United Airlines, “the bureaucratic voice”, contracts of carriage and airline economics (PART 2)

Fly the friendly skies

David Dao, the now famous United Airlines passenger,

forcibly removed from a United Airlines flight

 

For Part 1 of this post which are comments on “the bureaucratic voice”  click here

 
In Part 2 below, some comments on “contracts of carriage”  and airline economics
 
 
Oh … and I included a very cool animated graphic at the very end 
on why airlines overbook (with a lesson in statistics)

15 April 2017 (Serifos, Greece) –  Incredible. United Airlines just cannot get a break as word was out this week that on another United flight a scorpion fell from an overhead bin and stung a passenger.

And comment on the bloody David Dao affair continued.

Sapna Maheshwari, a business reporter covering advertising for The New York Times and a well-known reporter from her previous days covering retail and e-commerce at BuzzFeed, made an astute observation on her blog:

In most organizations, supply chain, H.R., legal or whatever it is – they’re not exposed to the same kind of stuff as marketing because it’s not traditionally in their area of responsibility. They focus on the news flow from screens humming the activity of stock quotations, chyrons and headline tickers on CNBC. What they do not realize is that anyone can take a look at what is going on across the whole social ecosystem and see how what they do impacts their business.

 

She was writing about Pepsi and similar companies that have screens installed in their company’s headquarters … usually in the marketing departments … to display real-time social media conversations about its brands. It was what led Pepsi last week to react within 24 hours over that now infamous  tone-deaf commercial that invoked imagery from the Black Lives Matter movement.

Crises that play out on social media are increasingly being viewed as threats to a company’s profits instead of short public relations episodes. One tweet, just one dangerous tweet, can really impact your share price.

One thing I learned at Cannes Lions was there are a plethora of tools to simulate crises for executives, inventing a plausible firestorm then running a drill exposing them to a litany of challenging media inquiries, news articles, social channel conversations and videos as you witness the immediate implications of your responses (or non-responses). Companies must gird themselves for social media grenades, whether it is critical Twitter posts from President Trump, or campaigns from socially and politically conscious consumers holding brands to account for where they advertise (yeah, I’m talking to you Bill O’Reilly).

Cannes Lions … which is for the advertising and media industry … has become my favorite event of the year. It is where I have learned the most about the impact of technology, the visualization of data, creativity, and how to create a high level of quality storytelling.

 

These instances are not limited to social channels. The United video has been reposted on Twitter more than 170,000 times, and has circulated well beyond that on television broadcasts, news websites, YouTube and Facebook. Oscar Munoz, the chief executive of United, has been criticized for not making a full-throated apology until Wednesday afternoon.

One of my clients, Hilton Hotels, monitors its social networks and mentions of its brands around the clock, usually responding to people in less than 10 minutes. Employees are trained to respond to everything and to be aware that all interactions are public. As Bobby North, a long-time friend at the advertising giant Ogilvy & Mather, put it:

It used to be that consumers interacted with you through call centers or they wrote you, so it was a one-on-one communication. Now, you may be responding to one person’s Twitter, but everyone is seeing it, so you have to be conscious you have a public audience. That includes private messages, and especially screenshots that can be taken and shared.

 

Unilever, the consumer goods giant, relies heavily on deep analytics and powerful language processing tools to understand the “tsunami” of data it sees from social media. It is at the vanguard of data analytics at numerous levels (especially e-discovery which I will address in another post). At Unilever, 25 percent of the marketing team … almost 75 people … work with social media, compared with 5 percent two years ago.

So why have airlines as a group been so remiss … Southwest Airlines being the glaring exception with its “hub social team” that has spokes into every element of the business … with social media?

Part of the Southwest Airlines “listening Center” which is a 30+ person “social business” department that is at the center of the entire company’s operations: 

airplane operations, marketing, logistics, executive, human resources, etc.

