United Air Lines – an OODA loop perspective

In other words, what’s their orientation?

I’m not too good at reading minds, much less corporate minds, but one thing stands out: For all practical purposes, domestic airlines in the US today are monopolies. They have left just enough market share at their primary hubs to avoid the threat of federal action, and this limited capacity means that open skies treaties won’t significantly increase competition.

When your orientation says “monopoly,” you act like a monopoly. In particular, without the threat of the marketplace, you have a lot of flexibility in the levels of service you provide — your quality — and in what you can charge. Play this game well and you can maximize the amount of money to be paid out to the the people who control the organization and to those who can fire them.

However, as Tom Peters once pointed out, in Thriving on Chaos as I recall, after some point, it’s impossible to order cost cuts without also damaging the customer experience.

Back in the pre-Toyota US auto industry, they had a similar orientation:  Customers didn’t appreciate quality and wouldn’t pay for improvements in quality over what Detroit was already producing.  As I said, that was pre-Toyota. But weren’t Toyotas cheaper than their American competitors? They were indeed less expensive, but their quality, in terms of manufacturing defects and ride experience, was much higher. Detroit claimed “Dumping!” but extensive studies showed that Toyota had evolved a manufacturing system that reduced waste thereby lowering costs organically, rather than just arbitrarily cutting costs by leaving out things.

So although the US auto industry thought they were monopolies and acted accordingly, it turned out that their orientations had left a huge opening for better, “lean,” competitors. You can read the story in The Machine That Changed the World. [It’s worth pointing out that Southwest did evolve a system incorporating a number of lean principles, and they are the second largest US airline by passenger count. However, the three legacy airlines have managed to contain this threat through tactics like controlling gates at major hubs, matching fares on critical routes, and maintaining significant international networks. Their orientation probably is that these tactics will continue to work.]

Here’s the significant point: Airlines are not manufacturers. They don’t leave you with a product that you’ll use and live with for years to come. They sell a short-term service that most people seem willing to put up with because you can stand anything for a few hours. As the editors of the website Smarter Travel concluded:

Studies show that when travelers are planning a trip, fare and schedule trump “quality” factors every time.

My guess is that as with the US car industry, this is an example of incestuous amplification. They rationalize that slightly lower prices will offset customer resistance to another ratcheting down of service levels, and they can pocket the difference in costs. It’s always worked, so you can see how orientation stays locked in the airline industry.

However, you do have alternatives because you don’t really need to fly. What you need is to move from one place to another, or sometimes, just to interact closely with people in another place (attend meetings & conferences, for example).  Try this thought experiment: If you could snap your fingers and be there, wouldn’t that be much better than flying, except perhaps if you can wrangle First Class?

I listed several of these alternatives a few years ago at https://slightlyeastofnew.com/2013/03/28/transportation-update/

Looking down the road, very high speed rail — like Elon Musk’s Hyperloop — could compete with airlines on both speed and service, although one suspects that if hyperloop companies evolve into monopolies, they’ll act like monopolies, just as the airlines did.

There’s also the promise of autonomous vehicles — self-driving vans and cars — that would pick you up at your house or office and drop you at your destination in another city (or even town, village, beach resort, etc.)  Design strategist David Liddell (whose company also does work for Boeing) expounded on this a couple of days ago for the New York Times:

But Mr. Liddell warned of long-term competition from other kinds of transportation. If self-driving cars make driving easier and more comfortable, midrange flights would face competition. Counting the time it takes to clear airport security and get to and from the airport, it takes just as long to drive between some places — Los Angeles to San Francisco, say — as to fly. If self-driving technology makes driving much more comfortable, too, lots of people might abandon planes for cars, Mr. Liddell said.

In other words, just as Uber sees itself an an alternative to private ownership of cars, self-driving cars could be an alternative to short – mid range air travel.  If you take the objective as “get somewhere else” instead of “fly,” you can probably think of other possibilities.

For the next few years, assuming that none of the current alternatives work for you, you either pay the price for serious upgrade, or try to minimize what you pay for cattle car service. The logical result of this tactic, played out over billions of customers, is something I call “Imperial Class.” Eventually, service in non-premium classes deteriorates to the point where it isn’t worth the trouble for the legacy airlines to keep it. Use the search box at the top of the right sidebar to search on “Imperial” and you’ll find several posts I’ve done on this.

For airlines who can’t retreat into a niche like Imperial Class, my prediction is the obvious one, when orientations lock in the face of a changing enironment.

10 thoughts on “United Air Lines – an OODA loop perspective

  1. “Play this game well and you can maximize the amount of money to be paid out to the the people who control the organization and to those who can fire them.”
    So “doer” are those in control and those who “be” have command of the force (potential of the corporation), which means they are able to fire. As you say the tipping point may be wide or narrow, but does exist within every OODA loop.

    “But weren’t Toyotas cheaper than their American competitors? They were indeed less expensive, but their quality, in terms of manufacturing defects and ride experience, was much higher.”
    From that quote I get that the tipping point isn’t only wide or narrow, it is higher or lower quality.

    “So although the US auto industry thought they were monopolies and acted accordingly, it turned out that their orientations had left a huge opening for better, “lean,” competitors.”
    So (now) not only can monopolies work wide/narrow, higher/lower, but lean or expansive beyond the horizon.

    Once monopolies go beyond wide/narrow, deep/shallow, and far/near they pretty much only have one choice left: to open or close their loop. As Trump might appreciate, monopolies can either double-down on their orientation or open their loop up to future change.

