Saturday, September 18, 2004

Paranoid Airline Conspiricy

Well, the airlines and their stupid security programs seem to be back into the blogosphere. Ted Kennedy getting stuck on the “watch list” seems to have a great deal to do with it. It took him, with all his connections (Homeland Security Secretary Ridge returns his calls) three weeks to get things unscrambled — and the name that was causing the problem was “T Kennedy”. I'd have expected it to be “E Kennedy”, at least.

Now, the usual explanation for this kind of nonsense is that the Homeland Security people don't have the foggiest idea what they're doing, but have to work really, really hard at looking like they're doing something. Bureaucracies want you to judge them by their input (“look at all the work we've done”) rather than by output (“look at what we've accomplished”). Reason is, oftimes, there isn't any output. This is probably true.

But it's fun to play Paranoid Conspiracy. Now, Once Upon A Time, the airlines were heavily regulated. Routes, fares, schedules, all had to be approved by the Government. People didn't fly much because the prices were high, but the airlines still made lots of money. Then came deregulation. Suddenly, the airlines were in control of their business. They could fly pretty much where they wanted and charge a market price. This was a disaster. Many airlines went out of business; the rest had to restructure their operations drastically. The result was the airline industry we have today -- low prices and full schedules to common destinations, coupled with incomprehensible fare structures, minimal “service”, and airlines on the verge of bankruptcy.

Airlines are selling a "commodity"; in other words, any airline is pretty much indistinguishable from any other airline. In this kind of market, the lowest- cost supplier wins and everybody else loses. If you want to fly to San Diego next Tuesday and Airline A wants $200 and Airline B wants $300, who are you going to fly? Well, you know that the main difference between Airline A and Airline B is the color of the planes. You'll go with A every time.

This is just what we see. Southwest Airlines and JetBlue are making money hand over fist and everybody else is on the verge of bankruptcy.

The traditional way of making money in a market like this is to differentiate your services. In the example above, suppose that Airline A has itchy, uncomfortable, narrow seats, and no food or drinks while Airline B has wide, comfortable seats and a nice meal. Now the choice is not obvious. Is the extra comfort worth $100? Your call. If you have to get off the plane and go straight into a meeting it almost certainly will be. Fly Airline A and you'll go into your meeting all twitchy and grouchy. As a matter of fact, Midwest Airlines has this extra level of service, and they're making money.

What would happen if the major airlines started going bankrupt? Well, they'd certainly have to keep flying. Equally certainly, they'd use the opportunity to wage- bust their hourly employees. Right now, United Airlines has stopped payment to its employees' pension plan and US Airways wants to.

It seems that this is the perfect opportunity for the airlines (other than Southwest and JetBlue) to get themselves re-regulated. Your trip to San Diego costs $400, no matter who you fly with. The airlines breathe a deep sigh of relief and give their CEOs big bonuses. Well, they'll get the bonuses anyway.

So in this scenario, the fewer people who fly, the better. Easiest way to keep people from flying is to make it as inconvenient as possible. Hence lots of stupid rules and regulations that accomplish nothing. This pushes the airlines closer to bankruptcy, without having to do obvious things like raise prices.

From the Manual of Business in the Twenty First Century — whenever possible, get somebody else (Government is ideal) to do your dirty work for you. Also try to get the Government to order you to do what you want to do anyway.

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