 

Oh, its complicated: regulatory failures as well as consolidation, technology failure, and an airline industry that has stubbornly resisted innovation to improve customer service. Reality? Technology has only fueled the industry’s race to the bottom with an overall attitude that brutish capitalism is the best that nonelite customers can expect from this fallen world. It is baked into the airline industry’s business model.

So let’s unpack a few of these points.

  • Oh, that [*&$!!?&*] technology

Farhad Manjoo is a technology columnist for The Wall Street Journal. I met him when he was a staff writer for Slate magazine. He has done a deep dive into technology’s affect on the airline industry. I have been connected with six ediscovery review projects involving the airline industry (I was a project manager on the mega United Airlines/Continental Airlines merger, and on the American Airlines/US Airway merger) and Farhad has been a refreshing/knowledgeable source. Oh, and for my non-ediscovery readers, a refresher on ediscovery can be found by clicking here.

Farhad recently blogged:

Everything about United Flight 3411 – the alleged “overselling” (which was not true), underpaying for seats when they are oversold, and the cultish refusal to offer immediate contrition marks a business model that has been accelerated by tech. Travel search engines rank airlines based on price rather than friendliness or quality of service. Online check-in, airport kiosks and apps allow airlines to serve customers with fewer and fewer workers. What we are witnessing is the basest, ugliest form of tech-abetted, bottom-seeking capitalism – one concerned with prices and profits above all else, with little regard for quality of service, for friendliness, or even for the dignity of customers.

 

Ah, a man after my own heart. I owe him a chocolate Easter bunny.

Several years ago, because of my experience in airline antitrust issues,  I was commissioned to write a brief for a private client on possible state aid issues involving RyanAir and several EU member states. The work offered me the opportunity to do a deeper dive into airline competition in U.S. markets, airline competition in European markets, antitrust regulation, antitrust immunity, how the allocation of airport gates work, market entry, air travel distribution, etc., etc.

Through that assignment I became aware of a company called FlightGlobal that analyzes many aspects of the aviation industry. In one white paper they noted:

The airline industry has been on a steady downward trajectory when it comes to customer service for nearly 40 years. American carriers were improving on some metrics – on-time service is up, baggage loss is down and prices keep getting better.

 

But what keeps deteriorating are comfort and quality of service for low-end passengers (i.e., most people). Legroom keeps shrinking. Airlines keep tacking on separate fees for amenities we used to consider part of the flight. And customers keep going along with it. Consumers have shown that they’re willing to put up with an awful lot, including lack of legroom, lack of amenities, mediocre or worse customer service, dirty airplanes and more to save money. And the airline industry has evolved to meet that desire – cheap fares.

 

Henry Harteveldt, the president of the Atmosphere Research Group which is a widely-followed travel industry research firm, was questioned about the United Airlines PR disaster this week and he said a big issue is how we buy tickets today:

The whole system is mercilessly transactional. When you search online, you look for price and travel times, and perhaps you consider some airline loyalty program. Customer service – that is, how the airline treats you – isn’t often part of the transaction. As a result, airlines have little incentive to reform themselves. Airline executives will tell you they don’t view themselves as being service companies. They want Wall Street to view them as industrial companies, and they want consumers to view them as transportation providers. Customer service is just not what the airlines are about.

 

BANG!!  The essence of a service industry is the point of contact with the customer. From a yoga class or therapist to a decorator, a restaurant or a tour operator, we expect value to lie in the personal nature of the delivery. It lies not in product quality but in experience quality – in courtesy, humanity and kindness. We do not expect a difference between a first- and a second-class experience, between caring and not caring.

That is why trouble occurs when services subcontract. Each link in the hierarchy erodes the bond between boss and front-of-house. The larger the organization, the more likely are its staff to curse its bureaucracy and blame senior managers for their own failures. The loyalty of Chicago’s airport marshals on Monday would not have been to United but to their local police service. They had no interest in the airline’s reputation.

And as Henry notes above, customer service is just not what the airlines are about. You can see this in United’s initial response to what happened on that United Airlines flight:

I apologize for having to reaccommodate these customers.

 

As one wag noted on Twitter: “that is a statement dripping with all the warmth of a ransom note”.

