Airlines: Cost and Value

0 – As Airlines Pull Out of Dive, United Charts Its Own Course ($$ Subscription)

Most of what we hear about airlines is “low cost” this or “cutting costs” that. Everyone is chasing Southwest's low labor costs or copying them in other ways.

United Airlines is taking a different approach — focusing on value, not just cost.

Determined not to be another clone of low-cost, low-fare juggernaut Southwest Airlines, United is making an all-out effort to raise revenue by pampering its best business travelers — and keeping them on United whether they are flying to a meeting on the coast, or taking the family to Orlando. That means accepting higher costs, the very problem that drove it into bankruptcy in the first place.

United is deciding that “value” includes:

  • More legroom (American Airlines back off it's old “More Room in Coach” strategy)
  • Keeping blankets and pillows onboard (many airlines are cutting these)
  • Expanded domestic business class service and lay-flat seats on coast to coast flights

Thinking as a lean guy, I would also challenge the idea that more service means “accepting higher costs.” Maybe if they focused on eliminating waste, rather than eliminating things that customers value, then United could have both — better service AND lower costs??

United CEO Glenn Tilton says something that could be applied to manufacturing companies, as well:

“It doesn't take talent to take the pillows off” planes, says Mr. Tilton, a former oil-industry executive who has guided United since September 2002. “In the industry's herd mentality, we were supposed to trundle down the runway of commoditization,” he says

You could argue it also doesn't take talent to close plants, to lay off workers, or to cut features from products (“de-contenting,” in GM-Lutz-speak) in an effort to save money. It's much tougher to maintain or improve value.

An example of how American Airlines cost-cutting helped cut valued “elite” customers:

An elite American frequent flier for two decades, he says he switched to United a couple of years ago because he got fed up with cost-cutting and service lapses at American. A trivial detail was the final straw: An American flight attendant in first class said she could offer only skim milk for his coffee. “No half-and-half in first class?” he says. “They lost a $100,000-a-year customer.” (American's Mr. Cush says the company thought it could save money by dropping cream, but reversed that decision after passengers complained.)

This discussion reminds me of Eli Goldratt (author of The Goal), who said something to the effect of “You can only cut costs to zero, but revenue can up to inifinity!” It's the same thinking that's behind Womack and Jones's Lean Thinking and Point #1 of understanding value, as defined by the customer. Point #1 was not “focus on cutting all costs.”

One other thought, related to employee satisfaction and how that translates into quality. Now I haven't flown United in a while, and that's by choice. Their employees were grumpy and nasty as they were entering bankruptcy. That's one thing that will be difficult to fix. I assume that fliers value friendly and helpful employees (I know I do). In the manufacturing world, you hear horror stories of little “presents” that disgruntled auto assembly workers leave inside the doors of vehicles as they go down the line, because they hate their employer so much and don't care. The same idea applies in the service industry. I can tell when employees hate their employer, whether it's an airline or otherwise — you get bad service.

Maybe I'll give United another shot to see if they've improved.

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Mark Graban
Mark Graban is an internationally-recognized consultant, author, and professional speaker, and podcaster with experience in healthcare, manufacturing, and startups. Mark's new book is The Mistakes That Make Us: Cultivating a Culture of Learning and Innovation. He is also the author of Measures of Success: React Less, Lead Better, Improve More, the Shingo Award-winning books Lean Hospitals and Healthcare Kaizen, and the anthology Practicing Lean. Mark is also a Senior Advisor to the technology company KaiNexus.


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