Is the airline industry an example of excessive competition? Friday, Jun 8 2007

Economics divide businesses into oligopolies, monopolies or those in perfectly competitive markets.  Theory doesn’t address excessive competition – markets so competitive that nobody makes any money.  For an example consider the US domestic airline industry. It seems impossible for a carrier to make money for a sustained period, but players never go out of business. Economics says that companies exit markets if they lose money.  

To the casual observer airlines rarely seem to go out of business, but go into Chapter 11 bankruptcy regularly as clockwork. Why can nobody make any money and why don’t these apparently unsuccessful operators get forced out of business permanently?

In fact, over the years numerous airlines have gone belly-up, if you include those acquired by other airlines. The few successful airlines, such as Southwest, have carefully avoided acquisitions, but mergers are fashionable among the incautious. Wikipedia lists more than 200 defunct airlines, including such notables as PanAm (1927-1991), Braniff (several existences) and TWA which lasted from 1930 until being acquired by American Airlines in 2001.  

Clearly there is excessive competition in the airline industry. I think there are two reasons for this. One is an abundant supply of people just itching to start an airline, none of whom have any experience or knowledge in the business. Some do manage to beat the odds, Virgin being one, although they do not operate in the cutthroat US domestic market.  Numerous others such as Trump, Hooters, ValuJet (now AirTran) and Song (merged back into Delta), have been willing to jump into the sacrificial fire. A new entrant, Skybus, is launching the ultra-low fare model made popular in Europe by Ryanair.  I will be extremely surprised if they are profitable, but I expect they will survive several injection of financing from their hopeful backers.  This regiment of entrants inevitably pulls down potential returns.

The second reason for the excessive competition is the apparent willingness of large lenders to the industry to lose big sums of money.  When airlines are in bankruptcy there seems to be an endless troop of banks willing to advance more cash in the expectation a recovery in the industry is just around the corner.   Additionally airline costs are still very high, and bankruptcy is seen as a model for getting down to a lower-cost model that is thought to be a requirement for survival.

This is a fairly miserable situation for the customer.  Employees have seen their pensions go west, so are generally demotivated and surly.  The airlines have no money to spend on planes so the conditions range from down-at-heel to alarming. Operators, desperate to fill seats, offer very low prices to the casual traveler, subsidized by us business travelers, who pack in despondently. 

I am waiting to see the emergence of small, business-only flights on domestic routes.  If this happens then the big carriers will melt away like summer mist, taking a fortune in frequent flyer miles, but otherwise unmourned.

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Independent research on airline quality Saturday, May 26 2007

The 2007 Airline Quality Rating, an independent performance analysis of all domestic airlines published since 1991, is interesting reading.  It provides a little objective insight into my complaints about United.  The data show that United Airlines tied for the highest level of complaints per 100,000 passengers, and that they have fallen from being the best carrier in 2002 to ranking number 13 out of 18 in 2006.   Moreover, the trend is firmly downwards.

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United Airlines – the worst international carrier? Saturday, May 26 2007

As every traveler knows, flying internationally with a major western airline isn’t remotely like the experience on a top Asian carrier such as Cathay Pacific or Singapore Airlines. Granted, many Asian airlines are basically sexist, and in their advertising Singapore Airlines exploits the fact that they employ young, good-looking flight attendants. In contrast, the major US carriers obviously have what can charitably be called a seniority policy on the long-haul routes. However, this isn’t the real issue. Most travelers prefer excellent service, and flight attendants on most western carriers have completely given up the effort to provide that.

When I boarded yesterday, I started up the stairs on the 747 to my seat and was told by the attendant to put my suitcase in an overhead bin downstairs. No big deal, other than the sense of being ordered around. It was doubtless also annoying for the people sitting in the last row in business class to discover that their overhead space was mysteriously full.

The impression you get from the attendants on United is that we are all in this unpleasant process of flying together. They read out the ridiculous announcements about how we must stay in our designated areas, comply with all instructions and obey the fasten seat belt sign, with the weary relish of a schoolteacher with a new class. The message: “You do exactly what is expected of you, and this whole experience won’t be too difficult for any of us”.

Before takeoff I was asked to select two out of the three meal choices. There is no pretense that your first choice will be available. I firmly said I would have the fish. By the time it arrived I had dozed off and was roused by a sharp poke. The last thing she wanted was to have to go through this process again. The food is terrible but this is a 14 hours flight and you have to eat something. Even the way they speak is revealing. “Something to drink?”, “vinaigrette or creamy Italian?” are comprehensible provided you aren’t struggling with English, but would it be too much trouble to say “for your salad we have a choice of dressings, etc. etc”?

The seats don’t adjust very well because the springs are old and tired. They have no 115V power outlets for PCs, other than the special connector that requires you to carry a completely new power supply that usually only holds the charge in a computer. If you accidentally disconnect you are toast.

Before landing I was asked if I wanted the second meal service. I asked what it was, and the attendant said she didn’t know, but there was a choice between something hot and something cold, “probably be a fruit plate.” I said “You know, I think I’ll pass, thank you”

Even in business class it is pretty much impossible to get out of a window seat without having to clamber over the person in the aisle row, a process that will wake all but the deepest sleeper.

When we arrived, I now had to retrieve my bag from where I had been told to put it, which meant waiting until the front section of business and first class was all clear or pushing against the traffic coming in the opposite direction.

This miserable experience costs around $7500, most of which is fuel and employee costs. Presumably for airlines like United, employee costs are much higher than a comparable Asian one. Now, I have a little sympathy for the flight attendants on United. They have been pushed around by the management, their pensions have disappeared, they have to implement continuous niggling costs cuts and then listen to passengers complain about them. But surely, they and their management must realize that making the process of flying as unpleasant as this will ultimately affect the survival of the airline.

A postscript: one of the attendants who was serving my section was also on my second flight. She was obviously off-duty, but I heard her complaining to her colleague about the international travel and how she had only three days off: “You know, it’s not healthy.” No doubt about it. For all of us.

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