US Flag Carrier Airlines: Culture, Margins, and Business vs Leisure Travel | In Practise

US Flag Carrier Airlines: Culture, Margins, and Business vs Leisure Travel

Former COO at Delta Air Lines and Former Global Head of Transportation at Airbnb

Learning outcomes

  • Impact of US airline consolidation on pricing
  • How legacy carriers are positioned versus low and ultra-low cost carriers
  • The DNA of Delta vs United and Southwest vs Ryanair
  • Potential responses from airlines if 10% to 20% of business travel is lost permanently
  • Core levers airlines can pull to manage margins
  • The average operating margin for first, business, and economy class for US airlines
  • Outlook on the industry structure
  • How Airbnb was approaching integrating airlines into the core product and the future distribution of air travel
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Executive Bio

Fred Reid

Former COO at Delta Air Lines and Former Global Head of Transportation at Airbnb

Fred has over 45 years of experience in the travel industry. Fred ran European Sales for American Airlines in the 1980’s before spending 7 years as President at Lufthansa Airlines, the German flag carrier. Fred was also President and Chief Operating Officer at Delta Air Lines for 5 years before becoming the CEO of upstart Virgin American in 2004. Fred also spent 4 years as President of Flexjet, fractional private jet ownership company owned by Bombardier, and also enjoyed 4 years working on the Cora Aircraft Program, a division of Kitty Hawk building next-generation aircraft. Fred is currently a Senior Advisor to Brian Chesky and the Former Global Head of Transportation at Airbnb. Read more

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Fred, can you provide a short introduction to your background and role in the airline industry?

I would call it an accidentally happy career. I graduated from college at UC Berkeley, across the bay in San Francisco. I knew two things. I wanted to move around – I didn't want to be stuck to a desk – and I knew I wanted to be in an exotic location. So I joined a hotel company in India. A couple of years later, I started in the lowest possible job I could get at Pan American World Airways in Saudi Arabia. Over the decades, I moved from place to place, lived in eight different cities and eight different countries, and worked for a number of carriers. The highlights of this time were being the president of Lufthansa, based in Germany, years ago, and being the president of Delta a few years later. Then I was the founding chief executive of Virgin America, launched in San Francisco in 2007.

Looking back at the structure of the airline industry in the U.S., we have seen significant consolidation in the last 10 to 15 years. What is your view of the drivers of that consolidation?

It’s a matter of evolution. Compared to other service industries, whether it’s rental cars, hotels, computer reservation systems, or airports, the airline industry was a lot less consolidated than other industries of a like nature. In addition to that, in the crisis years following the September 11th attacks of 2001, at one point, 60% or 65% of all the seats in the USA were in bankruptcy proceedings. To clean up the balance sheet and consolidate was a big driver. This consolidation ended up with the three super mega carriers today, Delta, American, and United, and some other very respectable players like Jet Blue, Southwest, Alaska and so forth.

Do you think this consolidation can prevent a race to the bottom in prices?

You could argue the way that pricing is displayed on computer reservation systems, that the race to the bottom, if you want to call it that, pre-existed consolidation and might be a factor today. I think that how many seats you put in at what price points is what drives your pricing strategy. It's not so much your price; it's how many seats do you have available at that price. In the years coming up to 2020, the U.S. carrier industry has been on a five or six-year streak of record profitability that we never achieved before. Of course, that's changed now, due to the pandemic, but I don't think that pricing alone is an indicator of success or failure.

Your view is that it's more about the price of the incremental seat in the industry, rather than the aggregated price of tickets in the industry?

You’ve had low-cost carriers for decades, you’ve had ultra-low-cost carriers for a decade or slightly more, and you’ve had global carriers, and they all bring something else to the party. I don’t think it’s safe to say that the global carriers will kill low-cost carriers, nor will it happen the other way around. The global carriers offer different things to different people, and so do the low-cost carriers. They’ve found a way to co-exist. The common threat right now is the pandemic and the disruption to society and the economy.

Can we look at how the legacy airlines and the legacy carriers have evolved versus the likes of Southwest or even the ultra-low-cost carriers? How have you seen their position and value proposition evolve over the last decade?

