More on Management Mediocrity- Part 2: Airlines

Yesterday's Wall Street Journal featured yet another piece on inept long-term management. This time, we were treated to an in-depth explanation of how major airlines have apparently chosen to manage ineptly for years.

According to the Journal's article,

"The improving financial results posted by seven of the nation's 10 big airlines in recent months reflect a fundamental shift in strategy....The big carriers, which for decades have doggedly pursued market share at any cost, now are focusing just as aggressively on the profitability of each route and flight."

Imagine that. Actually measuring profitability on a flight and route basis, then choosing to stop flying the unprofitable ones. What kind of management were shareholders of these '10 big airlines' paying for all those years- dart throwing? ouija boards?

It isn't really necessary to reiterate in detail what the well-written article states. Airline after airline has finally gotten serious about operating on profitable routes, and adjusting their size to fit. Load factors are now expected to reach 85% this summer.

Isn't it about time, for an industry that has frequently been described as having lost money, on a cumulative basis, since the Wright brothers flew at Kitty Hawk at the dawn of the last century? According to the article, part of the profitability turnaround comes from a new generation of revenue management systems which allow for pricing decisions to take into account whether passengers are flying just one segment of a flight, or are a more lucrative passenger on a longer trip, of which the segment is but one part.

I'm reminded of the legendary Bob Crandall's comment that he wished he could have spun off American Airlines and kept the reservation system. Knowledge is power, and it looks like, in the airline industry, some rational managers, with better knowledge management tools, are finally gaining the upper hand.

Will this result in higher non-business fares and fuller airplanes? Doubtless. Of course, if that bothers you, why not wait til there's only one airline left on many routes, and pay their uncontested fare? Because the way things have been going, it's only a matter of time until something like that scenario was bound to occur.

I don't keep track, but so many airlines have been in, then out, then maybe back in, then out again, of Chapter 11, it's hard to recall the ones that have not filed for bankruptcy at some point.

That's no way to run a company, much less a sector. Business behavior like that signals too much capital committed to earn too few profits, and, thus, excess capacity. As if on cue, the article in the Journal notes that, these days, airlines are not chasing every expansion opportunity that occurs with a failed airline. Rather, they are focusing on development of added routes providing they are quickly and routinely profitable. What a concept!

Perhaps, in a backward-looking sort of way, airline executives have finally learned about consumer behavior in their business. Most non-business flyers appear to value price over brand, so that brand ubiquity added no value in that segment. Add in the ever-increasing pressure to avoid travel using email, instant messaging, and desktop- and laptop-based videoconferencing on inexpensive cameras, and you have a recipe for the disaster that occurred in the airline industry. Demand became hyper-price sensitive, and the internet contributed to the "discovery" of low prices, squeezing airline margins.

Apparently, empty feeder flights didn't deliver profitable customers and higher load factors when all routes are under pricing pressure.The eventual reaction, for airlines to survive, is to reduce capacity to the solidly profitable routes. It appears that in airline management, glamour is out, and sensibility is in.

Schumpeterian dynamics are alive and well in yet another part of our economy. And that, as usual, is a long term good thing for consumers and our economy.