Thomas Petzinger Archives – The Rabbit Hole

Key Takeaways

The men who run the airlines of America are an extreme type; calling them men of ego would be like calling Mount McKinley a rise in the landscape. Airlines demand a single strategic vision, lest the delicate choreography of airplanes, people, timetables, and finance break down. The airlines both attract and promote executives obsessed with control, who flourish at the center of all decision making.
A timber magnate in Seattle named William E. Boeing, bidding low because he built his own airplanes, won the line from Chicago to San Francisco, giving birth to what would become United Airlines.
Trippe had discovered what might be called the First Rule of Airline Economics: If a plane is going to take off anyway—once the fuel is purchased and the pilot paid and the interest rendered on the money borrowed to buy the plane in the first place—any paying passenger or payload recruited to the flight is almost pure profit. The fare paid by the last passenger taken on board represents a fabulously lucrative rate of return.
Increasing passenger traffic, Brown reasoned, was the one sure way to wean the airlines from postal subsidies. But public confidence could be inspired only by big, financially secure carriers committed to safety, maintenance, and training, not by the fly-by-night operators abounding at the time. Brown changed the rules so that the airlines received payments based not on the weight they carried, but on the distance they flew and the volume of space they maintained in reserve for the mail. This system guaranteed the airlines a minimum payment every time a mail plane left the ground, and the bigger the plane, the greater the payment. Though an outright gift to the airlines, Brown’s scheme gave them the incentive to order the sturdier and more costly planes then in development—planes, he hoped, that would help convince a wary public that it was at last safe to fly. Brown had codified the First Rule of Airline Economics into government policy: Once the flight was paid for, any additional payload was pure gravy.
Some of them went to management with an extraordinary proposal: to maintain the existing four-airplane schedule with only three airplanes. The company was incredulous. The only way to accomplish that would be to get the planes in the air after they’d been on the ground only 10 minutes—an unheard-of feat. Fine, some of the employees said. We’ll turn them around in 10 minutes. Pilots and management supervisors were soon helping with baggage. Tickets were collected on board rather than at the gate...Each airplane was restocked with beer, booze, and soft drinks through the rear door while passengers were still deplaning through the front. Flight attendants worked their way to the front of the cabin as passengers exited the planes, picking up newspapers and crossing seat belts row by row, rather than waiting for ground handlers to come aboard. Once the last passenger had deplaned, the remaining flight attendants began performing the same tasks from front to back. “When they meet, they have time to brush their hair,” a trade publication, Aviation Week & Space Technology, would incredulously report. And as the next cargo of passengers came aboard, they did so with no seat assignments, which meant that people simply stepped into one seat and then the next and then the next, in a nice, orderly, rapid sequence. Everyone’s job had been saved. Braniff and Texas International watched in horror as Southwest gave birth to the airline industry’s first 10-minute turnaround.
Southwest had discovered another lesson in airline marketing: giving the expense-account customer something for free that he could take home instead of to the office—in short, a kickback—won his undying loyalty.
Surveys showed that 25 percent of the people flying on “peanuts fares” would have otherwise made their trip in a car; an additional 30 percent otherwise would have stayed home. Some of these new, first-time fliers began to think about doing it a second time, and a third.
On the rare occasions that United got the better of American, Crandall blew his stack and demanded immediate countermeasures. At one point United obtained an exclusive software license from a Florida company for a series of bookkeeping and other programs that could be made available to travel agents over the Apollo network. Crandall ordered his people to jump on the next flight to Florida, where they arranged to buy the very company that had sold the software license to United. American gained the benefit not only of owning the technology but of employing all the people who had developed it. Sabre was not only a way of making fees, of course, but also a distribution system for American’s own flights. Although agents could book flights on nearly any airline through Sabre, Crandall began enticing agents to skew their bookings toward American with an addictive new financial arrangement. The greater the dollar value of an agency’s business with American, the greater the percentage the agency received on the entire sum. The standard 5 percent commission might be increased to 6 percent, say, on ticket sales over $1 million, or 7 percent on sales over $3 million. (American could easily pay the higher rate, since each additional passenger put so much money on the bottom line.) The more American flights an agency booked through Sabre, the greater its incentive to buy still more flights on American.
“We are a highly financially successful airline, and the focus of the entire airline industry, the public, and the legislators in Washington,” the presentation read. “Maximization of the financial (e.g., cost cutting, marketing, peanuts fares, debt structure, etc.) was historically correct and absolutely essential for this company’s survival at one time in our history. “But when low fares become universal,” the report went on, “we will be left in large part with the ‘people’ equation as the chief component of competitive leverage.” Success and failure in the airline business, the report said, would be decided on customer service.
