United Airlines – How Bad Strategy Created a Culture That Kills Puppies

United Airlines – How Bad Strategy Created a Culture That Kills Puppies

Do you remember the songs, and videos, from 2008 “United Breaks Guitars?” After United Airlines destroyed musician Dave Carroll’s guitar he chronicled the months-long journey he took trying to replace it. In the end, United told him “F**k you” as customer service blew him off completely. He went on to make a few million dollars with his songs and parody about the horrible experience. Because so many people felt they were abused like Mr. Carroll.

“United Breaks Guitars” was a hit because so many people related to the terrible customer experience on United. book united breaks guitars “The Unfriendly Skies” was the motto of customers, mocking the airlines “Friendly Skies” ads. It was clear that by 2008 United did not care about customers. Moving headlong to constantly lower operating costs, United built a culture that focused solely on efficiency, leading to terrible customer service, unhappy customers and employees that were a lot more worried about being yelled at by their bosses for not cutting costs than creating any customer satisfaction.

Things certainly haven’t changed. In 2017, United ejected a 69 year old physician from a plane, breaking his nose, knocking out his teeth and giving him a concussion. That created an uproar. Yet within a week United killed the world’s largest bunny rabbit in an airplane holding bin. But, even worse, last week United actually killed a puppy by forcing it be placed in an overhead bin. At least the dog United sent on a 1,000 mile unexpected flight to Japan survived, and the interviewed owner said he felt lucky the airline hadn’t killed his pet. Of course United refunded their money – which as you can imagine was a slap in the face to all these people who were so abused.

Unfortunately, United is just the worst of a bunch of bad airlines. Customer service really isn’t any better on Delta, American, JetBlue or Southwest. Saying these other airlines are better is just picking out a less heinous member of the Khmer Rouge Army.

STRATEGY MATTERS

This all goes back to deregulation. When President Carter allowed the airlines to charge as they like the industry really had no idea what it was going to do. There was chaos for years. But eventually consolidation kicked-in, and cutting cost was the only thing all 3 majors agreed upon. Buy more market share, as opposed to winning it with customer service, then slash the costs. This did the wonderfulness of leading all of them to file bankruptcy! Some twice! What a grand industry strategy!

eaten green olivesThen Chairman of American Airlines received Wall Street Journal front-page coverage for realizing people weren’t eating their olives in first class, so he ordered olives removed from the first class meals. He was cheered for saving $100K. But what folks missed was that he, and his peers leading the airlines, were systematically trying to figure out “how do we offer the least possible service.” By focusing on a strategy of lowering cost, and being doggedly determined in that strategy, soon nothing else mattered.

Today, there are no free meals in coach, and terrible meals in first class. Management angered employees into strikes and multi-year negotiations, beating down compensation and eliminating benefits leading to unhappiness so bad that in 2010 a Jet Blue flight attendant pulled the emergency exit and jumped out of the plane as he quit.

So, all the airlines in America stink. And, many domestic airlines in Europe, such as Ryan Air, have followed suit. The execs keep saying “all customers care about is price.” They use that excuse to create a culture so hostile to employees, and customers, that pretty soon employees are beating up customers and killing family pets (after charging extra to take the pet on the plane) and actually not caring.

Employees have become gestapos for the leadership – which has created a culture in which nobody wins. So flight attendants do as little as possible, because they don’t care about customers any more than leadership does. In 2017, a JetBlue attendant threw a family off flight because their toddler kicked the seat. When a woman complains about a child in seat next to her a Delta attendant throws her off the plane. And just last week when a 2 year old cries during boarding a Southwest attendant throws the child and her father off the plane.

Deregulation led to an oligopoly. Now, customers have no choice. Some of us fly almost every week on business, and it is pure hell. Nobody we deal with, from TSA to airport vendors to airline staff like customers. The culture has become “I’m abused, so you will be abused.” To fly is to succumb to being obsequious to ALL employees in your effort to not anger anyone, for fear they will deny you service. Or, worse, beat you up or kill your pet. But, honestly, there is nothing customers can do about it.

