Opinion Wheels Up Fragmentation is not customer friendly By Robert Silk / May 18, 2017 Share 1 -- When I first started listening to airline earnings calls in the fall of 2015, what quickly struck me is how much of a divide there is between what investors care about and what matters to consumers. Of course, investors want the airline to make a profit. But in late 2015, even more than now, profits were coming easily for U.S. carriers. That year they would record a cumulative net income of $25.6 billion, an all-time record.On the earnings calls, however, analysts seemed to be mainly consumed by unit revenues, which is how much money a carrier earns per available seat, per mile flown. To increase unit revenue, which goes by the acronym Prasm (passenger revenue per available seat mile) in airline industry parlance, airlines only have a few options. They can fill a higher percentage of seats per plane. They can sell seats for more money. Or they can do a combination of both. Though it won't necessarily increase the Prasm, airlines can also bring up their average revenue per flight by what is euphemistically known in the industry as densification -- i.e., squeezing seat width and pitch so that more seats can be placed into each aircraft. Of course, all of the above options are the opposite of what consumers want. Who among us hasn't delighted in finding a cheap ticket, then boarded the plane to find out that nobody is occupying the middle seat? How many airline customers who typically fly economy don't already feel that legroom and seat widths are inadequate and that the experience itself is uncomfortable?So airline executives, including the now-beleaguered Oscar Munoz of United, are faced with the unenviable task of pleasing the disparate masters of shareholders and consumers. And that's without even considering employees and the labor unions that represent them. Calling this an impossible task is probably an overstatement. But what is clear -- and was illustrated with repugnant clarity by the events that unfolded last month after David Dao refused to give up his seat on a United Express flight from Chicago O'Hare to Louisville -- is that U.S. airlines are failing in this task. Profits are high, but by and large, the American people dislike their airlines. And they surely dislike them even more now, after seeing a paid ticket holder bloodied and then dragged off the plane by airport police. Not all U.S. airlines have taken the same approach to ameliorating the tension between investor demands and customer service, though for a long time all except JetBlue have embraced the concept of overbooking, or to put it in clearer language, selling the same seat to more than one passenger. In most industries, a practice like that would constitute fraud. But in the airline industry, where federal law explicitly allows for such a practice, executives have long regarded it as a vital tool for boosting the Prasm. In recent years, most major U.S. airlines have turned to increased product fragmentation in an effort to drive unit revenue. Early this year, United launched its upgraded business-class cabin, Polaris. And Delta will follow suit with its Delta One product later this year, which it is billing as the industry's first business- class cabin to feature all enclosed sliding-door suites.Also later this year, Delta will roll out its Premium Economy Select cabins for international flights, bridging the ever-widening gulf between economy and business-class offerings. The move follows American, which last year became the first U.S. carrier to offer a true premium economy product, featuring its own cabin separate from the economy section. At the bottom end of the scale are the basic economy tickets that Delta has been selling since 2012 and that United and American put up for sale just this past winter. In exchange for paying a lower fare, basic economy travelers accept a variety of inconveniences, including seats in the back of the plane and tickets that are nonrefundable and nonchangeable. United and American have taken the basic economy concept one step further than Delta, and in so doing grabbed their fair share of negative headlines, by forbidding carry-on bags that can't fit underneath the seats.Airlines argue that such fragmentation is a boon for passengers, enabling them to decide where along the matrix of comfort vs. cost they want to fall. They also say it makes money. United, for example, estimates that segmentation will drive nearly $2.5 billion in extra revenue through 2020. But there could also be a price to pay for fragmentation that airlines don't talk about (and might not even consider). Just as the widening divide between the wealthy and the middle class within the U.S. has sowed discontent among voters of disparate political leanings, cabin divides on an aircraft increase the chance of air rage, according to a late 2015 peer-reviewed study published in the Proceedings of the National Academy of Sciences journal. In fact, the authors analyzed flight records and found that the chances of an onboard incident in economy class were 3.8 times higher when an aircraft had a first-class cabin than when it didn't. And if economy passengers actually saw the first-class cabin -- meaning they boarded from the front of the plane rather than from the middle -- air rage incidences multiplied. The study did not address the question of whether coach passengers are generally just less satisfied when flying on aircraft with first-class cabins, but logic suggests that's possible. Famously, one major U.S. industry player, Southwest Airlines, has bucked the fragmentation trend, and in so doing has proven that there is more than one way to approach the often competing priorities of increasing unit revenues while satisfying customers. Southwest, which has grown into the largest provider of domestic U.S. flights, flies an entire fleet of one-class 737s and last year recorded net income of $2.2 billion, a record profit in a year when American, Delta and United saw profits decline from 2015. Of course, Southwest also was the U.S. industry's worst actor when it came to involuntarily bumping passengers from an airplane. But last week the carrier ended its use of overbooking. In the coming months other U.S. airlines will either fend off or be forced to submit to calls for new regulations on overbooking and on what they must do in cases in which paid passengers end up without a seat. Legislators from both parties have filed new bills, and the House and Senate have already held oversight hearings. Whatever results from that political fight, U.S. carriers -- not just United -- face the more important challenge of showing a skeptical general public that they are valued as customers. In the first one-and-a-half years of Munoz's tenure at United, the carrier improved its on-time performance, its baggage handling performance and, yes, even the rate at which it involuntarily denies boarding to passengers. But as Munoz has now surely learned, none of that amounts to much in the mind of the average flyer if the pervading sense is that they're little more than cargo whose personal space and service expectations on the aircraft are being sliced and diced in search of higher profits, even as the fortunate few at the front of the plane drink ever finer brands of Champagne. Airline stock analysts demand profits and growing unit revenues. The trick for airline executives is to achieve such ends without leaving most customers feeling like just another metric.