the bastids never even sent me an email saying they were sorry. But I know all airlines suck. Even the good ones are like the "tallest dwarf in a circus"... Yeah they might be taller than the other dwarfs but they're still a dwarf.

Congrats airlines for having the worst managed businesses on the planet!
John - Posted on December 19, 2006
Sure, airline travel is miserable, but it is a necessary evil to get from point A to point B. I do not believe that the airline folks set out to make our lives miserable. We could have better flights if the airlines were nationalized and run by a benign dictator, but tickets would cost a lot more.
I have never heard you whine before...there is nothing new here and yet you are acting like it just started last week.
Carl Street - Posted on December 19, 2006
What Are Airlines Doing Wrong?
Asking a question like that is likely to overload the Internet and get you arrested for cyber-sabotage... :)
Carl Street
carl_street@cjstreet.com
David Culbertson - Posted on December 19, 2006
Hey Denny,

Unless you fly Southwest Airlines and JetBlue, my experience is that all domestic airlines stink. The employees are surly and don't care about you. When you fly to the UK next time, I recommend British Airways. My BA flights have always been excellent, from coach to first class.