Travelogue
OPINION
Business Travel Coalition <http://btcweb.biz/>
May 9, 2004
When Reversing Strategy Can Be Deadly
US Airways as Poster Child
By Kevin Mitchell
A Wharton professor once instructed his class that true strategy can be
identified when the cost to reverse it is dear; all else is merely tactical.
My mother taught her children not to put off to tomorrow what can be
accomplished today. US Airways is in the throes of reversing true, but
flawed strategy. The cost will likely be dear for its employees,
shareholders and possibly the communities and customers it serves. More
seriously, delaying for years what its customers have been fruitlessly
asking for may cause the airline to go out of business.
Recently US Airways announced that where it competes with Southwest Airlines
at Philadelphia it will simplify, lower and cap its airfares. Upon learning
of this news, a senior Southwest Airlines executive told me that if US
Airways had taken this action three years ago, Southwest would not have made
the decision to enter Philadelphia. It is not smart to put off to tomorrow
what can be accomplished today!
Now the long-defended US Airways strategy of charging supra premium airfares
in monopoly city-pair markets is under attack. Instead of pro actively
providing a product that its best customers clearly communicated over a long
period of time that they wanted, and providing it at a price point customers
could embrace, US Airways will be forced by Southwest Airlines to do so. The
cost will be dear.
A simplified and more rational business airfare structure is something
corporate travel buyers began petitioning US Airways for through the
Business Travel Contractors Corporation (BTCC) ten years ago this June. Of
the three reforms customers sought--fee based travel agency pricing, net
airfares and a simple, rational airfare structure--the first two were
implemented by the industry and the third was the considered the "Holy
Grail" of distribution system reform. Simplification would enable cost to be
removed from supplier, distributor and buyer sides and all channels of the
airline industry distribution system.
It would now appear that true airfare structure reform is just a matter of
time, due in no small part to the fact that the major network airlines
(Majors) were forced during the late 1990s, by significant national
criticism, to throttle back on their most extreme anticompetitive responses
to new airline entry. Congress, DOT, DOJ, State Attorneys General and the
media all engaged the issue. Today, we now have a financially strong
low-fare airline segment. As underscored by the predicament US Airways finds
itself in, there are few places left for Majors to hide as low-fare airlines
advance into more and more markets. Nevertheless, there are holdouts in both
management and labor leadership at the Majors.
These holdouts cling to the belief that the business traveler is not price
sensitive, and that an expanding economy will return a sufficient number of
them at high yields to allow the avoidance of more painful restructuring.
However, mounting evidence has now convinced most airline employees,
managements, analysts, and shareholders that the marketplace has indeed
shifted permanently from a supplier to a consumer-driven one due to a
confluence of developments.
An increasingly global marketplace, wherein companies in virtually all
industries have been forced to join a race for low-cost producer status, has
resulted in business travel cost reduction becoming a permanent initiative
at most companies, irrespective of economic cycles. Moreover, business
travelers now have an unprecedented range of alternatives to a seat on a
Major airline, e.g., low-fare airlines, trains, automobiles, Web
Conferencing. Finally, travelers have increasingly sophisticated
Internet-based tools that bring transparency to shopping for air travel
options. The customer is now in charge.
Notwithstanding significant airfare reform initiatives by America West and
Alaska Airlines, it is unlikely that we will see a wholesale shift by other
Majors to simplified airfare structures across their entire systems. More
likely will be that the Majors will reform "chunks" of their systems at a
time because their current outsized cost, debt and asset productivity
problems will hamstring the pace and extent of required reform. Concurrent
with being forced to partially reform airfare structures however, well
managed Majors will aggressively continue to pursue deeper restructurings as
the only course to long-term viability.
US Airways has now become the Poster Child for Majors caught in the
crosshairs of the low-fare airline juggernaut without the ability to
effectively respond. US Airways must immediately implement reforms, but can
only do so in a limited manner due to its financial constraints. By all
appearances, US Airways now understands it must prepare for the quickly
approaching day where the vast majority of its system will be under assault
by low-fare airlines. But is it too late? Its peers will be watching the
engagement of US Airways and Southwest Airlines at Philadelphia with
unparalleled interest.
For US Airways and other Majors that can successfully restructure to fully
match the requirements of the new customer-driven marketplace, rewards will
include:
Induced leisure and business travel demand
Slowed market share shift to the low-fare airline segment
Profitability; improving balance sheets
Growth; new investor confidence
Longer-term viability; more motivated and focused employees
Unfortunately for US Airways, the practical advice of my mother is relevant
to another serious impediment for the airline as it reverses strategy at
Philadelphia, and elsewhere across its system. For the past several years
senior management at US Airways has been distracted and putting off managing
their business first by attempting to be acquired by United Airlines and
then by its related financial crisis. Many employees at US Airways are shell
shocked, disillusioned and fearful of losing their jobs. Others are just
very angry.
At Southwest Airlines, and other low-fare airlines that provide service at
Philadelphia, senior management teams have been focused on meeting customer
needs and growing their businesses. Employees see new planes being delivered
and new markets being entered. Motivated and focused managements and
employees are a result of sound strategy well executed. Such a positive
result will likely have a significant impact on who the winners and losers
will be at Philadelphia.
Handing out free slices of pizzas, back rubs and car washes in Philadelphia,
as US Airways has been doing recently as part of its "gorilla marketing"
initiative, is just more silly distraction, and perceived as disingenuous by
many customers. The business community sincerely wants US Airways to survive
and to once again succeed in the marketplace. But having to reverse strategy
this late in the game may prove to be too difficult for US Airways to
execute, and therefore, deadly.
