Bob Crandall: How I'd Save The Industry
Posted by: Dean Foust on June 11, 2008
During Bob Crandall’s long tenure as CEO of American Airlines, the airline was truly an innovator—so much so that employees at AA had a certain swagger about them. They knew they were the best and brightest of the industry. It was on Crandall’s watch that American created one of the first frequent flyer programs in the industry, developed the most sophisticated reservation system of its time, and pioneered the concept of “yield management”—using sophisticated algorithms to constantly reprice fares to maximize the revenue for each flight. Labor relations was another matter, but Crandall knew—and knows—his business.
When the airline industry was deregulated in 1978, Crandall was one of the biggest critics. And with most airlines on the ropes from soaring oil prices, Crandall took the podium yesterday at The Wings Club in New York to offer his proposals to pull the industry out of its tailspin. Crandall doesn’t mince words about the industry’s condition:
Our airlines, once world leaders, are now laggards in every category, including fleet age, service quality and international reputation. Fewer and fewer flights are on time. Airport congestion has become a staple of late-night comedy shows. An even higher percentage of bags are lost or misplaced. Last-minute seats are harder and harder to find. Passenger complaints have skyrocketed. Airline service, by any standard, has become unacceptable.
For his part, Crandall doesn’t believe that mergers are the salvation of the industry:
In my view, the arguments in favor of consolidation are unpersuasive. Mergers will not lower fuel prices, they will not increase economies of scale for already sizable major airlines. They will require major capital expenditures and are likely to increase labor costs. Finally, they will disadvantage many employees, who incentive to provide good service will be further reduced.
I agree with Crandall on that point. Frankly, if the industry merged down into a single airline tomorrow, it wouldn’t take 24 hours for that carrier to announce a fare war and then gripe how it can’t make money.
Crandall has some intriguing proposals to save the industry (and I’ve deliberated saved one of the more intriguing/puzzling/controversial proposals for last, to allow more room for discussion). They include:
--Enabling the airlines to curb labor costs by outlawing strikes by airline labor groups. Crandall says airlines and their unions should be required to settle disputes in binding arbitration.
“The threat of binding arbitration would encourage both labor and management to adopt more moderate positions than has been true in the past while simultaneously moving all airlines closer to labor cost parity."
--Revising U.S. bankruptcy laws to...
“...deprive failed carriers of the right to use lower costs to undercut the fares offered by their more prudent rivals, forcing both management and labor to face the twin specters of liquidation and unemployment.”
In other words, take away the option of Chapter 11 and force troubled carriers into Chapter 7 – the mere threat of which could force labor groups to offer concessions more readily, rather than being content to milk the cow until it keels over and only then consent to a lower wage scale. You know this will be popular with workers…
--Creating regulations that limit the number of scheduled flights to what the airport can handle. This is already a problem at airports like JFK in New York, which routinely slot far more flights than was ever intended – explaining why your 5 pm flight never leaves before 7 pm. Crandall argues that current schedules should be “reduced proportionally,” which would force each carrier to use the largest feasible aircraft in each slot. So bye-bye regional jets—and bye-bye competition.
Maybe I’m wrong but this proposal would seem to have the effect of stunting the growth of popular (and fast-growing) carriers like JetBlue, since late-booking passengers would effectively be steered to other carriers that still have seats available. You think I’m wrong?
--Relaxing antitrust laws in a way that gives airlines more latitude to strike “code-sharing” alliances with other carriers. Code-sharing arrangements were designed to allow airlines to contract with another carrier which would fly the last leg of a connecting flight where Airline A doesn’t have enough traffic to warrant a flight of its own (or in the case of international routes, might not have landing rights in that far-flung city. On a flight from Atlanta to Istanbul, I flew Delta Air Lines to Frankfurt, then Delta put me on a Turkish Air flight the rest of the way—and likewise coming back. Such arrangements exist in the U.S., but are less common).
Critics say these arrangements can be anti-competitive, but Crandall believes they would help carriers get passengers where they want to go, and in a way that’s more efficient and profitable for the industry.
-- Here’s the most intriguing of Crandall’s ideas: Return the industry to a greater degree of government regulation, at least on fares.
“Unfettered competition just doesn’t work very well in certain industries, as amply demonstrated by our airline experience and by the adverse outcomes associated with various state efforts to deregulate electricity rates. In my view, it is time to acknowledge that airlines look and are more like utilities than ordinary businesses."
Crandall notes that the extreme view would be to...
“...establish minimum fares sufficient to cover full costs and produce a reasonable return. While I would fully support such an approach, the idea is deeply offensive to those who cling to the belief that the markets can solve everything.”
Crandall believes a less-intrusive way to help the industry would be to create a regulatory agency requiring passengers traveling on a connecting flight to pay “the sum of the local fares” on their itinerary. In other words, no airline could charge fares for connecting flights that were less than what they charge for both of the individual legs.
I admit that, of all Crandall’s proposals, this is the real head-scratcher because at American, Crandall was credited with pioneering the “hub and spoke” system that funnels passengers from small markets through big hubs in cities like Dallas, Atlanta and Chicago. Clearly, it’s less efficient than point-to-point flying, but proponents have long argued that it enables airlines to provide more travel options to people in small market.
On its face, though, this proposal would seem to greatly favor discounters like Southwest whose business models were built around point-to-point flying, and penalize the traditional carriers like American and Delta that built extensive hub-and-spoke networks (and probably are guilty of offering cheaper fares on connecting flights – perhaps only because that’s what it takes to lure passengers away from point-to-point rivals like Southwest.)
I am dying to know whether this is a sign Crandall believes the hub-and-spoke system is broken, or what. I’ve got a call into Crandall, and as soon as I hear back, I’ll post his response.