STRATEGY MATTERS

The leadership of the airlines, lacking regulation, implemented a strategy of “be low cost.” The result was creating a culture where employees routinely abuse customers in the process of trying to save a few dimes. If the next Mark Zuckerberg, Elon Musk or Reed Hastings showed up, do you think HR would hire them? Would the Board of Directors, so focused on the wrong strategy, consider any of them as CEO? The wrong strategy has led to the ruination of an entire industry, miserable employees, unhappy customers and marginal returns. It is a terrible culture.

So what is your strategy? Is your strategy creating the culture you want? Are you headed toward happy customers who want more of your product or service, and create growth? Or are you letting your lack of a forward-thinking strategy default you into operational cost cutting, and the movement toward a culture of misery that drives away employees, vendors and eventually customers?

United – this is NOT “any way to run an airline”

The good folks at Wichita State (a final four contender as U.S. basketball fans know) and Purdue released their 2013 Airline Quality RatingUnited Airlines came in dead last.  To which United responded that they simply did not care.  Oh my.

Interestingly, this study is based wholly on statistical performance, rather than customer input.  The academics utilize on-time flight performance, denied passenger boardings, mishandled bags and complaints filed with the Department of Transportation.  It does not even begin to explore surveying customers about their satisfaction.  Anyone who flies regularly can well imagine those results.  Oh my.

So how would you expect an innovative, adaptive growth-oriented company (think like Amazon, Apple, Samsung, Virgin, Neimann-Marcus, Lulu Lemon) to react to declining customer performance metrics?  They might actually change the product, to make it more desirable by customers.  They might hire more customer service representatives to identify customer issues and fix problems quicker.  They might adjust their processes to achieve higher customer satisfaction.  They might train their employees to be more customer-oriented. 

But, United decidedly is not an innovative, adaptive organization.  So it responded by denying the situation.  Claiming things are getting better.  And talking about how it is spending more money on its long-term strategy.

United doesn't care about customers – and really never has.  United is focused on "operational excellence" (using the word excellence very loosely) as Messrs. Treacy and Wiersema called this strategy in their mega-popular book "The Discipline of Market Leaders" from 1995. United's strategy, like many, many businesses, is to constantly strive for better execution of an old strategy (in their case, hub-and-spoke flight operations) by hammering away at cutting costs. 

Locked in to this strategy, United invests in more airplanes and gates (including making acquisitions like Continental) believing that being bigger will lead to more cost cutting opportunities (code named "synergies".)  They beat up on employees, fight with unions, remove anything unessential (like food) invent ways to create charges (like checked bags or change fees), fiddle with fuel costs, ignore customers and constantly try to engineer minute enhancements to operations in efforts to save pennies.

Like many companies, United is fixated on this strategy, even if it can't make any money.  Even if this strategy once drove it to bankruptcy.  Even if its employees are miserable. Even if quality metrics decline. Even if every year customers are less and less happy with the product.  All of that be darned!  United just keeps doing what it has always done, for over 3 decades, hoping that somehow – magically – results will improve.

Today people have choices.  More choices than ever.  That's true for transportation as well.  As customers have become less happy, they simply won't pay as much to fly.  The impact of all this operational focus, but let the customer be danged, management is price degradation to the point that United, like all the airlines, barely (or doesn't – like American) cover costs.  And because of all the competition each airline constantly chases the other to the bottom of customer satisfaction – each  lowering its price as it mimics the others with cost cuts.

In 1963 National Airlines ran ads asking "is this any way to run an airline?" Well, no. 

Success today – everywhere, not just airlines – requires more than operational focus.  Constantly cutting costs ruins the brand, customer satisfaction, eliminates investment in new products and inevitably kills profitability.  The litany of failed airlines demonstrates just how ineffective this strategy has become.  Because operational improvements are so easily matched by competitors, and ignores alternatives (like trains, buses and automobiles for airlines) it leads to price wars, lower profits and bankruptcy.

Nobody looks to airlines as a model of management.  But many companies still believe operational excellence will lead to success.  They need to look at the long-term implications of this strategy, and recognize that without innovation, new products and highly satisfied new customers no business will thrive – or even survive.

Yes AMR, Bankruptcy is failure


Airline company AMR, owner of popular American Airlines, filed bankruptcy this week.  To which most people responded “again?”  The reaction was less about AMR, which is having a first-time filing, and more about airline bankruptcies overall.  People are simply used to airlines failing. 

Most people are so used to everything about airlines sucking that news a major filed bankruptcy simply wasn’t surprising.  What they cared most about were two questions: “Is my ticket any good?” and “Do I get to keep my frequent flyer miles?”

