In this week’s Trends, we’re going to look
at an industry that hasn’t shared our success during the past several years, the
airline industry. This article references a concept mentioned in a recent article by
Al Ries titled “Dissecting the Wreckage of Airline Marketing Disasters.” With
respect to the airline industry, during the past 10 years, the five largest U.S.
airlines – American, United, Delta, Northwest, and Continental – generated close
to $700 billion dollars in revenue, yet lost close to $700 million. American
Airlines saw especially dismal performance during this time period, earning $180
billion in revenues but losing almost one billion. What makes the airlines
example so pertinent to our industry deals with the reason why the airlines have
faired so poorly; namely, those accountable for setting the direction for the
company made decisions that worked out well in the short term but led to long
term financial ruin.
This is not to say that
our industry exhibits signs that run parallel to those made by the management of
the major airlines. Instead, by highlighting some of the mistakes made in a
market as vital and large as the airline industry, those in our space might
expand their scope on certain decisions and/or collaborate at times when the
initial reaction is not to. When companies give in to short-term opportunities
without properly assessing or ignoring the long-term consequences, they tend to
make the wrong decisions. It’s the equivalent of protecting a fort by only
building defenses on one side because that is from where the enemy approaches.
Nothing will stop them, whether they are the enemy, the competition, market
forces, etc. from attacking the other side.
As it pertains to
the airlines, over the years they have had key choices to make. For example –
carry people or carry cargo. Carrying both sounds like a good idea – more money.
A look at the numbers tells a different story. American Airlines made close to
$600 million last year on cargo revenues, a hefty sum until it gets mentioned
that this figure represents only 3% of their total revenues. Running a cargo
business requires significantly different operational needs, ones that most
likely are not synergistic to their core revenue contributors. It is reasonable
to expect that were the airlines to focus the same resources on their core
revenue generating activities they could realize greater than a 3% increase in
revenues. Focusing makes sense, especially considering that FedEx for instance
made more than $24 billion last year on moving cargo, not to mention close to
$900 million in operating profit.
Many of the major
airlines decisions don’t seem glaringly incorrect until another company does
things differently and better. Other examples of decisions made by airlines that
covered short-term opportunities but led to longer-term difficulties include
saying yes to both when choosing whether to focus on business destinations or
vacation ones. The same is also true when the decision had to be made whether to
fly domestically or internationally. A third includes the airlines answer to the
question of what class of service to offer – first, business, or coach. In all
of the past three decision nodes, the major airlines' chose to accommodate all
options rather than focusing on only one.
Competition
forces specialization. Market saturation and maturity demands focus, in order to thrive.
The commoditization of an industry often means becoming lean, dropping those
activities that do not lead to overall market share growth, new market creation,
and/or displacing the competition in key operating segments. Competition,
saturation, maturity, and commoditization all happened to the airlines, but the
decisions made by the big five early on, decisions that initially yielded
increased profits and margins, came back to ground them. One look at Southwest
explains how they managed to survive when other airlines failed. They had a
focus. They too filled a market need but didn’t try to fill all the available
markets needs.
Want
to go from Los Angeles to Dallas? American will take you there, so too will
Southwest. The latter though doesn’t allow pets on any of their flights, only
flies one-type of plane, has no advanced seating, only one seating class, and
doesn’t serve meals. On paper, Southwest’s options may sound scarce and
unattractive, but their consistency, low fares, and the resulting efficiencies
helped them stay profitable when the major carriers experienced huge losses. The
stock market confirms this about Southwest. Their market capitalization of $12.4
billion exceeds Northwest, Continental, Delta, and American combined. Not
surprisingly then, we don’t see Southwest or JetBlue attempting to run
full-service airlines. Yet, that is just what United and Delta are doing by
choosing not to pare down their business but each open up a new airline to
compete with Southwest and JetBlue. Perhaps that is their attempt to specialize
by creating new divisions, but it could also be seen as another example of
trying to operate in too many segments, i.e. as Al Ries describes it, going down
both forks in the road.
Is
our industry in for the same turbulent ride as the major carriers continue to
experience? Chances are several companies will fold or have already folded by
spreading themselves too thin and having attempted to go down both forks such
that when outside forces exerted margin pressure on the industry they could not
stay in business. More than anything, the airline industry provides a current
and ongoing example of what can happen by focusing too much on the short term.
Something to think about as we make our resolutions for next year.
Jay Weintraub
