The age of competition is over. There, I said it. Okay, so it only holds true for the airlines. More correctly, for what’s left of the legacy airlines that fought to the death after de-regulation. In a matter of months, American Airlines and US Airways will merge. It should be the last major consolidation we see in the US market. There may be smaller acquisitions but I think we largely know what the map looks like in the US, if not how many lines stretch between different cities.
I just got through reading Hard Landing: The Epic Contest For Power and Profits That Plunged The Airlines Into Chaos. Gary of View From the Wing loaned me his copy when he learned I hadn’t read it. If you consider yourself at all interested in the airline industry it’s an absolute must read. It’s a bit dated, leaving the airlines in the mid-90s. But, it’s a great historical reference piece that, for airline geeks, reads like a spy thriller.
As I finished reading it, I was also contemplating how my flying will look over the next few years. Who should I be loyal to? Will they be loyal to me? I’m already on record about my thoughts on Doug Parker taking over American. That New York Times article that I was quoted in lays out some of Doug’s thoughts:
If the merger is completed, the nation will have three major airlines of similar size (American, United, Delta). Mr. Parker said that means they would compete more on in-flight products, like Wi-Fi, seats and food. Yet he pointed out that US Airways research shows passengers care most about basics: getting where they want to go on time (with their bags). That answer doesn’t exactly allay the concerns of American Airlines elite members who are accustomed to being fed.
No surprises here. Doug thinks showing up on time and handing someone their suitcase is what customers really want. And, he might be right. But, we certainly need more evidence than this to assume that the airlines won’t compete. And, to be clear, I don’t think the lack of competition will come from the airlines getting lax. To the contrary, 20 years behind similar customer service industries, the airlines are learning to crunch data about their customers in more efficient ways. They’ve learned who their best customers are, and who the worst ones are.
Instead of targeting those best customers with better benefits, the airlines appear to be using the scalpel to trim benefits from the lower tiers. A great example of this is United’s decision last year to restrict their bottom tier’s access to Economy Plus seating. Premier Silver (used to be just Premier prior to the merger) used to receive access to Economy Plus for free at time of booking. In the new system, they get access to those seats at check-in only.
Let’s consider Delta for a moment. They’ve upgraded their premium cabins, added Wi-Fi and even added some extra legroom seats in coach. They offer complimentary domestic upgrades and access to those preferred coach seats to all their elites. But, earlier this year, they instituted a new requirement to achieve elite status, a minimum spend threshold. They want you to spend a minimum amount on all those tickets you buy or book a large amount of spend on their branded credit card. In exchange for this new requirement they offered the following new elite benefits. Pretty much nothing. Well, not exactly true. They did roll out crossover benefits with Starwood Preferred Guest. I do need to give them credit for that.
Don’t get me wrong. They could decide to roll out new benefits sometime soon, but I don’t see an impetus to do so. And, recent actions such as their drastic cuts to earning miles on partner airlines suggest the opposite.
Back to United, who recently announced, wait for it, a minimum spend threshold to achieve elite status. Sound familiar? The airlines have always been a copycat industry. If this move surprised you, you just haven’t been paying attention.
United is also updating its premium cabins and says they’re adding Wi-Fi. I actually believe them when they say they’re adding Wi-Fi this time. It’s no longer about adding a benefit for customers but making up for not having something pretty much all of their competition has already done (yes, even Southwest is kicking their ass here).
A quick peek at American Airlines sees them chipping away at one of their competitive advantages, the size of their domestic premium cabins.
For the purposes of this discussion, let’s group passengers into those that are occasional flyers (2 or 3 times a year, mostly for personal or leisure travel) and frequent travelers (mostly business folk). There are countless ways to categorize passengers but I’d like to stick with these generalizations since most will fall into these categories.
The occasional passenger doesn’t care about the food on their flight. For the most part, they probably don’t make their decision based on the quality of the seat or whether there’s Wi-Fi. Nobody’s saying they don’t care about these things, but really? How many people that fall into that occasional traveler category are going to Google the seat pitch of various airplanes to figure out the best one for their trip (or use SeatGuru)?
Online travel agencies (OTAs) such as Expedia and Travelocity field a lot of these types of customers. To my knowledge, none of them are including information about the quality of the seat (with the exception of something like actually booking through SeatGuru). There’s some basic info here and there about Wi-Fi but that’s not widely disseminated, and the airlines sure aren’t advertising months ahead of time what they’ll be serving on an upcoming flight from JFK to Orlando.
The occasional passenger is deciding mostly on price. And, they probably want a direct flight. But, ultimately if it’s a family of 4 traveling, price is going to be one of the largest determining factors.
Now, the business traveler. He or she is more likely to be loyal to an airline because they want benefits. More miles, upgrades, better seats in coach. As a self-avowed business traveler, I can certainly vouch for the fact that those benefits make a big difference. I don’t enjoy traveling 150,000 miles a year, but I do enjoy using those benefits so my family can see the world. I’m also more likely to take a connecting flight somewhere so I can rack up those miles on my favorite carrier.
The business traveler is generally much more constrained by time than the occasional traveler. Generally speaking, they need to fly on specific days of the week and generally flights that optimize their time in a destination (so, early and late flights). If they aren’t loyal to an airline then they’re really only choosing on price and things like time of flight and direct or connecting flights. All else being equal a frequent traveler might select a flight with better food and Wi-Fi availability.
But, I think it’s unlikely that a meaningful number of business travelers are do so. The hub and spoke model that most carriers employ means that there’s not a lot of competition on direct routes. Take one of my most popular routes, Washington-Dulles (IAD) to Denver (DEN). Technically, United has competition from Southwest for direct flights. But, Southwest has 2 departures, 1 in the early morning and one in the evening. Currently, United has 9 departures spread throughout the day. That’s a lot more flexibility, especially during irregular operations.
When you move to international business travel (and to a lesser degree international leisure travel) there’s a bigger reason to differentiate between products. Those tickets are a lot more expensive (and generally more profitable for the airlines). The flights are longer, so a better seat is more important. Ditto for better food and soon internet connectivity will be widespread enough for international flights that it, too will be a way to lure customers. Significantly more international flights include a connecting flight, so in those cases the airlines are competing less on flight plans as opposed to the benefits offered. This is one of the reasons why I think Delta’s decision to award less (or no) miles on some Skyteam partner flights could come back to bite them.
While the airlines are likely to continue refining their international experience, I don’t think they will ultimately find reasons to compete inside the US. They wait for each other to move in lock step on things like price increases and benefit reductions and are doing a great job cutting capacity to keep planes full. Due to less competition on direct routes they can charge a bit more of a premium there.
I just don’t see the driving reason why they will compete. As the leader of a business in a competitive marketplace, you’re constantly assessing the competition to make sure your product is relevant and appealing, able to sway customers. Those customers at the margin add up to gains in profitability. For the first time in a long time all the legacy airlines are profitable and structured to continue that trend barring a drastic outside change or their own desire to regress from their cost-cutting ways.
Not only don’t the legacy airlines have many things they can use to separate themselves, they spent the last decade finding ways to drag themselves back to profitability. It’s always possible they lose that discipline, but for the first time in a long time, I just don’t see it.
The current product seems here to stay with minor tweaks along the way. It’s definitely something I want to give more thought to, I could be wrong.
What do you think? Will there be competition between the legacy carriers? Will someone like Southwest force them to be more competitive?