To Merge, Or Not To Merge, That Is The Question

While the decisions about whether or not airline mergers are an existential necessity are still in the air, it’s time to take a deeper look at their shadow side, to understand how they touch the lives of employees and passengers, and what is their impact on cost and service quality.

On Sunday 9th April 2017, Doctor Dao, United Airlines’ passenger, was violently dragged out from his seat just before the departure of his flight UA3411 from Chicago to Louisville. He was chosen to leave the plane against his will despite his claims that he was needed at a Louisville hospital. The reason: airline needed to make room for four unexpected employees of a partner airline who needed to get to Louisville by Monday morning to crew another flight. United originally characterized the flight as overbooked, but later said that was (obviously) not the case.

The incident would have probably stayed contained locally (as most of the disruptive events do) if it was not for the video that his fellow passengers posted on social media. It caused an outrage against United Airlines. Airline’s CEO Oscar Muñoz rushed to defend the employees’ conduct and said that forcibly removed doctor had been “disruptive and belligerent”. As the video went viral and company’s shares began to slide Mr Munoz reset the tone and softened his words. The way the case was handled has been widely condemned and described by some as a ‘mockery of the world leadership’.

Why would an airline that cares about its business and reputation ever think of allowing a paying passenger to be assaulted, so that its own employee could take his seat?

To answer this question we need to dig a bit deeper. Doctor Dao’s case revealed the tip of the underlying pattern that is invisibly eroding the future of air travel. Major legacy airlines are caught in a self-made trap by choosing to operate a hub-network, wrongly assuming that they can expand indefinitely within finite airport capacities. Consequences experienced today include operational and financial volatility of major hub operators, a rise in operational disruptions and passenger dissatisfaction.

The origins

The situation that major airlines are in today started in 1980s when deregulated US airlines all rushed to copy FedEx’s hub-and-spoke business model, assuming it was more efficient and rewarding to fly passengers via huge hub airports instead of taking them straight to their destination (just as FedEx did with parcels). The idea of allowing fast expansion and offering passengers more travel choices sounded great, but soon proved to be a big mistake. Missed connections at hubs created huge passenger dissatisfaction and inefficiencies, and contributed to the bankruptcy of almost every big US airline.

The side effects

In the meantime, traffic concentration at major hub airports has continued to rise. Airlines have become less resilient and more vulnerable to even the smallest unforeseen events. The next big crises in 2001 (9/11), and 2008 (sharp increase in fuel prices, global economic downturn and increased low-cost competition) have shaken the industry even more as airport and airspace congestion restricted their opportunity for growth. Airline consolidation was seen as the quickest fix in the battle for survival, creating unanticipated side effects that may have surpassed the benefits of mergers and acquisitions. The resulting massive cost cuts were made at the expense of employees and passengers. Deregulation allowed airlines to create monopolies wilfully ignoring the far-reaching consequences of such decisions.

The birth of megamergers and how it affected passengers
By definition, a megamerger creates one corporation that may maintain control over a large percentage of market share within its industry. This occurs through the acquisition, merger and consolidation. The big four megamergers (American Airlines, Delta Air Lines, Southwest Airlines, and United) now control 85 percent of the market, compared with 55 percent ten years ago. Having fewer competing airlines means that there is now less pressure to improve customer service or worry about losing passengers who often have no better travel alternatives. What they are still not measuring and accounting for are losses caused by increased inefficiencies and passenger dissatisfaction.

Beyond megamergers

As a result, flight schedules and system resources have become more difficult to manage and optimise. Despite some reduction in airline capacities, consolidation increased operational complexity resulting in growing number and harshness of flight disruptions with unreported consequences. Problems have been exacerbated by pushing aircraft utilisation and cabin load factors up, at times beyond manageable limits. And merging with partners’ schedules made things even more complicated. This has created a highly ineffective system prone to disruptions and inability to control them. The true causes of internally caused disruptions are not measured. Instead they are simplistically explained using the delay coding system designed to serve operational needs. Megamerged airlines have little control over their partners’ performance and losses they can potentially cause. Their own capabilities to respond to challenges have weakened, so that even the small unforeseen events can escalate the problems systemwide. The major airlines may have managed to survive and may financially flourish at times, but operationally, they are drifting into failure.

Who really cares about passengers?

Does the lack of competition give airlines the right to deprive passengers of dignified travel? There are no authorities nor passenger organisations that have the power to challenge the disruptive (and offending) airlines and protect passengers. Forced to reduce flight frequency at capacity constrained airports, megamerged airlines have increased cabin load factors, usually to barely manageable 80+ percent, which is why on monopolized routes their incentive to keep service quality up and fares down have disappeared. They also shifted some of the costs of standard services to passengers, like baggage charges and meals, to become source of airline additional revenue. The absence of enforceable regulations and complexity of the process itself have made a mockery of passenger protection and passenger rights to compensation (EC261). It will stay so as long as authorities and airlines continue to deny the reality and try to prove the unprovable through deceived delay reports and by ignoring passenger complaints. They fail to understand that it is not all about money. Passengers can never be compensated for loss in time, anxiety and as in the case of Doctor Dao, emotional scars.

