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.

 

September 11, 2009 – United, American, Delta, Northwest, Airlines et.al.

Stealing language from FDR, September 11, 2001 is a day that will go down in infamy.  Dramatic shifts happened in the world resulting from the horrific attacks on American civilians in New York, Pennsylvania and D.C. .  But can we say that most organizations have reacted effectively to those shifts?

Few industries were more affected by the attacks than the airline industry.  Shut down for a week, revenues plummeted immediately and were hard to win back from a frightened public.  But if ever there was an industry of needing to push the "reset button" on how things worked it was airlines.  All the major players (except Southwest) had struggled with profitability, many declaring bankruptcy.  Some never emerged (like PanAm, Eastern, Braniff).  Mergers had been rampant as companies tried to expand into greater profits – unsuccessfullyCustomer satisfaction had been on a straight southeasterly direction, lower and lower, ever since deregulation.  Here was a collection of businesses for which nothing was going right, and in dire need of changing their business model.

The shut down and economic downturn provided a tremendous opportunity for the airlines to change their Success Formula.  The government allowed unprecedented communication between companies, and unions were ready to make changes, to get the air traffic system working again.  A sense of cooperation emerged for finding better solutions, including security.  Market shifts which had been happening for a decade were primed for new solutions – perhaps implementing operational methods proven successful at Southwest.

Unfortunately, everybody chose instead to extend Lock-ins to old practices and bring their airline company back on-line with minimal change.  Instead of using this opportunity to Disrupt their practices, taking advantage of a dramatic challenge to their business, and use White Space to try new approaches – to a competitor every single airline re-instituted business as usual.  To disastrous results.  Quickly profits went down further, customer satisfaction dropped further and in short order all the major players (except Southwest) were filing bankruptcies and hoping some sort of merger would somehow change the declining results.

The airlines' problems were not created by the events of 9/11/01.  But on that day long-developing market shifts become wildly apparent.  The airlines, and other industries like banking, had the opportunity to recognize these market shifts, admit their impact on future results (not good), and begin Disrupting old practices in order to experiment with new solutions that better fit changing market needs.  None did.  It wasn't long before America was mired in another long and expensive military conflict, and an extended deep recession.  For most businesses, things went from bad to worse.

Leaders need to recognize when external events pose the opportunity to Disrupt things as they've been – Disrupt the status quo – and start doing things differently.  These prime opportunities don't happen often.  Reacting with reassurances, and efforts to get back to the status quo as quickly as possible prove disastrous.  This is an emotional reaction, seeking a past sense of stability, but it creates additional complacency worsening the impact of market shifts already jeopardizing the future.  Instead, one of the most critical actions leaders can take is to leverage these market challenges into a call for Disruptions and use White Space to implement new solutions which meet market needs. 

If only the airlines had done that perhaps they could operate on-time, let customers check luggage without a charge, provide quality meals on long flights and internet access on all flights, and provide a reliable service that customers enjoy.  If they had sought to find a better solution, rather than Defending & Extending what they had always done, airline customers would be in a far better shape.  And that's a lesson all leaders need to learn from the events of 9/11 – use challenges to move forward, not try reclaiming some antiquated past.

To read how GM ended up bankrupt by refusing to recognize opportunities for changing to meet shifting market needs download the free ebook "The Fall of GM."

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.