United, We Fall On Our Faces

By now, there is hardly a larval emanation or tentacled youngling in the multiverse that hasn’t heard of United’s horrible treatment of a passenger on an overbooked flight and its subsequent epic and ongoing self-immolation. Case studies and business school texts are being drafted even now to include this story as the cautionary tale, above the caption: Don’t Ever Do This! (Or, at the better business schools: Fire Any Cretin Who Does This. One needs to be specific with alums of such business schools, as normal human behavior has long since been bred out of them.) Even I, who am unnaturally predisposed to ignoring anything that’s got the webs all a-twitter, have heard of it.

Ignoring the best response (rolling over and going back to sleep after pledging to never again take United at least until they have a really good deal to Cancun), there are two general ways one can react to this.   One can marvel at the efficacy of the Dead Hand, which, even now, is pounding United into a bloody pulp. Under the somewhat free market system airlines labor under – this is a tricky part for some – nobody has to fly United. You can pick any number of airlines to be the apex of your airport dehumanization process, or even take a train, drive or stay home. You can park your retirement funds someplace else. And millions, now, are dealing with that exact decision, and whacking big bad United where it presumably hurts the most – in the wallet. 

Or one can go all Cosmic Metaphor. You are not mad at United. You are mad at America! It’s the system getting you down, man. Rather than doing something simple, direct and effective – not flying the Friendly Skies – let’s instead throw a pouty party, and dust off everything that sociology professor with the cool beard told us about Capitalism back in the 80s while sitting on the front of his desk, and enlighten the masses.

Oldie but goodie.

No.

Airlines try to make money in order to a) stay in business and b) provide a profit to their investors. Or as Dr. Coolbeard would say: they’re greedy. Same exact thing. Because, under the magic flying unicorn system, airlines can stay in business and fly me, a nobody with no connections, most anywhere in the world for a under a week’s salary, without worrying about dirty, dirty money. They can finance (1), fly and maintain vast fleets of insanely complex and expensive machinery at locations all around the world, and sell me and anybody with a few hundred bucks a ticket to a regularly scheduled flight, and pay pilots, attendants, mechanics, baggage handlers and, evidently, graduates of the Nicolae Ceausescu School of Crowd Control – by applying good will and right thinking alone!

Not this guy! His tie proves he’s sold out to Da Man.  Nice beard, though.

I think not.

Running an airline is what is sometimes called a ‘sporty game’ by exactly those graduates of elite business schools from whom all human feeling has been surgically removed. What they mean: You have to be a little crazy to own an airline.

Boring yet important business type stuff follows.

Airline revenues are highly cyclical, while fixed costs are very high.  What highly cyclical means: when times get a little tough, one of the first things people cut back on is travel. This holds for businesses as well as individuals. If you sell travel, as airlines do, then, as the saying goes, if the economy gets a cold, you get pneumonia: a slight reduction in overall economic activity produces as relatively large dip in airline revenues. On the other hand, when times get better, people just love to go places!

Yet costs – financing and maintaining all those planes, leasing gates and counters and baggage facilities at all those airports and paying all those people – won’t just go away because you’ve decided to put off seeing grandma until next year and your company switches to a teleconference instead of an in-face meeting.  Nope – whether they’re booking every seat and adding routes or flying half-empty planes, a huge chunk of airline expenses are just there. (2)

In practice, what this means is that airlines have to make big money in good times in order to ride out bad times – they are highly motivated to get every penny they can out of every flight. Yet they are also in a highly competitive market, both in direct terms – you can almost always pick between several airlines between any half-way popular destinations – and indirect – you can often drive or stay home or teleconference.

The last straw: your customers aren’t stupid. They know they can go online and compare fares from sometimes dozens of airlines and pick the one they like – usually, the cheapest one that does what they want.

So, here you are, trying to run an airline and pay the salaries of thousands of hardworking people and avoid having to lay them off, so you’re trying to figure out both how much to charge for tickets and what policies will tend toward getting the most revenue out of each flight.