Lorenzo also borrowed from the underdog strategy that Herb Kelleher of Southwest Airlines had used against him, showing up at hearings and local community meetings with only one or two executives in tow, in contrast to the platoon that Pan Am always dispatched.
The permutations increase arithmetically according to the number of aircraft and geometrically according to the number of aircraft types in any given fleet—another of the reverse economies of scale that plague airlines as they grow.
They would walk into the meeting with knots in their stomachs, for it was an unforgivable sin at American Airlines to appear in a meeting before Bob Crandall without having every fact at one’s command. He would cut you to ribbons.
Braniff’s powerful hub vividly demonstrated another inviolate rule of the airline business: Whoever has the most flights from a city gets a disproportionate share of the passengers. Frequency enhanced convenience—the convenience of flying the day of your meeting, not the night before; the convenience of arriving just an hour before your business was scheduled to begin.
Meanwhile the endless computer studies at American had turned up another fascinating fact. Although American carried 25 million passengers a year, something like 40 percent of its business came from about 5 percent of its customers. There were that many repeat customers—“frequent fliers,” one might call them. Any incremental customer was welcome, of course, but every incremental frequent flier was, on average, nearly 10 times more valuable.
That was it. American could have its customers accumulate mileage instead of Green Stamps, earning free travel instead of household appliances. The concept was not unheard-of among the airlines. Southwest Airlines already had a program in which secretaries got free travel after booking so many trips for their bosses.
The element of surprise was critical. Other major airlines would have no choice but to match the program, but it would take them months to catch up, months in which American would have the entire field to itself. By having all the necessary Sabre programming written and debugged in advance, American would allow passengers to start accumulating mileage on the very day that it announced the program.
Other airlines, ordering whatever happened to be the new or sexy or cool plane of the moment, invariably wound up with many species of aircraft in their fleets. Southwest, by contrast, flew only 737s, requiring it to stockpile parts and train pilots and mechanics for only one kind of plane. The efficiencies were huge. Now, instead of rushing out to buy something altogether new, Southwest persuaded Boeing simply to update the old reliable 737.
Thus, as air cascades along the bottom of a wing, it is also being sucked, as if from a vacuum cleaner, toward the top of the wing. The faster the wing travels laterally, the greater the pressure differential above and below. The greater the differential, the greater the lift generated. Safety lay in speed.
1. Velocity
In its studies of the failed Continental strike ALPA had also discovered the critical role that wives played in the decisions of their husbands in crossing picket lines.
1. Lateral Networks
In Dallas Bob Crandall was jealous and outraged to learn that United was buying the Pacific division of Pan Am—and that he had never been given the opportunity to bid on it. Crandall could not imagine why he had been entirely cut out. In fact Acker and Gitner had considered shopping the routes to Crandall, whose interest in establishing foreign routes was well known. But Pan Am had previously conducted a major airplane swap with American, and they had found Crandall prickly and impossible to satisfy. The Pacific sale was an emergency transaction. A strike had been raging and cash dwindling. There was no time for dealing with a difficult personality. No one ever told Crandall that he was denied the chance to make the airline deal of the decade because he was just too tough.
The whole airline industry had become a living expression of the S-curve of yore: he who has the most planes gets more than his proportion of the passengers.
Just as Burr and his associates had made a virtue of the simplicity of peanuts fares back at Texas International, so too did People Express promote the simplicity of its fare structure; one series of ads showed a reservationist for the fictitious “BS Airlines” double-talking through a series of ludicrously complex restrictions. Even where the major airlines bravely matched People Express dollar for dollar, Burr still benefited because the low fares brought so many passengers into the market that all airlines benefited.
To make a reservation someone—a passenger or a travel agent—had to phone People Express directly, which proved a maddening experience; the relentless busy signal at People Express accounted for the first acquaintance of many people with the redial button on their telephones. By 1984 some 6,000 potential passengers a day failed to connect by phone. Burr also suffered uniquely from the age-old problem of overbooking. People Express permitted customers to buy their tickets after they had boarded the airplane, giving no passenger the slightest incentive to honor a reservation, much less to cancel one after his or her plans had changed. No-shows were so numerous that People Express began overselling some flights by 100 percent. Often, of course, many of the expected no-shows actually materialized, leaving dozens of unhappy people with confirmed reservations stuck in the pandemonium of the North Terminal.
Any incremental passenger is worthwhile, at virtually any price.
In the unwritten rules of the post-deregulation era, three major airlines operating within a single hub city was at least one too many. As American had displayed in Dallas, operating a hub had become a contest to control the maximum number of passengers between the maximum number of city pairs. This strategy demanded a huge number of airplanes flying hundreds of hub landings and departures every day, like a hive of worker bees racing to and from their queen. It was only marginally economical for two big carriers to conduct service on this scale at a hub; where three airlines attempted to do so, planes flew empty, which meant that fares plunged, which meant that no one made any money on anything.
