Op Ed

Article Published in Business Travel News, February 21, 2000

1999's year-end airline financial reports were interesting -- not from the perspective of the actual financial numbers, but from the perspective of what the percentages seem to show on an annualized basis.

For starters, Southwest had a 16.1% traffic increase on an 11.2% capacity increase. That is a 4.9% positive capacity ratio (i.e., passengers carried growth exceeds the growth in the number of seats offered). Continental and Northwest also had double-digit growth at 11% on positive capacity ratios of more than 1% to 2%.

On the other side of that coin, the "big three", United, American and Delta all had, effectively, negative capacity ratios. American's traffic was up 2.8% of a 3.8 capacity increase, Delta's traffic was up 1.5% on a capacity increase of 1.9% and United traffic was basically flat (about .07%) on a 1.5% capacity increase. Essentially, each had a negative traffic to capacity ratio.

Virtually all the airlines noted (and the industry in general) had load factors within a few percentage points of 70%.

Anybody following the industry knows that each airline, each marketing or finance person, and each external industry analyst has their own "spin" on these numbers ... rationalizations, justifications, qualifications -- all sorts of "...ations".

So Eastman's "Off-the-Wall Comment-izations" of these numbers are ...

1. It seems pretty clear that the airline seat has become a true commodity as defined by James and Gilmore in their 1999 book "The Experience Economy". As the airline seat becomes a commodity, "brand" and "quality" have less impact on carrier choice by travelers ... "price" becomes increasingly, the primary product-differentiation criteria. If "brand" or "quality of product" had been the drivers of differentiation in the airline seat marketplace last year -- then the "big three" should/would have been able to sustain growth rates comparable to the other carriers.

Not only did the big three not have comparable double-digit traffic growth rates ... even where there was increased capacity among the big three, the traffic-to-capacity ratios were negative (as compared to, for example, Southwest, Continental, or Northwest). Given that some combination of big-three serve most significant destinations right along with some combination of "the other" carriers -- and that the big three tend to offer comparable quality product at only marginally higher prices -- then the significant growth in the other carriers would appear to be primarily (not solely, but primarily) in marginal price differentiation. There is hardly a better definition of a commodity product!

2. It seems pretty clear that the era of rapid dissemination of digital information is changing the airline economic model from "supply-driven" by the airlines to "demand-driven" by buyers/travelers -- even in the face of limited supply (i.e., 70% load factors). Even at 70% load factors, there remains sufficient alternative air availability to so many U.S. destinations, that the traveler is just a "mouse click" away from an alternative travel solution to meet their needs or expectations. While "supply-driven" brand marketing may draw an initial first-look loyalty, the ability to serve the "demand-driven" need of the buyer is enabling buyer choices that bypass brand loyalty to obtain alternative product choices - based on price, time convenience, airport choice or whatever need the buyer desires.

These are particularly important aspects to monitor among those who do business in the distribution channel. The historic airline distribution model is built around the "supply-driven" economic model ... i.e., point of origin, destination, carrier(s), time, and then price. That model is as true of the people within the process as it is of the technology products that served the process.

In a demand-driven model, the aspects of the buyer selection model tend to reverse ... i.e., destination and price tend to precede origin and time, all of which precede carrier in the mind of the buyer. A reversed "demand-driven" mindset and the resulting information structure plays havoc with the existing GDS system -- whose query language (i.e., agent keystroke entries or their automated equivalents in the Internet GUI interfaces) and the internal logic structures within the database storage systems -- are based on the supply-driven model. Not only is the software that serves the vendors "out of sync" ... but, so too, is the mental logic of the people that use it.

After some 50 to 60 years of selling and buying air transportation in a "supply-driven" model, perhaps the single biggest challenge the travel industry confronts today is the mental transformation or reversal required by the evolving Internet induced "demand-driven" model. The issue is not just a change in "habits" - but a complete reversal of role relationships, demands, needs, and expectations.