 

Well, ok. But can technology improve how airlines work? Some people have ideas for how that may happen. One of them is obvious and sensible: customer reviews. Last year TripAdvisor, the travel reviews site that has become indispensable for hotel bookings, began rating airlines. Its new rankings, released this week, show that over all, airlines get an average rating of 3.7 out of 5 from customers.

NOTE: Emirates and Singapore Airlines are rated the best in the world; two American airlines, JetBlue and Alaska, made TripAdvisor’s Top 10 list. But Delta was the only major American airline to receive TripAdvisor’s seal of approval. United and American Airlines did not even meet the site’s minimum threshold.

 

But let’s face it. That is small potatoes. A bigger disruption would come from altering how we pay for airfares. In the same way that Netflix changed the DVD business by charging a monthly fee, some consultants argue that a membership fee could radically improve flying. Some have prototyped a subscription airline in the past, and it basically gets the airline out of the business of reducing service for offering the lowest fares. But none have taken off (get it?). You’d need an established airline tries it as a way to break free from the accepted way of doing things.

And some say “what we need is long-term competition from other kinds of transportation”.Ok, yeah, maybe. If … if … self-driving cars really make driving easier and more comfortable, then maybe midrange flights would face competition. And “do the math”. Counting the time it takes to clear airport security and get to and from the airport, it takes just as long to drive between some places – Los Angeles to San Francisco, say – as to fly. If self-driving technology really, really, really makes driving much more comfortable, then maybe lots of people might abandon planes for cars. Maybe.

 

So for now the only technological hope I see for better service is your smartphone camera and the viral push of social networks. If you are violently kicked off your flight, at least your fellow passengers will post a video to Facebook. Because it will take a lot for airlines to change. They are content to feed you ever-worse service for lower prices … because that is what the web wants.

So let’s take a look at the numbers.

 
  • Oligopoly, money and market power – God bless limited competition!!
 

Despite recent revelations that Fox News and anchor Bill O’Reilly had settled five complaints of sexual harassment against him to the tune of millions – his ratings went up. A few days later, a United Airlines passenger was dragged from an airplane to make room for crew members on a full flight – and United’s stock initially went up, then down, then rallied. And for this we pay good money?

 

The shock wasn’t so much that monetary values seem to increase in direct correlation to the diminution of moral values but that we’ve become passive bystanders to appalling behavior and allegations. Well beyond defining deviancy down, as the great statesman Daniel Patrick Moynihan once described our cultural devolution – we hardly know what it is anymore.

Kathleen Parker, editorial writer, The Washington Post

 

The reason is the same for why any of America’s other oligopolistic powerhouses can treat their fellow Americans with such crass indifference: shareholders don’t really care about consumer opinion or even a company’s larger public image. They care about profits. If there is no competitor to whom consumers can turn, who really cares what they think? The 2013 merger of American Airlines and U.S. Airways – the biggest and last in a series of dramatic consolidations that federal regulators did little to stop – left the United States with only four major airlines. The overwhelming weight of empirical evidence (there are scores of studies; I cite just one here) shows that wherever fewer carriers compete in individual airline routes, fares go up. No factor can fully explain it except market power.

I do not want this piece to become a recitation of the history of airline antitrust/deregulation development, but in brief:

 

  • In the 1960s and 1970s, the Civil Aeronautics Board set strict regulations for the airline industry. It managed routes and set fares, guaranteeing a 12 percent profit for any flight that was at least 50 percent full.
  • As a result, airline travel was so expensive that 80 percent of Americans had never flown. It also took a long time for the Board to approve new routes or any other changes.
  • Amid runaway inflation in the late 1970s, the industry was deregulated on the theory that market forces would produce lower prices and more efficiency. Still, the father of deregulation, economist Alfred Kahn, argued the new market needed strong antitrust enforcement to preserve the benefits of competition that deregulation was supposed to produce.
  • That enforcement Kahn envisioned never materialized. The Reagan administration introduced new merger guidelines that were much friendlier to combinations of large corporations. Under the mantra “Bigness Isn’t Badness,” the Justice Department Antitrust Division became much more receptive to claims that efficiencies resulting from mergers. And Obama made it worse (see notes below).

