Thursday, January 1, 2009

Out of Touch: U.S. Airlines Face Declines in Traffic

The holiday travel season is marked by throngs of travelers scurrying about the country to reunite with loved ones. This year, however, the crowds mask growing weakness in air travel with the IATA reporting a 4.6% drop in November passenger traffic and a 13.5% decline in cargo traffic. Just as the U.S. automobile manufacturers have claimed to be innocent victims of a growing credit crisis, it would be easy to argue that the airlines too are suffering the consequences of Wall Street excesses and the corresponding global recession. Business travel is undoubtedly down (just ask all those insurance salesmen at AIG who are no longer permitted to attend fancy meetings at beach resorts). Similarly, cargo shipments have certainly diminished with the slowing economy and global de-leveraging. All of these challenges are simply diversions that cloud the underlying issues with poor customer service and unreliable execution. In many ways, the airline industry confronts similar issues as the domestic automobile industry. Large investments in fixed assets result in relatively inflexible supply. Rather than focusing on customer needs and rethinking their corporate strategies, both industries have resorted to forcing this supply through the pipeline (fleet sales for the domestic automobile manufacturers and complex discounting / fare structures for the airlines) while cutting costs in areas that would improve customer satisfaction. Let’s examine some of the great value propositions that surely attract customers to the airline industry:

• Compressed leg room in coach, often to the point that passengers are unable to move for the duration of their flight. Ironically, activists argue for elimination of similar treatment for farm animals, yet humans, allegedly possessing common sense, knowingly cram their bodies into coach seats like chickens in a coop. Then again, it is painfully obvious that coach passengers are viewed as little more than cargo to the disinterested airline industry.

• Surcharges for every “service” provided by the airlines are now compounded by aggressive attempts to force passengers to check bags (and, of course, pay for the service) and pay for food and drinks (despite being locked in a tin can for hours and often delayed due to mismanagement or inadequate network resources). TSA prohibits you from bringing liquids on board, so the airlines have a captive market to force dehydrated passengers to pay for beverages.

• Unreliable service due to poor labor relations (and unrealistic unions), overwhelmed “hub” airports, and frequent maintenance issues. Whether it be the unavailability of operable aircraft, an absent flight crew, or excessive scheduling of flights at peak hours, it is virtually assured that you will be delayed if you depart at all. To compound this atrocity, airlines refuse to adequately compensate displaced passengers and shrug their shoulders when passengers fail to make connections. With no accountability, airlines continue to abuse the diminishing goodwill of passengers.

While I am sure there are many more examples of the shoddy service provided by our domestic airlines, I think it is clear that coach service has been completely written off as little more than a bus ticket. The airlines need to completely rethink their pricing methodology and service levels in order to restore the goodwill of frequent travelers and establish a sustainable path to profitability. Absent serious strategic reforms, it is inevitable that frequent travelers will forego the headaches of air travel whenever possible, leaving airlines grasping for price sensitive customers, further eroding their fiscal position.