Some genius MBA comes up with the idea of overbooking: since some percentage of people are all but guaranteed to not show up or cancel at the last minute, if you sell only exactly how many seats the plane has, you’ll be flying a less than full airplane and leaving money on the table. What if you sell a few more tickets than you actually have seats for, so that you can fill in the empty seats created by those no-shows and late cancels, and fly a full plane, and make a little extra dough?

The cool part: you, the airline, have all the data needed to make this work – you’ve got years of history of no-shows and cancels by flight! You can hire some smart statisticians to crunch the numbers, and they can tell you within an acceptable level of confidence exactly how many extra seats to sell per flight so that a) your chances of a full flight (and resultant maximum revenue) are high (for whatever value of high you like) while your chances of really, really pissing off your customers is acceptably low (for whatever value of low you can live with).

Two catches: the obvious one, the one painfully clear from United’s late unpleasantness, is that, once in a while, you are going to royally infuriate some customers. The less obvious one: once any airline starts overbooking, all of its competitors on the same routes are all but forced to start overbooking as well. Why? Because failure to get that extra couple grand per flight generated by overbooking means your flight is that much more expensive, on net, than your competitors – in the not so long run, that will put you out of business, unless you can find some other way to make it up. Since you’re already charging for extra bags and food and every other thing the evil, evil airlines have come to charge for over the years, the only real option is to raise prices.

Aaaaaand – you’ll go out of business. Even if it’s only, say, $20 a ticket, you know and I know we’re picking the cheaper ticket – every. darn. time. So is almost everybody else. (This is where our more enlightened comrades will tell us that $20 doesn’t matter, it’s a small price to pay for JVSTICE! and so on. Of course, they always say this about somebody else’s $20. Try walking up to them and asking for that $20 that doesn’t matter – see what happens.)

Conclusion: The free market has provided the opportunity for anyone with a few hundred dollars to travel almost anywhere in the world – at +/- 600 miles/hr.  That we take this for granted is nearly as amazing as the brute reality itself. The prices are kept very low (3) because many airlines fly the same popular routes, and most people almost reflexively price shop for tickets. Even a few dollars in price difference will make or break the sale much of the time.

Because airlines are in a sporty game in a highly competitive market, they must – as in, they will go out of business within a few short years or less if they don’t – try to squeeze every penny out of every flight. Overbooking helps them do that, so they are all but forced to do it – by us, the ticket-buying public. Usually, this works great – passengers aren’t even aware it’s going on.  Sometimes, it doesn’t. Sometimes, an airline will handle it so badly that they are in the news in the worst way for days on end, their market value drops into 10 figures almost overnight, and people start choosing any other airline.

This fiasco is what we business people call ‘negative reinforcement’. If United had to do it over again, they’d be offering 5 free flights and $10K in cash, and a ride around the airport in a sedan chair carried by United executives dressed as Vestal virgins, and OK, a pony! to free up the seats they needed, and be thrilled to do it. Hindsight is funny that way. Chances are pretty good that, in the future,  United will have to find some other way to make total asses of themselves, insult and demean their customers and pull millions and millions out of their investor’s pockets – because they will, for a while at least, make sure they don’t do THAT again.

But they screwed up.  And are paying a steep price. And that’s not because America is screwed up – it’s actually a rare case in which things are working pretty well.

1. My job has entailed learning a bit about financing aircraft, enough that I could go on for several pages at least on the financial ends and outs of getting and maintaining the aircraft an airline needs to stay in business. It’s scary stuff, financially speaking. If you’d like the inside scoop, just ask in the comments, and I’ll do a post! I don’t recommend it, really, but if you’re into that sort of thing…
2. Overtime and especially fuel are two readily controllable expenses, and they certainly are significant. But they’re not enough for a downturn of any length. Airlines regularly declare bankruptcy – just google any of the big carriers who have been around for a while – United, American, Delta – and you’ll see bankruptcies in their histories.  Jetblue and Southwest are exceptions, I think, built on very tightly controlled business models.
3. Check inflation-adjusted airfares from a few decades ago if you don’t believe me.