The business model of US airlines is broken. That may sound strange since US airlines made nearly $8 billion in the first half of 2017. But they’re stagnating. They aren’t earning their profit by innovating or delivering more value to customers. And profits are down substantially from two years ago.
When American announced that full fare customers would no longer receive ‘premium’ seat assignments (most seats on the plane) without an extra charge, that seemed strange. Customers spending the most money are the ones they claim to want to ‘reward’ and incentivize and at a minimum compete for.
The message from American’s corporate communications was “this change makes our offering similar to other airlines, which generally already require customers on full Y tickets to pay for premium coach seats.”
They seem to be offering the following theory of business:
- You definitely don’t want, under any circumstances, to offer a product that’s better than your competitors.
- Ignore fads like cultivating customers and avoid the trap of advice like offering a product that’s unique and solves a problem competitors in the marketplace don’t.
- The key to a successful business is doing exactly what your biggest competitor does because they’re smarter than you are.
The airline industry is different from most businesses, because it’s protected from competition. Foreigners aren’t allowed to serve the domestic market. Samsung makes phones, Sony and LG sell us televisions, but neither Singapore Airlines nor Ryanair can fly from New York to Miami.
And even if they could, governments own and manage airports and are frequently captured by their largest airline tenant. Alaska Airlines bought Virgin America because it couldn’t break into or get more gates at the airports they wanted to serve on their own.
Even in the regulated era the point of regulation (under the Civil Aeronautics Board) was to prevent ‘ruinous’ competition and set prices high enough that airlines earned profit.
The only way to upend this business model is to legalize competition.