On Cancelled Flights and Industry Consolidation

The trouble began when we landed at O’Hare, I turned on my mobile phone, and saw that I had four voice mail messages from the company I least like to hear from when I’m at O’Hare: United Airlines.

IMG_0667My wife, daughter and I were returning from a few days in sunny California, and the weather in both Chicago and Appleton was as perfect as one could expect given the time of year.  The messages verified what I suspected the moment I saw them on my phone:  United had cancelled our flight – the last one of the night – to Appleton.

As a veteran traveler, I was not surprised and immediately went into travelers triage mode.  I called car rental agencies, thinking we could make it home without spending the night in Chicago, but decided against paying the exorbitant rates for a one-way rental.  So we were stuck.

The problem here isn’t that the flight was cancelled due to weather or some mechanical reason, but according to United, was cancelled for “unspecified reasons”.  Frequent travelers know that this means that the flight was almost certainly cancelled for economic reasons:  United decided the expense of putting a few people in hotels and handing them some meal vouchers (as well as re-booking the passengers in Appleton who mistakenly thought they were going to take the 6am departure out of Appleton the next morning since that, too, had been cancelled) was a better deal for United than actually flying the plane.

Consumers are increasingly frustrated as certain industries consolidate to the point where the competitive dynamics drive advantages to the companies themselves, with little trickle-down effect to their customers.  In the case of the airlines there are now only three “major” domestic air carriers in the United States: United, Delta, and a newly consolidated American Airlines.  The intersection between this consolidation and a public that is flying more often is the sense that the competition based upon delivering a differentiated, superior experience is an artifact of a past era.

In decision theory, it is said that when there are only three guys in a boat, and one of them makes a decision, that decision necessarily impacts the other two occupants.  And so, in the case of the airlines, we see baggage fees and “change fees” that are assessed if a customer wants to change her flight (but not provided as credit if the airline delays her flight); fees we will be seeing for a long time because once any industry or government gets hooked on a revenue stream, they are loathe to give it up.  Add to this a sort of soft collusion that comes from few competitors controlling big industries and you realize dissatisfied customers aren’t going to change the experience by threatening to take their business elsewhere since there are so few alternatives.

And the airlines are not alone.  According to the Federal Reserve, at the end of 2011 the five largest banks held assets equivalent to over 50% of the U.S. economy.  Of course, the dynamics that cause airline consolidation are different than those in the financial services industry, and the competitive landscape is different for banks since, unlike the airlines, there are thousands of banks and credit unions for consumers to choose from.  On the other hand, switching between air carriers is much easier than switching your bank account.

The end result though is a consumer experience where service is uneven, fees are arbitrary, and consumer is not in charge.  Dissatisfied with your mobile carrier?  Don’t like your cable/dish provider? Aren’t happy with your health insurance carrier? Similar situations.

Apart from the usual corporate interests concerning return on equity – and let me state here that I want companies to be profitable – there are two groups of people who will impact how these industries evolve in the next decade:  regulators and citizens.

In the wake of the TARP bailout and the “Too Big To Fail” dynamic, there is a growing sense among some that the mega-banks have gotten a bit too “mega” for the public good.  Although there are some differences between how the political parties deal with regulatory approvals for mergers, those differences are more minor than many believe.  In general, we are in an era where the government has allowed most mergers to happen.  We may, however, be entering a period where we will see more, not less regulation in the banking and airline industries, to name just two.

As for the other group: the road to consolidation is partially paved by consumer choice.  Our love of recognizable brands – whether Budweiser, AT&T, or Starbucks – causes us to consolidate our spending among fewer companies, thus enabling those companies to dominate industries that are growing in size, but shrinking in competition.

The coming years will be a bumpy ride for consumers.  Fasten your seatbelt.

 

Published April 14, 2013