Don’t listen to the airlines or their apologists when they point to the fact that average fares have not gone up – or, indeed, that average fares have sometimes grown even more slowly than inflation. As they deploy that nominal truth, it is all but a literal lie, because average fares are irrelevant. What matters is the price you actually pay when you buy a ticket, and that price goes up whenever a given airline controls more of the traffic on a route you fly. That pricing power has proven to be very durable and difficult for other airlines to undercut.

This is presumably why the major airlines have each had essentially the same remarkable stock performance as United, a performance that seems to immunize United from any real fallout over this recent scandal. Each airline has seen its stock prices – along with its profits – rise significantly from relative low points a decade ago, holding high plateaus since the American-U.S. Airways merger. Market power is very profitable, even if you rough up a passenger without cause.

And perspective, people, perspective. It won’t even matter if David Dao sues, even if he succeeds wildly. Early predictions from experts suggest that he has strong legal claims and that he could enjoy recovery of $1 million or more. But last year, United earned $2.3 billion on revenue of $36 billion. In other words, physically assaulting a man and leaving him with a concussion, a broken nose and missing teeth – though it seems he did nothing except express anger toward an indifferent oligopolist – will be just be a blip.

Of course, industry concentration itself did not cause this physical violence, and competition and antitrust enforcement alone will not keep companies from doing bad things. The point is that these physical injuries are emblematic of the larger, bloodless harm inflicted by oligopolistic power.  On his blog, Chris Sagers (an  antitrust law expert who testified before the House of Representatives against the merger of American Airlines and U.S. Airways in 2013) noted:

Since U.S. network airlines began their present run to massive dominance, they have confiscated billions of dollars from consumers, which they could not have done in competitive markets. That injury manifests not only in bloodless dollars. Those prices are sometimes gouged by hundreds – or even thousands – of dollars when travel is needed to see distant family or go to funerals or attend to urgent crises.

 

And there is a bit of irony in all of this. The Obama administration had unleashed its might on behalf of beleaguered American air travelers, filing suit to block that mega-merger between American Airlines and US Airways. The Justice Department laid out a case that went well beyond one merger. The big “quote of the brief”:

Increasing consolidation among large airlines has hurt passengers. The major airlines have copied each other in raising fares, imposing new fees on travelers, reducing or eliminating service on a number of city pairs, and downgrading amenities. This must stop.

 

But the Obama administration itself had helped create that reality by approving two previous mergers in the industry, which had seen nine major players shrink to five in a decade. In the lawsuit, the government was effectively admitting it had been wrong. It was now “making a stand”.And then … poof! The government stunned observers by backing down. It announced a settlement that allowed American and US Airways to form the world’s largest airline in exchange for modest concessions that fell far short of addressing the concerns outlined in the lawsuit. We would learn later that the Justice Department’s abrupt reversal came after the airlines tapped former Obama administration officials and other well-connected Democrats to launch an intense lobbying campaign, the full extent of which was never fully reported until last year.

Side note: I worked on one of the e-discovery teams on the American Airlines/USAirways merger and I had an interesting perspective. I knew many of the DOJ team members. It was a typical e-discovery “battle”. The government is always outmatched. The DOJ’s Antitrust Division assigned roughly 30 lawyers and economists to work on the case. They faced off against an army of at least 200 lawyers (and I am not including the 420+ contract attorneys brought in just to sift through millions of emails for this matter).