Who cares about employees dealing with disruptive situations?

It is not just passengers that suffer the consequences of the rise in disruptive travel. It is also the employees. “Unhappy mechanics do not tend to go the extra mile — or the extra foot — to get the airplane ready to go,” says George Ferguson, a Bloomberg Intelligence airline analyst. Longtime fliers have noticed the delays, cancellations, and lost bags — and the short-tempered gate agents and flight attendants. “As individuals, they are really nice people,” says Jared Spool, a Web design consultant who flies 150,000 miles a year on the airline. “But they are in such a horrible situation, constantly trying to deal with customers that are not happy, and they’re completely powerless.” Does anybody pay attention to this kind of problem?

Who needs sterile surveys on customer experience and delay benchmarking?

Measuring passenger experience has become a farce. It is based on deceiving surveys on customer satisfaction carried out in a controlled environment. The same applies to the misuse of airline delay reports which are not suitable for benchmarking and decisions made outside operational environment.

Who needs customer service departments in the age or social media?

Do airlines really need customer service departments that deny or ignore most of the passenger complaints and compensation claims? In the age of social media, it is becoming more and more difficult for an airline to escape these costs and more and more easy for passengers to get the compensation using the power of social media, like the musician who wrote a song called United Breaks Guitars. It was the song that finally won him compensation, which he donated to charity.

Back to reality

Back to flight UA3411 of ‘mega-merged’ United. It was operated under the umbrella of United Express (United regional airline) by Republic Airways’ Republic Airline (one of its 9 subsidiaries) which offers scheduled commercial passenger service as US Airways Express, United Express and under the American Eagle brand.

The question is, how do magamerged airlines control their businesses faced not only by their own complexity, but the conglomerate of merged, yet independent carriers? How much do their leaders know about the impact of disruptive events on airline profitability and what actions should they be taking to make them beneficial for all members?

Let’s scale it down. What lessons can be learned from Doctor Dao’s case? It will much depend on the way the incident and its consequences are recorded and willingness and ability to raise the right questions that lead to the roots of the problems. For this kind of questioning one needs to have a good understanding of how the system works. Standard numerics and segmented and then aggregated reporting systems won’t help much here due to the disconnection between operational and strategic sides of management information. The following questions may serve as a guide:

• Which of the following codes was used to describe the cause of delay: 14 (Oversales, booking errors), 66 (Late cabin crew boarding or departure procedures), 67 (Cabin crew shortage), 68 (Cabin crew error or special request)?
• For how long was the flight delayed? How long did it take passengers to reach their destination? How long did it take Doctor Dao to get to the place he needed to be and was he accompanied by his luggage? How long did it take him to heal his wounds?
• Is there an IATA code for passenger experience and emotional scars they may wear for life?
• What caused the sudden assignment of deadhead crew from the partner airline?
• How much will it all cost the airline in refunds, compensations, and future revenue loss?
• How many passengers on other routes experienced long delays and cancellations and what are the real causes of losses in costs, revenue, and reputation?
• Do high load factors of over 80% cause more harm from disruption losses than benefits from increased revenue? What are the most critical routes?
• How much does high aircraft utilisation contribute to disruptions and what are the related losses?
• How much does adding more routes at congested airports really cost the airline?
• How many passengers lost connections and how much did it cost the airline?
• What are the losses caused by outsourced service providers and partners and can they be recovered?
• Do surveys about passenger satisfaction include disrupted passengers?
• Can employees cope with a surge in disruptions and how does this reflect on their attitude towards disrupted passengers?
• What needs to be done to make a better balance between profit and quality?

Published results about United’s operational performance indicate the lack of these insights. They are well beyond its competitors’ metrics on quality, including delays, cancellations, mishandled bags, and bumped passengers. The airline has, since 2012, been the worst or near worst among its competitors. In 2012, when reported punctuality was 58.7% according to the U.S. Department of Transportation, United was responsible for 43 percent of all consumer complaints filed against U.S. airlines’. Even though the punctuality has improved in the meantime, it is still below the industry norm. Read more United’s Quest to be Less Awful (Bloomberg, Jan 2016).

What lessons can be learned?

‘There are lessons we can learn from this experience’ has become a common closing phrase used by airline executives interviewed after major disruptive events. What lessons did they really have in mind at that moment? Considering that airlines don’t have a system that controls wider strategic and management aspects of disruptions, it is unlikely that real improvement can be expected.

How to make improvements in the age of disruptions

Disruptions offer a still unexplored, if not the only opportunity to improve system performance. These are unique events where system planning and assumptions meet reality and customer numbers turn to real people. It’s the only way to get an insight into the interactions between data, people, and processes and most critical strategic and operational inputs in need of adjustments. The answer is in working continuously on identifying the most damaging influencers at time and keep repairing the broken links on the go — a chance that shouldn’t be missed.