OPINION
Business Travel Coalition <http://btcweb.biz/>
May 9, 2004
When Reversing Strategy Can Be Deadly
US Airways as Poster Child
By Kevin Mitchell
A Wharton professor once instructed his class that true strategy can be
identified when the cost to reverse it is dear; all else is merely tactical.
My mother taught her children not to put off to tomorrow what can be
accomplished today. US Airways is in the throes of reversing true, but
flawed strategy. The cost will likely be dear for its employees,
shareholders and possibly the communities and customers it serves. More
seriously, delaying for years what its customers have been fruitlessly
asking for may cause the airline to go out of business.
Recently US Airways announced that where it competes with Southwest Airlines
at Philadelphia it will simplify, lower and cap its airfares. Upon learning
of this news, a senior Southwest Airlines executive told me that if US
Airways had taken this action three years ago, Southwest would not have made
the decision to enter Philadelphia. It is not smart to put off to tomorrow
what can be accomplished today!
Now the long-defended US Airways strategy of charging supra premium airfares
in monopoly city-pair markets is under attack. Instead of pro actively
providing a product that its best customers clearly communicated over a long
period of time that they wanted, and providing it at a price point customers
could embrace, US Airways will be forced by Southwest Airlines to do so. The
cost will be dear.
A simplified and more rational business airfare structure is something
corporate travel buyers began petitioning US Airways for through the
Business Travel Contractors Corporation (BTCC) ten years ago this June. Of
the three reforms customers sought--fee based travel agency pricing, net
airfares and a simple, rational airfare structure--the first two were
implemented by the industry and the third was the considered the "Holy
Grail" of distribution system reform. Simplification would enable cost to be
removed from supplier, distributor and buyer sides and all channels of the
airline industry distribution system.
It would now appear that true airfare structure reform is just a matter of
time, due in no small part to the fact that the major network airlines
(Majors) were forced during the late 1990s, by significant national
criticism, to throttle back on their most extreme anticompetitive responses
to new airline entry. Congress, DOT, DOJ, State Attorneys General and the
media all engaged the issue. Today, we now have a financially strong
low-fare airline segment. As underscored by the predicament US Airways finds
itself in, there are few places left for Majors to hide as low-fare airlines
advance into more and more markets. Nevertheless, there are holdouts in both
management and labor leadership at the Majors.
These holdouts cling to the belief that the business traveler is not price
sensitive, and that an expanding economy will return a sufficient number of
them at high yields to allow the avoidance of more painful restructuring.
However, mounting evidence has now convinced most airline employees,
managements, analysts, and shareholders that the marketplace has indeed
shifted permanently from a supplier to a consumer-driven one due to a
confluence of developments.
An increasingly global marketplace, wherein companies in virtually all
industries have been forced to join a race for low-cost producer status, has
resulted in business travel cost reduction becoming a permanent initiative
at most companies, irrespective of economic cycles. Moreover, business
travelers now have an unprecedented range of alternatives to a seat on a
Major airline, e.g., low-fare airlines, trains, automobiles, Web
Conferencing. Finally, travelers have increasingly sophisticated
Internet-based tools that bring transparency to shopping for air travel
options. The customer is now in charge.
Notwithstanding significant airfare reform initiatives by America West and
Alaska Airlines, it is unlikely that we will see a wholesale shift by other
Majors to simplified airfare structures across their entire systems. More
likely will be that the Majors will reform "chunks" of their systems at a
time because their current outsized cost, debt and asset productivity
problems will hamstring the pace and extent of required reform. Concurrent
with being forced to partially reform airfare structures however, well
managed Majors will aggressively continue to pursue deeper restructurings as
the only course to long-term viability.
US Airways has now become the Poster Child for Majors caught in the
crosshairs of the low-fare airline juggernaut without the ability to
effectively respond. US Airways must immediately implement reforms, but can
only do so in a limited manner due to its financial constraints. By all
appearances, US Airways now understands it must prepare for the quickly
approaching day where the vast majority of its system will be under assault
by low-fare airlines. But is it too late? Its peers will be watching the
engagement of US Airways and Southwest Airlines at Philadelphia with
unparalleled interest.
For US Airways and other Majors that can successfully restructure to fully
match the requirements of the new customer-driven marketplace, rewards will
include:
Induced leisure and business travel demand
Slowed market share shift to the low-fare airline segment
Profitability; improving balance sheets
Growth; new investor confidence
Longer-term viability; more motivated and focused employees
Unfortunately for US Airways, the practical advice of my mother is relevant
to another serious impediment for the airline as it reverses strategy at
Philadelphia, and elsewhere across its system. For the past several years
senior management at US Airways has been distracted and putting off managing
their business first by attempting to be acquired by United Airlines and
then by its related financial crisis. Many employees at US Airways are shell
shocked, disillusioned and fearful of losing their jobs. Others are just
very angry.
At Southwest Airlines, and other low-fare airlines that provide service at
Philadelphia, senior management teams have been focused on meeting customer
needs and growing their businesses. Employees see new planes being delivered
and new markets being entered. Motivated and focused managements and
employees are a result of sound strategy well executed. Such a positive
result will likely have a significant impact on who the winners and losers
will be at Philadelphia.
Handing out free slices of pizzas, back rubs and car washes in Philadelphia,
as US Airways has been doing recently as part of its "gorilla marketing"
initiative, is just more silly distraction, and perceived as disingenuous by
many customers. The business community sincerely wants US Airways to survive
and to once again succeed in the marketplace. But having to reverse strategy
this late in the game may prove to be too difficult for US Airways to
execute, and therefore, deadly.