 

 

The airlines assembled top antitrust attorneys from five separate law firms, virtually all of whom had previously worked as government antitrust enforcers. In a news brief after the merger American Airlines’ general counsel estimated the company had spent $275 million on outside lawyers for its bankruptcy and to defend the merger suit. And that doesn’t include US Airways’ spending on the deal. The airlines had also hired a team of over 30 economists from a consulting firm headlined by two academics who had previously done stints as the Justice Department’s chief antitrust economist. The economists created complex models designed to demonstrate that the merger would, in fact, create wide-ranging benefits for flyers and actually increase competition. Of course the Justice Department’s economists created their own models, coming to the opposite conclusions. It’s impossible for the public to compare the models as they remain under seal, although I kept all of my work notes since I was exempted from the NDA requirement.

 

So the airlines got the coveted market power that mergers could deliver.

And as far as the “cultural devolution” which is noted in the Kathleen Parker quote that leads this section … well, there is a serious disconnect in the American public. In this past week’s United Airlines fiasco, social media was alive with (infrequent) travelers “outraged” that purchasing a ticket does not give a customer to right to actually fly on their chosen flight-even, in rare cases like last weekend, after boarding has taken place.

The public, at large, doesn’t “get it”: we have created … and they do not accept … that today we (they) must accept a difference between a truly personal service and an impersonal one, and pay more for the former. Airline travel used to be smart, its staff glamorous, and its comfort and safety assured. Nowadays passengers must acknowledge that low fares mean low service. They must put up with delays, cancellations, cramped seats anin-flight famine – and with being bumped off planes.

The market drives price optimization above anything else because that’s what customers prioritize above anything else. If people didn’t care about saving a few bucks on a plane seat ($5 * 130 pax = cost of an extra seat), airlines wouldn’t need to overbook. But because they will buy from a different airline if the fare is $5 cheaper, airlines have to play the overbooking game to reduce the fare a tiny bit more.

Markets are like computers. They do exactly what people want. The problem being ranted across social media comes about because of a mismatch between what people say they want, and their actual behavior. Not because of a problem with the market. Everyone says they want bigger seats, shorter lines, “free” checked bags, better food, no bumping, buttheir purchasing behavior clearly indicates they’d rather save a few more bucks than have those things. The media listens to what people say, not what they do. The market doesn’t care what people say, only what they do.

The “security theater” (yes, my cynicism again) is mandated (and run by) the government, not the airlines. Outrageous fees were another cost-cutting move – to reduce the fares for customers who didn’t need to check in a bag, or didn’t want the in-flight meal service. Cramped seats are yet another way to reduce fares for people who don’t want to pay a little extra for larger seats (Economy+). Inadequate cleaning is also a consequence of reduced fares – by reducing the turn-around time to the absolute minimum, the airline can get more miles out of its equipment each day, reducing operating expenses thus allowing lower fares. It all boils down to customers prioritizing ticket prices above all else (and a disproportionate fear of terrorism fed by the media which runs terrorism stories because they catch more eyeballs thus leading to more advertising revenue).

Yep, the vast majority of consumers vote with their wallets every single time. People bitch and complain about offshoring and evil corporations .. but then go buy cheap Chinese crap at Wal-Mart and pass up the products with “Made in USA” labels. And then they lament that all the manufacturing jobs are gone.

Yes, we all love the “digital revolution” and how things have become easier and cheaper … yet we still expect these services in some sense to be “personal”. But the bigger the deliverer, the more this is implausible. That is why big service organisations punish us with long waits if we try to find a human being in their corporate depths. If you want quality, go small and costly. Poor David Dao would have had a delightful flight if he had gone first class. And, yes, his treatment was inexcusable. But let the big organization that is without sin cast the first stone.

 
  • “Contracts of carriage”

For those of us who are a “certain age” who have been flying for a loooooooong time, getting “bumped” on a flight never happened.  The airlines didn’t do it in the 1980s and 1990s when flying half-full planes was the norm. That started in the late 1990s when airline tickets first went online and people started to shop by price. “Overbooking” became the rage.  But it really took off with Priceline who made a huge business of selling cheap tickets to the point these were the first passengers to be denied boarding.

I have one (fond) memory. I was bumped off a trans-Atlantic flight (NYC to London). But it was a dream compared to today.  I was put up in a hotel at JFK, the flight cost was fully refunded, and they flew me out the next day. I was a wee pit pissed … it was a 5-day trip and I had commitments in London. But I was bumped to first class that next day so … eh, it was fine.

