U.S. Airlines -- On a 'Collusion' Course?

In 2014, Malaysia Airlines Flight 370 mysteriously disappeared somewhere -- it is believed -- in the Indian Ocean. There was a broad-based search for the plane but to date, the airliner has not been discovered and no generally accepted reason has been proposed for its disappearance.

In the United States, over the past decade or so, planes have been disappearing too -- as routes and flights have been eliminated or cutback. The apparent reason for this is due to a lack of competition.

The question is whether this decline in competition is due to market forces and the natural order of supply and demand or is it driven by unnatural collusion among the major airlines to drive up prices and profits. The anti-trust division of the Department of Justice has announced it is conducting an investigation to determine whether the reason for the disappearance here stateside is attributable to "unlawful coordination" among major airlines.

The investigation has just begun and what the Department of Justice (DOJ) will find is a purely a matter of speculation. As Gene Kimmelman, former Justice Department anti-trust official indicated, however, the DOJ does not initiate these investigations lightly.

There has to be a smoking gun, or in this instance, some leaky fuel tanks for the DOJ to launch an inquiry of this type. Indeed, one of the reasons for this scrutiny may be the manner in which the airline executives themselves have been talking about their business practices.

As James B. Stewart observes in his June 12 article for The New York Times, at "the annual meeting of the world's top executives airline executives, the buzzword was 'discipline.'"

Stewart quotes Delta President Ed Bastian stating that Delta is "continuing with the discipline that the marketplace is expecting." And, he reports that, "American Airlines' chief, Doug Parker, said the airlines had learned their lessons from past price wars. 'I think everybody in the industry understands that.'"

This led Stewart to conclude that, "'Discipline' is classic oligopoly-speak for limiting flights and seats, higher prices and fatter profit margins."

If Stewart is correct, "discipline" as applied to sound business management practices is becoming a dirty word. It didn't use to be that way. Discipline was the effective hallmark of market leaders.

That's what Michael Treacy and Fred Wiersema advised in a classic 1993 Harvard Business Review article. In their article, Treacy and Wiersema identify three key value disciplines for business success. They are:

  • Operational excellence -- Providing customers with reliable products or services at competitive prices and delivered with minimal difficulty or inconvenience
  • Customer intimacy -- Segmenting and targeting markets precisely and then tailoring offerings to match exactly the demands of those niches
  • Product leadership -- Offering customers leading-edge products and services that consistently enhance the customer's use or application of the product, thereby making rivals' goods obsolete.

Those might have been the "value" disciplines in the 20th century. But, based upon the apparent key drivers for the majority of airlines today -- if they have their way across all industries -- the value disciplines for the 21st century could be labeled:

  • Operational sufficiency -- Providing customers with minimally adequate products and service at the maximum price the market will bear delivered with minimal concern for customer satisfaction
  • Customer negligence -- Treating 99 percent of the customer base as the lumpen-proletariat and caring little for their wants, needs or desires as individuals or members of a group
  • Product irrelevance -- Offering customers essentially the same mediocre product and/or experience and controlling the marketplace to make competition virtually impossible

It is not clear whether the airlines are making the decisions to follow this disciplinary course independently or together. What is clear given their similar business practices and the increasing dissatisfaction of the flying public is that the "discipline" they share is not just pricing.

Are the value disciplines of operational excellence, customer intimacy and product leadership a thing of the past for the airline industry? Time will tell and the DOJ investigation -- regardless of the findings -- may move the airlines back toward better treatment of and pricing for customers.

That may be too much to hope for. But, hope springs eternal. So, here goes.

The airlines might even rediscover the customer-centered concepts of "total customer value" and "exceeding customer expectations" that were popular across all industries in the 90s. They were the basis for competition then for many companies and remain so today in industries like automotive, hotel, restaurants, and advanced manufacturing.

Sometimes progress does benefit the consumer. Overall, however, this is absolutely not the case in the airline industry at present.

Deregulation gave the traveler more varied options and heightened competition constrained pricing. This era of industry consolidation which places 80 percent of the travel in the hands of only four airlines -- Delta, United, American and Southwest -- has done just the opposite.

This may or may not be due to the airlines following a "collusion" course. No matter the reason, the American flying public is saying it is time for the airlines to change course.

It is time to begin to fly once again in friendlier and farer skies.

(This is the second blog that Frank and Ed have posted this week on the nature of the airline industries today. The earlier blog was titled, "Squeezing the Yahoos: The Airline Business Model".)

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