Conceptually, business is not hard to understand.  Create a product or service that people want.  Make it appealing enough so people will pay enough to cover costs and make a profit, allowing you to re-invest in growth and repay your investors.  Pretty simple. 

But AMR, like most airlines, simply doesn’t understand this concept.  Yes, people want to fly.  But ever since deregulation, service has become worse and worse.  Ask anyone what they think of American (or United or Delta or any “major” airline) and answers are the same.  They hate them. 

  • Pricing is incomprehensible.  You may pay $800 for a ticket, and the person beside you $200 and the reason is completely unclear.
  • There is never enough room on the plane for all the carry-on luggage, but that is free while the airline charges for checking bags. What they don’t want (carry-ons) is free, what they want (check your bags) requires you pay?
  • You are charged for a checked bag, but if the bag is late, damaged or items stolen you have no recourse to the airline
  • When planes are late or cancelled, nobody cares how much customers are inconvenienced. Literally. You have no recourse to bad, or failed, service.
  • Planes are cramped and dirty, often looking well worn – or worn out.
  • Every year planes are becoming smaller and less comfortable.
  • The food is gone – or wildly expensive.  And that little botttle of rum costs as much as a fifth at home.
  • Empllyees appear uncaring at best, or simply rude.  It’s like there are way too many customers, and not enough of them, so “PLEASE stay back and do what we tell you to do!”

This list could go on forever (readers, feel free to comment on your favorite stupid policy or practice of any airline.)  Why?  Because the airline’s leaders have completely lost track of what business is all about.  In the rush to cut prices, trying to sell that last empty seat on that midnight feeder flight to Omaha, the entire industry has driven out all the customer satisfaction, and profitability.  Everyone has learned that it doesn’t matter how much you pay, the experience is going to suck.  So the industry has taught customers to be price sensitive, above all else.

Shortly after deregulation Robert Crandall became AMR’s Chairman.  He was a notorious cost cutter.  The Wall Street Journal ran a front page article highlighting his efforts to build American, highlighting how on a flight Mr. Crandall noticed that few customers were eating the 3 black olives on their salad.  He claimed to go back to company managers and tell them to remove the olives, thereby saving (ostensibly) $700,000/year.  Nobody would notice, he claimed, and money was saved.

And that’s been the trajectory for American ever since. Cut this, cut that.  Shave costs everywhere, including employee pay, benefits and pensions.  And after 30 years, the sum total is that not only are the olives gone – the whole meal has disappeared!  Where working at an airline was once considered a great job (pilot, flight attendant, gate agent or baggage handler, ) today compensation has been cut and complicated (remember tiered compensation that has 2 people doing the same job, but at different pay just because of hire date?)  so that employees are largely overworked, under-appreciated and constantly being pushed by management one direction, while pulled by customers in another.  

Where once we didn’t mind flying, maybe even enjoyed it,now everyone thinks of flying as the opportunity to learn what life is like as herded, and penned, livestock!

It has been a fallacy of “modern management” that leaders have a primary job to optimize the business – largely by limiting innovation and cutting costs.  The famous business guru, Jim Collins (author of Good to Great,) actively advocates (IndustryWeek.com 11/29/2011) that businesses focus exactly on the kind of business optimization that has driven AMR to bankruptcy!  His recommendations have inevitably lead businesses down a road of commoditization as they offer less and less to customers, and fall into vicious price wars.  Ineveitably a market shift happens that undercuts their ability to compete at all!

Great companies do not fall into this trap.  They constantly add customer value, utilizing new technology and business processes to improve performance.  They grow revenues, rather than focus on cutting costs.

Think about how Google has made doing research easier, and placing internet advertisements.  Or how Apple has improved personal music and mobile information access.  Or how Whole Foods has delivered more organic and tasty products.  Or how Amazon has made access to books, periodicals and much of retailing a better experience.  These companies have seen their market capitalization explode as they eschewed optimization in favor of innovation to make things better – not just cheaper.  Where AMR’s value went from $40/share to zero the last 5 years, you would have had big gains in these companies that focused on innovation and delivering better customer results.

