Capacity Cuts Continue to Prove: Airlines Are NOT in the Customer Service Industry

A NY Times article from last week notes that airlines have been successful driving domestic fares up 20 percent in the second quarter of this year over the same quarter last year (international fares are even higher).  The airlines have accomplished this (as the OTR has said over and over again, if we may pat ourselves on the back) by controlling capacity in a way we haven’t seen in ages.  As one analyst says in the article, “Airlines are continuing to show voluntary capacity discipline for the first time not just this decade, but really since the industry was deregulated in 1978…”

That’s a huge statement, because the industry has really been in turmoil since deregulation (note: I am not in any way arguing for re-regulation).  Pre-deregulation airlines and the government set fares on each route, allowing airlines to offer a bit more legroom and some crappy food in exchange for making a profit.  For years after deregulation airlines continued to offer the same service, only they couldn’t charge as much for it.  That doesn’t sound like a good business plan.

Only recently have airlines fully come around on this fact:  they are manufacturing companies in a commodity market.  They manufacture connections at hubs (or, for direct markets, manufacture point-to-point flights), trying to minimize costs as much as possible while using yield management to drive as much revenue as they can.  Note:  they are not in the business of providing meals, comfort, movies or baggage transfer.  Those things now do (and should) cost extra; they gained exactly zero revenue by being extra, extra nice to you, and they lost roughly zero revenue by taking away all of those things.  It doesn’t take a genius to realize this fact:  providing service on a flight offers no benefit to the airline.  None.

Yes yes, customers complain about poor airline service.  Boo hoo.  They can Tweet all they want about how badly they were treated, but in the end, we’ve seen a billion times:  they fly whoever is cheapest.  Please don’t write to me about how you’ll chose one airline over another — if you’re paying for it, you’re going with the cheapest.  And if your company is paying for it, there’s a growing chance that they’re telling you which airline to fly anyway.

Spirit Airlines, which everyone complains about all the time (and from whom I just bought a roundtrip ticket from New York to Detroit for $80) is profitable.  That’s all you need to know:  control your costs, and customer service will have no bearing on  your profitability.

Ok, fine, JetBlue’s customer service probably had something to do with their initial success.  But, as high-profile recent incidents have shown, keeping that level of service up as you grow the company is near impossible.

Oh, and service also doesn’t really matter on international premium class flights either.  Sure, airlines need to offer a minimum level of service in business class.  But US airlines get away with a sub-world-class business class product and, guess what:  if they control capacity they turn a profit offering that level of service.  We can talk all we want about the glories of Singapore Airlines and Etihad and Emirates, but they’re in an entirely different business than the airlines in the US.  Other than bringing people from here to there, they have roughly zero in common with what AirTran does for a living.

The services provided up front are fun to chat about and write about and share photos of, but for US airlines, it doesn’t matter at all.  As Eos learned the hard way:  so much international premium traffic is tied up in corporate agreements that for the most part, travelers aren’t choosing who they fly with anyway.  To some extent, corporations will base a part of their decision on which airline to make an agreement with based on the services provided; but these days, it matters much less than it ever did.  Flat bed seats are nice.  $2400 round trip business class tickets to Europe are nicer.

The customer-facing stuff is the fun part of the airline industry, I recognize that.  But the US industry’s profitability rests entirely on managing costs and keeping capacity at a level where they can charge fares that cover their costs.  That’s it.  It’s not sexy, but Spirit (and others) have shown that quietly turning a profit makes much more sense than pretending you offer the world’s greatest service in the air.

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