I think Seth Godin said it best in a recent blog when he said “you are not selling a commodity unless you want to.” When it comes to building a business model around a commodity, the airline industry is a shining example of why that doesn’t work. The airline industry provides a textbook example of how to not run a business. Based on their performance it is obvious that they totally flunked Business 101.
Over the past twenty years, the airline industry engaged in a hopeless fare war with its competitors and moved completely away from the service oriented “customer experience” that differentiated the successful airlines. And, to compete better in this arena they added more routes and more capacity to offer more cheap and questionably profitable travel. Somehow they believed that their survival was based on making business decisions focused on selling more stuff at a loss and hoping that somewhere in this mess, costs would come in line so they could make a profit. Who were they kidding? Survival here was not based on being the smartest and most market efficient. Rather, perceived survival was based on who could be the biggest at being the cheapest.
What happened? A lot. Not much of it good. Between the air carriers there is too much capacity, no noticable service, no real differentiation, and there is no value. Hence, fares remain relatively and unprofitably low. Then, the other shoe drops. Costs go through the roof. Labor, fuel, planes, and landing fees all increase. Obviously some costs, like fuel, skyrocketed. And everyone is looking around like “what happened?” It is obvious what happened. The industry leaders turned their back on the obvious and hoped to avoid the inevitable. Then the inevitable happened. Revenue was kept down by the fare wars and costs were driven up. Skinny profits have been decimated. This was predictable, expected and anticipated. That anyone is pretending to be surprised or helpless is crazy. This was a bad risk that finally hit home hard.
This is an expensive industry. It is labor intensive and fuel dependent and utilizes high-tech, expensive equipment. This is not a cheap proposition. To think that you can enter into a market where supply is higher than demand by being the cheapest with a high cost threshold is ludicrous. Despite the obvious pitfalls, the air carriers moved to a sales model that was focused exclusively on low fares. Now everyone is unhappy–passengers, employees and investors. If you want to screw up a perfectly good business, sell on price. Look no further than to the airline industry for proof.