AMR chart 12.1.11
Chart Source Yahoo 1 December, 2011

AMR’s leaders, and airline industry analysts, can try to put perfume on this bankruptcy pig by saying it is a “strategic action” taken to re-align costs (CuriousCapitalist.com.)  That’s code for union-busting, in yet one more effort to ignore the real problem of no innovation.  Rather than actually improve the airline this is more of the same old strategy –  cut more olives (cost,) chasing the spiral yet further down toward even worse performance.

It’s time to be honest.  AMR’s bankruptcy is a failure.  Leadership’s inability to address customer needs well enough to price at a profit.  Gimmicks like loyalty programs, bag charges, reservation fees, change fees, seat location fees and drink charges merely obscure the fact that the leaders cannot profitably run an airline!  Their service is so poor that they cannot charge enough to cover costs. Continuing to cut costs, further hindering service, is NOT the answer in a service industry! 

It certainly is prossble to make money in service industries.  Most do.  It is even possible to make money as an airline – just look at Southwest (which has made more profit than all its [much larager] competitors combined.) And the first step is for AMR to recognize that its strategy for 30 years is wrong!  The company needs to end the cost-price spiral and introduce some innovation!  Change the game AMR, or you’ll forever remain a crappy company for investors, customers and employees.

Avoid Gladiator Wars – Invest in David, Make Money Like Apple


When you go after competitors, does it more resemble a gladiator war – or a David vs. Goliath battle?  The answer will likely determine your profitability.  As a company, and as an investor.

After they achieve some success, most companies fall into a success formula – constantly tyring to improve execution. And if the market is growing quickly, this can work out OK.  But eventually, competitors figure out how to copy your formula, and as growth slows many will catch you.  Just think about how easily long distance companies caught the monopolist AT&T after deregulation.  Or how quickly many competitors have been able to match Dell’s supply chain costs in PCs.  Or how quickly dollar retailers – and even chains like Target – have been able to match the low prices at Wal-Mart. 

These competitors end up in a gladiator war.  They swing their price cuts, extended terms and other promotional weapons, leaving each other very bloody as they battle for sales and market share.  Often, one or more competitors end up dead – like the old AT&T.  Or Compaq. Or Circuit City.  These gladiator wars are not a good thing for investors, because resources are chewed up in all the fighting, leaving no gains for higher dividends – nor any stock price appreciation.  Like we’ve seen at Wal-Mart and Dell.

The old story of David and Goliath gives us a different approach.  Instead of going “toe-to-toe” in battle, David came at the fight from a different direction – adopting his sling to throw stones while he remained safely out of Goliath’s reach.  After enough peppering, he wore down the giant and eventually popped him in the head. 

And that’s how much smarter people compete. 

  • When everyone was keen on retail stores to rent DVDs, Netflix avoided the gladiator war with Blockbuster by using mail delivery. 
  • While United, American, Continental, Delta, etc. fought each other toe-to-toe for customers in the hub-and-spoke airline wars (none making any money by the way) Southwest ferried people cheaply between smaller airports on direct flights.  Southwest has made more money than all the “major” airlines combined.
  • While Hertz, Avis, National, Thrifty, etc. spent billions competing for rental car customers at airports Enterprise went into the local communities with small offices, and now has twice their revenues and much higher profitability.
  • When internet popularity started growing in the 1990s Netscape traded axe hits wtih Microsoft and was destroyed.  Another browser pioneer, Spyglass, transitioned from PCs to avoid Microsoft, and started making browsers for mobile phones, TVs and other devices creating billions for investors.
  • While GM, Ford and Chrysler were in a grinding battle for auto customers, spending billions on new models and sales programs, Honda brought to market small motorcycles and very practical, reliable small cars. Honda is now very profitable in several major markets, while the old gladiators struggle to survive.

As an investor, we should avoid buying stocks of companies, and management teams that allow themselves to be drug into gladiator wars.  No matter what promises they make to succeed, their success is uncertain, and will be costly to obtain.  What’s worse, they could win the gladiator war only to find themselves facing David – after they are exhausted and resources are spent!

  • Research in Motion became embroiled in battles with traditional cell phone manufacturers like Nokia and Ericdson, and now is late to the smartphone app market – and with dwindling resources.
  • Motorola fought the gladiator war trying to keep Razr phones competitive, only to completely miss its early lead in smartphones.  Now it has limited resources to develop its Android smart phone line.
  • Is it smart for Google to take on a gladiator war in social media against Facebook, when it doesn’t seem to have any special tool for the battle?  What will this cost, while it simultaneously fights Apple in Android wars and Microsoft for Chrome sales?

