How many CEOs wish they could say that? (Answer: All of them.)
How many CEOs actually would say that, even to themselves, let alone in an investor meeting?
At least one. In September, that’s what came out of the mouth of Doug Parker, CEO of American Airlines, whose industry has always been the poster child for financial instability.
And he might just be right – but for all the wrong reasons.
The three factors contributing to Mr. Parker’s optimism are:
• Low fuel costs
• Increased passenger fees
• Industry consolidation
Let’s look at them one by one.
Low Fuel Costs: Sure, fuel costs are relatively low these days, but that can change in no time. Crude oil is selling at $55 per barrel as I write this, but if, for example, Iran decided to shut the Straits of Hormuz, it would cut off 20% of the world’s petroleum supply. Given the uncertainty in the region, this is hardly an unimaginable event. In the past decade, just the possibility of such an event caused oil to spike over $100 per barrel.
With aviation fuel between $5 and $6 per gallon, American Airlines would have a tough time absorbing a five-dollar increase. Unless they could find a way to get you to pay for it. Oh right, they already have. See the fine print that says your low, low airfare does not include airport fees, taxes or fuel surcharges.
Increased Passenger Fees: If you take advantage of one of the rock-bottom fares American offers, you should be aware that you are not allowed to use the overhead compartment above your seat, even though it will remain empty for the flight. You must check your bags – each will incur a $25 fee. Should you gamble that your luggage will fit under the seat in front of you and lose, you will be charged a $25 baggage fee plus a $25 gate check fee – fifty bucks added to your previously low fare.
The only way to avoid these fees is to travel with only what you can carry in your pockets and/or cram into a little under-seat tote bag. But American knows that’s not how most people travel, and they’re going to get your money one way or another. By the way, when you check in, you can opt to pay a number of additional fees that let you carry on your carry-on, move to a better seat, and get on board the plane while there is a chance to find a space for your baggage. But by then, your rock-bottom fare has increased by as much as $100 each way.
Industry Consolidation: Mr. Parker is fully aware that the vast majority of domestic airline passengers have a four out of five chance of flying American, Delta, United or Southwest because these four carriers own 80% of the market. As anyone who lives far from the major airline hubs knows, there may be only a couple of choices of airlines in the local market to fly on – maybe only one.
There is no incentive for airlines to do anything to make the flying experience better — or less awful. American recently considered reducing the space between seats from a tight 30 inches to a knee-jamming 29 inches. Only the objections of the flight crews, who were worried about having to deal with even more angry passengers, caused the airline to back down.
Of course, the chiseling down of the customer experience is hardly limited to airlines. Home Depot used to take pride in the omnipresent, skilled tradespeople who populated the aisles. Now, if you can even find an orange apron, it’s often worn by a person who isn’t sure where Aisle Twenty-Six is, let alone what might be in it.
American business is always hunting for ingenious ways to boost profits, though sadly not by creating brand loyalty through excellent quality and service. Instead, they look for ways to give us the least they can get away with for the money we pay. At this, airlines are nonpareil.
And you’ve got to hand it to Mr. Parker. American is one profitable airline. But how sustainable is a business proposition that is built on customer disgust? History is not on American’s side. Good luck with that, Mr. Parker.
Categories: Random PR Thoughts