The director of a large airport
once told me, "Individually, the airlines are very rational. But
collectively, they behave very irrationally."
Perhaps. But I think
that more to the point is the observation that, like other airborne
creatures, carriers tend to exhibit flock behavior. When one moves,
others will follow.
This has some bearing
on two news developments last week: The courtroom maneuverings of
travel agents who accuse the airlines of conspiring to cut their
commissions, and a possible merger between Delta and either United
or Northwest.
The airlines'
flocking behavior (described as "parallel conduct" in court
documents) simply presents difficulties for travel agents making a
case that the airlines collaborated to cut, cap and eliminate
agency commissions. True, the carriers seemed to have enacted new
and near-identical commission policies in short order, but it's not
unusual for them to watch their competitors closely and mimic any
behavior that can have an impact on their costs, revenue or market
share.
In fact, I'm told
that this month airline sales and marketing agents are tying up
phone lines into larger agencies in the New York region for
conversations that can end with offers of 15% commission overrides
on certain routes.
And this is not just
coming from international carriers but from the likes of American,
Delta and Northwest. No one is charging conspiracy; it appears to
be a reaction both to general market softness and a sharp focus on
increasing market share.
(Interestingly, one
agency owner who reported this to me said that some of the
conversations with airlines took a remarkably similar path, with an
airline rep first suggesting commissions might be cut over concerns
about the agent's ability to move market share. But when the agent
began pointing out that his clients were booking away from the
caller's carrier in reaction to perceived problems with that
airline, the rep quickly came back with additional commission and,
in some instances, soft-dollar goodies for clients.)
Accusations of group
irrationality on the part of the airlines arise because flock
behavior amplifies activity that seems to counter to the long-term
interests of the aviation industry. For example, the airport
director who leveled the charge pointed out that the airport
congestion that creates such headaches for the carriers could be
somewhat alleviated if flights were more evenly distributed
throughout the day. But passengers all want to book the rush-hour
flights, and it would be a brave airline CEO indeed who strays from
the flock and bets that he could sell on the proposition that
passengers should book flights in less-crowded time
slots.
The intense
competitive considerations airlines weigh are exacerbated by the
weak players among them that cut fares to stimulate cash flow at
critical moments, and by the strongest players that make strategic
short-term fare cuts in an attempt to scare off new entrants from
important routes.
In reality, this sort
of competitive behavior (and charges of group irrationality) play
out in all major global industries throughout the world. But
there's an important difference between aviation and other global
industries.
Airlines may fly
hundreds of routes across six continents and take minority stakes
in other nations' carriers to earn the label "global," but they
cannot, under present regulatory conditions, become truly
"multinational." If Delta is allowed to merge, the resulting
airline will certainly serve more countries, but at the end of the
day it will still be a U.S. carrier, just as Air France-KLM is an
iteration of a European carrier.
Any major
international corporation in today's flat world would find it
difficult to be tied so strongly to the fortunes of one country --
even one continent -- and one currency. The primary reason hotel
companies continue to hum an upbeat tune as the U.S. economy frays
is that they have the opportunity to balance softness here with
growth in China, India, the Middle East and Europe.
The Open Skies
agreement between the U.S. and Europe is a huge step forward in
removing restraints, but it falls short of what British Airways CEO
Willie Walsh calls the "transformational" effects that would occur
if airlines were allowed to become multinational
companies.
I'm aware that giant
multinational airlines could result in further homogenization that
wouldn't serve the interests of passengers and could lead to
bullying of other industry segments.
But I'm willing to
let the free market work that out. The alternative to the rise of
strong multinational players that can exploit a global marketplace
is a flock of smaller players whose movements are too often
choreographed by the weakest among them.