On the other hand, it’s smart to invest in companies that enter growth markets, but have a new approach to drive customer conversion.  For example, Zip Car rents autos by the hour for urban users.  Most cars are very high mileage, which appeals to customers, but they also are pretty inexpensive to buy.  Their approach doesn’t take-on the traditional car rental company, but is growing quite handily.

This same logic applies to internal company investments as well.  Far too often the corporate reource allocation process is designed to fight a gladiator war.  Constantly spending to do more of the same.  Projects become over-funded to fight battles considered “necessity,” while new projects are unfunded despite having the opportunity for much higher rates of return.

In 2000, Apple could have chosen to keep pouring money into the Mac.  Instead it radically cut spending, reduced Mac platforms, and started looking for new markets where it could bring in new solutions.  IPods, iTunes, IPhones, iPads and iCloud are now driving growth for the company – all new approaches that avoided gladiator battles with old market competitors.  Very profitable growth.    Apple has enough cash on hand to buy every phone maker, except Samsung –  or Apple could buy  Dell – if it wanted to.  Apple’s market cap is worth more than Microsoft and Intel combined.

If you want to make more money, it’s best to avoid gladiator wars.  They are great spectator events – but terrible places to be a participant.  Instead, set your organization to find new ways of competing, and invest where you are doing what competitors are not.  That will earn the greatest rate of return.

 

Thanksgiving Travel- Airlines Struggle to Profit

Thanksgiving is tomorrow, so the crush of people flying through O’Hare airport has started.  It’s natural to think about the largest airline in Chicago – United.

United was on the brink of failure last summer as jet fuel prices skyrocketed.  In response, United started charging people for baggage.  Take a couple of bags along and your baggage costs could be 50% or more of your ticket price for a round trip.  United also raised prices, and cut flights.  None of these actions were likely to make United a more competitive airline – and weren’t designed to.  United leadership was using “foxhole management” – trying to survive.  Of course the problem is that it doesn’t take long sitting in a foxhole to get blown up.

Last week I had a business trip from Chicago to south Florida.  Imagine my surprise to learn that United no longer services 2 of the 3 airports in south Florida, and for the remaining destination it has one flight each direction daily.  The result?  To get to south Florida from Chicago (something done by many people in the winter), I had to fly U.S. Airways connecting through Charlotte.  Not supporting any loyalty to United.  And the latest word is that United intends to further cut flights (read article here).  United is the example of a company that is slowly killing itself in its effort to save its old Success Formula.

Meanwhile, Southwest Airlines keeps growing.  After United left South Florida, Southwest raised its fares on those flights, from its lower-cost Midway airport, to over $800!  It has been a profit boon for Southwest that United is cutting flights – and allowing Southwest to keep on growing.

When oil prices took their dramatic rise last summer, United was already a very weak competitor.  Although it was large, it had never addressed the market changes making its hub-and-spoke system and militaristic operating practices less viable.  Not the shutdown on 9/11/01, nor the bankruptcy filing, caused United to alter its business practices established 3 decades ago.  Thus the oil run-up put a weak competitor on the edge of viability – with a nudge over the other side.  United’s reaction demonstrates how, when confronted with the non-viability of its outdated Success Formula, an organization can remain entrenched – and uwilling to take actions that would save it.  Locked-in, without White Space, United was unprepared to deal with yet another market shift.  Intead, United chose to take minimal actions short term, HOPING somehow things would change back to the good old days, long ago, when the company was less unprofitable (keep in mind that over its lifetime since deregulation United has never consistently been profitable.)

Trying to save a troubled business, in rough economic waters, during a period of market change, cannot be done by doing more of the same – “better, faster, cheaper.”  Market Challenges pile up, until a punctuated equilibrium changes the market for all competitors – and rendering some no longer viable.  To be viable long-term takes a willingness to recognize the future must be different from the past, that competitors are more successfully growing and are worthy of intense study, that Disrupting old patterns which keep the status quo in place makes it possible to leverage White Space to create a new Success Formula.  Unfortunately for all those travelers out there this holiday – that’s not what United has done.