Don Burr did not realize that he was whistling “Dixie.” The majors were not, as a matter of fact, using their transcontinental routes to subsidize their short-haul routes—at least not enough to account for their 70 percent discounts. The majors were offering low fares against People Express because they had computers that enabled them to offer rock-bottom prices to discretionary passengers and still keep as many seats as necessary in store for higher-paying passengers. That was the cross-subsidy that was killing People Express.
As he had planned, Burr grafted the systems and culture of People Express onto Frontier; the disaster was monumental. Frontier had always been considered a classy airline, and the years of warfare with United and Continental had only brought out the best in service at all three. Now longtime Frontier passengers were being charged 50¢ for a cup of coffee. To stuff more seats into Frontier’s airplanes, Burr took out the galleys and began serving cold meals—three bucks for crackers, cheese, maybe some sausage. “Kibbles’N Bits,” people called it.
The computer technology that wiped out People Express in the marketplace did for flying what the assembly line did for the automobile. It reduced it to the most common denominator.
Inside the airline industry, however, everyone knew Southwest and only too well. It had never lost money, from the time it was fully established in business. And it had flourished while defying almost every success maxim of the post-deregulation world: it had no computer reservations system, offered no frequent-flier program, did not conduct yield management, and had never organized its flight schedules around anything remotely approaching a hub. How did Southwest do it? Consultants and academics were forever crawling over the company, looking for an answer as if they were searching for the recipe for Coke. Through all the studies no one ever had a better explanation than Robert Baker, who as Bob Crandall’s principal operating aide at American had come to know Southwest well. “That place,” Baker would say, “runs on Herb Kelleher’s bullshit.”
Within a year of offering service Southwest often doubled the ridership of whatever circuitous or direct service existed previously and doubled it again within the second year. It was unique among the airlines not only because it flew point to point instead of through hubs, but also because it built its markets almost entirely through a direct appeal to the public, bypassing travel agents. Southwest was happy to let other airlines fight for the loyalties of travel agents; doing so had pushed the commissions paid to travel agents to 10 percent of the ticket price, up from 5 percent in the regulated era. Southwest in fact did not particularly need travel agents. There were rarely any complicated itineraries involved in flying Southwest; the trip was usually just there and back, often in the same day. Southwest’s fares were excruciatingly simple, generally just two prices (peak and off-peak) on any route. Travel agents, for their part, were only too happy to let passengers handle their own reservations on Southwest; at such low fares the commissions were hardly worth it, especially since for the most part travel agents had to book reservations on Southwest by phone. Southwest refused to pay transaction fees to the major computer reservation systems.
Kelleher perpetuated the company’s underdog spirit. He had never fully recovered from the legal battle to get Southwest aloft and the trauma of its harrowing shoestring days, and neither had the earliest generation of employees. Maintaining the culture of martyrdom became so essential a strategy that it overpowered other corporate objectives; Southwest added cities and airplanes much more slowly than it could afford to, for instance, in large part to avoid an influx of new employees, which might dilute the purity of the “Southwest spirit.”
Kelleher also took the risky step of actively fostering “fun” in the workplace—risky because employees can easily spot a fake when such efforts are structured to manipulate or offered as a substitute for pay or perquisites. Kelleher’s intentions were indisputably commercial: happy employees are not only more productive but less apt to brood over setbacks and frustrations. More important, an ambiance of cheer—at the ticket counter, on the telephone, in the passenger cabin—was a critical component of Southwest’s no-frills marketing formula.
The passenger was deemed paramount; every employee’s paycheck bore the words, “From our customers.”
At least two factors at Southwest rescued this culture from cynicism. For one, Southwest had always encouraged spontaneous acts of frolic, such as a flight attendant’s conducting the preflight safety demonstrations to the tune of the William Tell Overture or the theme from The Beverly Hillbillies, or trying to see how many passengers would fit in a lavatory, or conducting a contest to see which passenger had the biggest hole in his sock. Instead of homogenizing the product (as no one did better than American, for instance), Southwest rewarded departures from the standard. Southwest also succeeded in nurturing fun because Kelleher cast himself as the chief jester—and made himself the butt of the most jokes. No personal appearance was too demeaning, no crack too crass.
As for Kelleher’s own office, the architect had received specific instructions: no windows. Once word had spread that he had a windowless office, Kelleher explained, how could anyone dare jockey for an office with a better view? To further control new-office politics, his executive assistant, Colleen Barrett, now a corporate officer, banned department heads from the committee planning the move; underlings, she and Herb reasoned, would be less absorbed in issues of office size and more committed to the merits of any space issue.
