by Adam Hartung | Aug 26, 2004 | In the Swamp
Over the last year, United Airlines has been requesting that the U.S. government guarantee its finances so it can continue operating in the face of massive losses. The government has been reluctant to agree. Facing a cash crisis, last week United Airlines informed its employees it planned to discontinue contributions to the employee pension fund. Understandably, the employees were angered and voted “no confidence” in management. Meanwhile, the whole mess is finding its way into court for lawyers to decide the future of the airline.
Who’s winning here? No one… not even customers. Lines are longer, waits are longer, on-time performance is still an issue. Customers regularly complain about harsh service from employees, a dropping of food service, poorly handled (or lost baggage), and a very unsatisfactory traveling experience. Travel agents are out of the equation; disenfranchised as commissions have practically disappeared over the last few years. So investors, employees, distributors, customers and even suppliers (Boeing, the airport authorities, etc.) are all losing.
What’s the problem? Everyone who doesn’t manage an airline has known that United was on a collision course with disaster for over 20 years. Their profits have been nonexistent to abysmal – even in the go-go 1990s. Every union negotiation cycle has been a request for concessions, and more concessions as their employees (from pilots to flight attendants and mechanics) have been asked to give up pay in order to keep the airline afloat. And then, on September 11, 2001 the whole system was grounded for a week. This provided everyone an opportunity to re-evaluate the future plans. Yet, as quickly as possible, United went right back to the same old, unprofitable, dismal business model.
United bought into a strategy over 30 years ago of “hub and spoke,” which was fed by a desire to be the biggest airline. It was their belief, after deregulation, that the hub and spoke system would be profitable if they could only generate enough volume. Of course, this was a myth. Volume only generated more losses. The pricing mechanisms, designed to “tweak” extra profit from the system, only upset customers as it became hopelessly complicated beyond even the understanding of the employees. And, of course, no matter how much they discounted to win volume, someone else discounted even more — keeping margins at unsustainable levels for operating an ongoing business.
United became so committed to its Success Formula that it was willing to do anything to try and make it work. United has been more willing to sacrifice its profits (thus its investors), its employees (to layoffs and pay cuts), its vendors, and its customers than its failed success formula. United keeps holding out trying to make that Success Formula work – long after any average business student could see it had no hope of working.
Not to mention a competitor, Southwest Airlines, which has shown that alternative models can be far, far more successful.
Only a fool would continue to back United in its efforts to make its Success Formula work. Let’s hope that fool doesn’t become the taxpayers.
by Adam Hartung | Aug 19, 2004 | In the Whirlpool
I’m shocked, shocked! Delta’s planning a layoff to stave off bankruptcy? Who would have predicted it?
Delta and the other major airlines have held a one-way ticket to bankruptcy court for years. The major airlines’ Success Formula became obsolete decades ago when Southwest Airlines was able to prove the effectiveness of their unique approach. The majors didn’t heed the warning signs then and they haven’t heeded them since.
The airlines like to blame the 9-11 tragedy for their troubles, but their problems were in place years earlier. The 9-11 challenge merely revealed how fragile the Success Formulas for the majors truly is. As soon as they hit a big pothole (or should we say “patch of rough air”), every major airline almost went under. If it weren’t for the federal bailout they would have, and some still did. But did that lead them to change? NO. Why? Lock-in to their historical Success Formulas.
And they’ve responded with Defend & Extend actions par excellence: create (or beef up) their low-cost carrier, drive for efficiencies, and today’s favorite—layoff employees. Have these worked? NO. And they won’t, because pruning actions such as these don’t address the real problem—their business model is broken and can’t be improved enough to create a positive future. It has to be disrupted and new, breakthrough strategies put in its place.
Across-the-board layoffs and salary cuts are sure signs that a company has lost the ability to deliver differentiated value to its customers. With no hope to raise prices and grow revenue, they look for cost reductions the only place they can get them — from their own employees. Seriously, what kind of future does that forebode for the company taking this approach? Its corporate anorexia.
These are the clear signs of a company—actually a whole industry—in the Whirlpool. If you have Delta frequent flier miles (or American, or United…) you’d best use them or lose them, the clock is ticking…
by Adam Hartung | Aug 18, 2004 | In the Swamp
Most business pundits hold Southwest Airlines (SWA) up as a great model for other businesses. And rightfully so, with SWA’s terrific streak of profitable quarters. However, today’s Dallas Morning News asserts that SWA is in trouble. Apparently, costs are increasing and they’re saying that the company will soon have difficulty sustaining growth and profitability..
SWA is a great example of a company that started with a radically different Success Formula that won big in the marketplace, and they’ve certainly made it better over the years. However, their innovations have been in the nature of Defending & Extending (D&E) their original model, not transforming it. SWA is aging. It has left the “Flats” part of its lifecycle and is in the “Swamp”—this calls for reinventing their Success Formula, not merely fixing or improving it.
Before they finally die from obsolescence, the major airlines like American will take business from SWA as they lower their rates in a last ditch effort to survive. But more disturbing to SWA is the rise of smart new competitors like Jet Blue, whose Success Formula breaks even the rules that SWA plays by. We now hear talk of SWA planning to follow Jet Blue’s lead by testing seatback video systems… what a long fall for SWA.
And things are only likely to get worse for SWA now that they’ve promoted a CFO into the CEO role. Without knowing him personally, we would predict that he will behave like a typical D&E manager, focusing on costs and efficiency, and will drive the company deeper into the “Swamp.” Soon SWA may be just another sad story of a great company that stumbled…