Today there is something called a “contract of carriage” which governs the transportation of passengers and baggage and it is referenced on your ticket, ticket jacket and eticket receipt. All airlines have them and they all say:

to the extent there is a conflict between this Contract of Carriage and any terms and conditions printed on or in any ticket, ticket jacket or eticket receipt, this Contract governs.

 

And yes, before you ask, they all say:

The priority of all other confirmed passengers may be determined based on a passenger’s fare class, itinerary, status of frequent flyer program membership, and the time in which the passenger presents him/herself for check-in without advanced seat assignment.

 

Simply put, by purchasing a ticket or accepting transportation, the passenger agrees to be bound by the terms of the “contract of carriage”. And it means that if a flight attendant, pilot or other authorized personnel tell you to get off the plane … you get off the plane. You can read the United Airlines version by clicking here.

The arguments on social media are “fine, but Dao was being denied boarding and he was, in fact, already sitting on the plane”. And there were arguments on what applies if we are talking “oversold flights” or “overbooked flights” or if United just needed to get those four employees on the flight. One aviation colleague noted that pursuant to a Federal rule (he cited this one) you cannot just bump passengers to make room for a crew.

Side note:  Eric De Grasse, my CTO, did some math and said “they could have hired a limo and had the four driven to their destination – it is only a four hour drive from Chicago to Indianapolis. Assuming the limo cost $125/hr, and you had to pay for the empty return drive, that’s less than $1,000.”

 

The “denied boarding” is a whole different ball game, more than “was he at the gate or already on the plane?”  In aviation law the legal definition of boarding is not the “common sense” definition. In essence you have not boarded the plane until everyone is on and the door has been closed. At that point, everybody has boarded and the plane is legally “in flight” even though it hasn’t left the gate. Thus, one can be denied boarding even though they’re sitting in their seat. So that complicates the idea that once you set foot on the plane the rules about being denied boarding no longer apply (physically removing someone from a plane is an entirely separate matter).

And there is no “max reimbursement” for being bumped. I have seen $675 and $1,350 bandied about on the web.  It is up to the airlines, as was evidenced this week when a family of four in Florida was asked to “deplane” to accommodate another family and they received a cool $11,000.  That’s a lot of Mickey Mouse coffee cups.

 
  • The ruthless economics of why the airline industry won’t ever stop overbooking flights (with a lesson in statistics)
 

Although the United Airlines case, the issue of overbooking was discussed ad nauseamacross social media. There were these flaming arguments about the “ethics” of overbooking and statements like “what other industry is allowed to sell commodities twice!? That’s fraud!!”

 

Well, how about ISPs who oversell? Or, even worse, ISPs (to grab a random one from a hat, let’s say Comcast) who accept payment from subscribers in exchange for delivering the packets their customers request at the fastest available speed, and then also charge another company (again, grabbing a random company from a hat, let’s go with Netflix) a fee before they actually deliver the packets their customers request at the fastest available speed. Similar?

Airlines regularly sell more tickets than seats available on their flights. The practice of overbooking, which is also common in doctor’s offices and hotels, makes perfect economic sense. As the TED-Ed video explains, bumping passengers (voluntarily or involuntarily) comes with a cost-putting bumped passengers up in hotels, rebooking them, giving them upgrades or compensation, or angering them so much that they fly with another airline next time.

So airlines need to walk a fine line, making a shrewd assessment of the economic risks of overbooking vs. underbooking. To do this, they parse many years of data on how many passengers show up for certain routes on certain dates, the video explains. Often they get the number right, no one is bumped, and the airline maximizes its profits:

 

And coming next week:

Part 2 of my series “HOLY CYBER!!: THE RUSSIANS ARE COMING!” : a further look at Russian cyber “activities” after my recent trip to Moscow (no, I didn’t see Ed).

For Part 1 click here.

 

Easter bunny

 

 

 

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