Thursday, March 20, 2008

The Industry That Doesn't Get Supply and Demand

Two pieces of business news caught my attention recently, if only because of their contrast. In one story, Starbucks is responding to falling profits by increasing the value of it's product. I am not much of a coffee drinker, let alone a Starbucks customer, but this does strike me as a wise business move. Produce a higher quality product with more features that your customers desire.

Then you have the airline industry. They are suffering from lower profits as well. Their response is the opposite. The airlines are seeking to reduce the quality of it's product, and either eliminate or charge fees for things that used to be free, such as pillows, blankets, food, luggage, etc.

This is very similar to their strategy after 9/11, when consumers were afraid to fly. In response, the legacy airlines downgraded their product. The results were predictable; many legacy carriers went bankrupt as passengers deserted them for low cost carriers that provided them increased amenities such as in flight entertainment.

I realize that the challenge to the airlines is different now. People are not afraid to fly, it is the cost of fuel is creating a supply shock. Costs are increasing far beyond revenue.

The solution is not to downgrade your product and annoy your customers with greater fees. I would argue that the solution is a relentless focus on controlling costs, while improving the customer experience. Grounding the older, less efficient aircraft is a start. I would then switch to larger, more efficient aircraft on domestic routes, rather than high frequencies of smaller aircraft. Perhaps they may even try to fly aircraft at economy cruise settings. Finally, most legacy carriers need to upgrade their web sites to allow customers to easily change flights, join standby lists for upgrades, and book award travel that includes partners, multi-leg itineraries, and other things they currently have to call customer services for.

For example, I am currently trying to move up a future award travel trip on United partner Lufthansa a couple of days. I had to deal with United customer service over the phone to even book it as their web site will not let you book partner award travel. Now that it is booked, there is no waiting list for an earlier flight that is currently unavailable. United's suggestion is to call them every day and ask if the flight is available. There's a great way to control costs and satisfy your customers!

Charging for a second check bag, as United and Delta are doing, is just putting them at a competitive disadvantage. In Denver and other Colorado markets, United competes with Frontier for skier traffic. I expect Frontier to pick up a lot of this traffic now that United is slapping customers traveling with skis or a second bag, virtually all skiers, with a $50 charge. This is going to result in more carry on baggage, and about the same weight. I imagine that couples and families will carry on more luggage, or simply travel with larger suitcases rather than 2 smaller ones. In the end, passengers are annoyed and inconvenienced, and the overhead bins are overflowing as passengers fight for space to put their carry on. This is going to delay both the boarding and exiting of the aircraft, increasing turn around time. In the end, any "profits" they make with this baggage fee will washed out by customers lost to the low fare airlines.

I just don't understand why airlines don't recognize the law of supply and demand.

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