It became evident, at some point, that low-cost carriers are not an existential threat to legacy carriers. I can't think of an instance when a legacy carrier or a low-cost carrier failed due to the direct actions of one or more competitors. I subscribe to the notion that most companies do not fail because of homicide; they fail because of suicide. This is a grim way of saying that if a company has got its values right, they’re careful with the cost, please their customers, and their price point is relevant, they’re probably going to find a place in the sunshine.

So the core proposition of premium offering, business travel, longer haul flights is here to stay, and it’s at less of a threat from the low-cost carriers?

I think so. What the legacy carriers offer are global alliances. If you are a frequent business or leisure traveler and get to a certain level of recognition within the frequent flyer programs, those benefits transfer across dozens of airlines through the global alliances. Don't forget that all these airlines, no matter what their positioning is, especially the legacy ones, will always have fare sales. Sometimes their fare sales will be route specific. They might be responding to a competitive threat in a given city by a given airline, and you’ll see a different price structure on those routes than you would on others. I'm not saying that low-cost carriers don't provide a competitive challenge; they do. But I think that both species, if you will, have a place to survive and prosper.

How would you compare the approach to customer service the legacy players take?

Again, it's different, and I'm not speaking from my personal opinion, although I've got plenty of those to go around. Customer service is not based on whether you are low cost or legacy. Customer service is based on the leadership's DNA, starting right with the CEO or the founder. Some airline CEOs are known for being very employee-focused, which is the first step. If you're going to be customer-focused, start with your employees. That's been said many times, but it's very, very true. If you take what global people say about airlines, Southwest is a darling, and Ryanair is a very effective carrier with pricing, but most people don’t speak of Ryanair as, oh, my God, they just love me the way Southwest does.

Why is that?

Again, it’s a value system at the top. Certain airlines have been founded by people or run by people who are very employee-focused. Continental Airlines was not very employee-focused, and then Gordon Bethune took over many years ago. He came to the party as an aircraft mechanic. He understood the way frontline working people feel. It’s driven significantly by the DNA of the CEO and the senior leadership. I feel strongly about that. If you look at good and bad airlines in the customer's eyes, and hundreds of thousands of them vote every year – Condé Nast and Gallup and J.D. Power – they have opinions. Those opinions are generally right, so it's not so much low-cost versus legacy. It's employee focus and customer focus from legacy across the spectrum to low-cost.

Everyone claims to hate Ryanair, yet everyone travels with Ryanair. O'Leary's point of view will be that he's laser-focused on cost because he knows that's what the best experience is for most of the market. How do you weigh up that focus on employees versus delivering the core value proposition, which is lowest price?

I’m not picking on Mr O’Leary. He’s been a very successful and dynamic CEO for a long time, and he’s created a great airline. His overwhelming focus is price, and that resonates. A lot of people like that. It works. Having worked for years in both employee and customer-focused airlines and the opposite of that, the customer and employee-focused one is just a lot more fun. You've got to do the same rigor. You've got to operate, you've got to have low prices, you've got to have your technical dispatch reliability, you've got to have your crews show up on time, you've got to do all the same things. Candidly, it's a little more fun.

I founded Virgin America from scratch. It was a long slog, but it turned into a very successful carrier. We decided, at the beginning, to have fun and show love. I know that sounds corny, and many airline CEOs will say that’s not a determinant of success. They may be right, but I think if you’re doing everything right in terms of cost management and pricing, and you go out of your way to surprise and delight both your employees and the customers, that’s just more fun.

I will also make a key point here. Airline employees are pretty unique because they tend to be unsupervised. If you work in a restaurant or a factory or a software company, everything you do can be managed and quantified and tracked. If you're an airline employee, you're alone when you're checking people in. You're alone at two o'clock in the morning if you're repairing an airplane in the middle of a rainstorm. If those employees have a stronger belief system in the company, I believe they give more. That's why Southwest, certainly in younger years, was so famous for its productivity because people believed in the company.

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US Flag Carrier Airlines: Culture, Margins, and Business vs Leisure Travel

September 15, 2020

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