Kelleher was a hero-worshiper and a reader of history and literature who could reel off couplets from Wordsworth, aphorisms from Clausewitz, and exchanges from Nixon’s 1950 debates with Helen Gahagan Douglas.
This is where Southwest came in. While the major airlines were frantically working to become all things to everyone, Southwest recognized that a huge number of people in any city would rarely want to fly anywhere except to a few other cities.
That Southwest operated largely in a market all its own was most evident in its headquarters town of Dallas. Southwest shared its operating center with the fastest growing and most ruthlessly powerful airline in the world, American Airlines. Yet even as both airlines grew, even as the airline industry became more competitive year by year, American and Southwest served increasingly divergent markets from their respective airports and actually became less competitive as time passed.
One evening Kelleher was talking to a business executive at a cocktail reception in Dallas. “I see that American now has fares as low as yours,” the man said. “Yes,” Kelleher admitted. But American, he patiently explained, required passengers to buy a ticket 30 days in advance. By contrast, Kelleher said cheerfully, anyone could walk right up to the airport gate and fly at those prices on Southwest.
But Southwest quickly realized that by exposing itself to even the rudiments of yield management, it could take its low fares so much lower that they practically disappeared—while the flights themselves remained profitable. Suddenly a passenger could fly anywhere on Southwest Airlines for $19. After American had beaten People Express at its game, Southwest was beating American at its.
Kelleher did harbor a flaw, however, one that was so obvious no one could appreciate it. He had made Southwest Airlines a one-man show.
Lorenzo had not foreseen the worst problem of all: scheduling the newly swollen and far-flung workforce. As with so much else in airlines, crew scheduling creates a reverse economy of scale: the bigger the operation, the more difficult, costly, and inefficient it becomes. Pilots and flight attendants, calling in for new assignments as flight cancellations worsened, encountered busy signals, meaning they could not be reassigned, causing still more flights to be canceled. There’s no such thing as a half-broken airline.
In the brief time he had served as the president of Continental Airlines, Tom Plaskett learned that aircraft suppliers made a point of keeping a little something in reserve in any negotiation with Lorenzo, even past the point of the handshakes, because Lorenzo would try to re-trade the deal. They called it the “Frank factor.” Phil Bakes would call this phenomenon the “last nickel” impulse.
Bob Crandall rapidly filled the void left by Eastern in Miami. Before long American would control 85 percent of the airline seats going in and out of the vital gateway. Having so many seats at a single airport, as he once explained to a meeting of his pilots, gave Crandall control not only over the local aviation market but over the community’s travel agents as well.
The self-destruction of Continental Airlines vividly revealed a principle as old as passenger flight itself: people will tolerate many sacrifices to fly, but they will not tolerate surprise. Predictability—the fulfillment of expectations—is the most important factor in whether an airplane flight is a pleasantly efficient experience or one of modern life’s worst travails. This principle is doubly important on international flights.
Like bees, airlines pollinate the world’s financial system with capital. They create, mobilize, and transport wealth in proportions vastly exceeding the fares paid by the passengers.
For a boy who grew up poor, Wolf acclimated himself easily to the badges of fortune.
Crandall, for all his ruthlessness as a taskmaster, was perhaps the best boss in the airline industry for female executives; a number had attained top positions in Crandall’s organization. If Crandall harbored any of the sexist bias so prevalent in the airline industry, it was snuffed out by his obsession with performance.
The company was now losing something like $2 million a day. Pan Am’s personnel analysts observed a sudden, sharp increase in medical claims, apparently as employees hurried up elective medical attention on the expectation that their benefits might soon vanish.
But Delta delivered for its employees. Delta people got jobs for life; the company had not laid off a soul in 34 years. There had been no BOHICA, no concessions, no b-scales. Delta paid its people exceptionally well, not only by the standards of the low-wage southern United States but by airline industry standards as well. On the initiative of the flight attendants, Delta’s employees had once organized the purchase of a Boeing 767—a $30 million airplane—from their own paychecks. It was only such a corporate environment that could produce an airline chief executive officer from the ranks of the personnel department. Ron Allen—like all his predecessors in the chairman’s suite, a born-and-bred Delta product
Freddie Laker had been out of business nearly two years when an American lawyer living in London came to Branson in 1984 with a plan to resurrect Laker's operating authority between Gatwick and Newark. Branson quickly bought the idea, sticking the Virgin logo on it. The two days he had spent trying to get through on the telephone to People Express was the entirety of his market research. The failure of anyone to answer the phone told him that either there remained either unrequited demand for cheap flights over the Atlantic or the service being provided was incompetent. Either way there was an opening

What I got out of it

An incredibly captivating and fun deep dive into the foundations and evolution of the airline industry with a lot of narrative lessons about business model, strategy, incentives, psychology, and more