    Perhaps we can think of an open-loop as life and a closed loop as immortality (cancer).
    I mean, there is nothing wrong with a cancer, in that it wants to live forever, but in a multicell environment the complexity of the OODA loop means cancer is charging through the lines with an exponent, and that exponent is what you describe as incestuous amplification. It’s like starving the human body until it starts to break down muscle instead of fat.

    And, as Thomas PM Barnett once said, be aware of the exponent, which in the case of a monopoly, in the end, it is represented in the qualitative difference between a living and nonliving OODA loop, if a qualitative difference actually exists.

  2. In the 80s, Boyd would include in briefings that former military officers were starting to contaminate US corporate culture. The issue was that officers had been indoctrinated in rigid, top-down, command&control with only those at the very top knew what they were doing. However, about the same time, articles were starting to appear that MBAs, with myopic focus on quarterly numbers were starting to destroy US businesses. Then there is this recent article:

    Harvard Business School and the Propagation of Immoral Profit Strategies
    http://www.newsweek.com/2017/04/14/harvard-business-school-financial-crisis-economics-578378.html

  3. Note re “immoral profit”, in the late 80s some large corporations (with lots of employees) started restructure to move profit out of human intensive operations into separate subsidiary. In the 90s, airlines were moving profit out of airline operations subsidiary into ticket sales & reservation subsidiary … even when airline operations showed significant loss, the parent company could show significant profit from the reservation subsidiary. Then you have cases where they declare bankruptcy for the airline operations and dump the employee pension plans on the government.
    https://www.pbgc.gov/

    Then last decade, the refinement was to move the subsidiary where the profit is being booked to offshore tax haven. the poster child is large equipment manufacturer that builds and delivers to customers in the US. Last decade they create a distributor subsidiary in offshore tax haven and sell to the distributor at cost. The distributor then sells to US customers … and all the profit is booked offshore (equipment is still made in the US and delivered in the US). some refs:
    https://www.icij.org/project/luxembourg-leaks

  4. possibly more than you ever want to know

    United Air Wins Right to Default on Its Employee Pension Plans

    Although the ruling freed United from $3.2 billion in pension contributions over five years, even that amount would not fully finance the plan. If United had been able to pay it, the amount would have simply brought it into compliance. The government measures United’s pension shortfall at close to $9.8 billion.
    ….
    United plans to switch its current employees from traditional retirement programs, which are called defined-benefit plans, to defined-contribution plans like 401(k) programs. The federal pension agency will assume responsibility for United’s plans, which cover about 134,000 workers.

    Trump delay of the ‘fiduciary rule’ will cost retirement savers $3.7 billion
    http://www.epi.org/press/trump-delay-of-the-fiduciary-rule-will-cost-retirement-savers-3-7-billion/

    Former president of AMEX, AMEX, then goes to KKR/RJR,
    https://en.wikipedia.org/wiki/Barbarians_at_the_Gate:_The_Fall_of_RJR_Nabisco
    then IBM … with
    http://www.ibmemployee.com/RetirementHeist.shtml
    then Carlyle. KKR & Carlyle and retirement plans:

    Donald Trump’s Executive Order Will Let Private Equity Funds Drain Your 401(k)
    https://theintercept.com/2017/02/06/donald-trumps-executive-order-will-let-private-equity-funds-drain-your-401k

    Large firms like Carlyle, Blackstone, Partners Group, and Kohlberg Kravitz Roberts (KKR) have developed a series of 401(k)-friendly products over the past couple years. Most enable plan advisers to offer private equity stakes to investors as part of a “target fund,” in a diversified portfolio with other investments.

    Milton Friedman
    https://en.wikipedia.org/wiki/Milton_Friedman

    Friedman promoted an alternative macroeconomic viewpoint known as “monetarism”, and argued that a steady, small expansion of the money supply was the preferred policy.[12] His ideas concerning monetary policy, taxation, privatization and deregulation influenced government policies, especially during the 1980s.

    Milton Friedman’s Cherished Theory Is Laid to Rest
    https://www.bloomberg.com/view/articles/2017-01-12/milton-friedman-s-cherished-theory-is-laid-to-rest

    Even now, when economic models have become far more complex than anything in Friedman’s time, economists still go back to Friedman’s theory as a mental touchstone — a fundamental intuition that guides the way they make their models. My first macroeconomics professor believed in it deeply and instinctively, and would even bring it up in department seminars.

    The Champions of the 401(k) Lament the Revolution They Started
    http://www.wsj.com/articles/the-champions-of-the-401-k-lament-the-revolution-they-started-1483382348?mod=e2fb

    Economists and the Powerful: Convenient Theories, Distorted Facts, Ample Rewards
    http://www.amazon.com/Economists-Powerful-Convenient-Distorted-ebook/dp/B009K44OW2

    loc1200-1206: There are plenty of examples from other countries to copy: the US individual retirement account system is based on the Chilean pension reform of 1980/81 that in turn was based heavily on proposals made in the book Capitalism and Freedom by Milton Friedman. In response to the Chilean system facing a likely collapse in a few decades time, it was substantially overhauled in 2008 to require mandatory participation of all citizens in exchange for universal pension coverage.

    “The Undoing Project” goes into some detail how Kahneman and Tversky disproved economists’ assumption that people make rational decisions … loc:1155-59: He had listened to an American economist talk about how so-and-so was stupid and so-and-so was a fool, then said, “All your economic models are premised on people being smart and rational, and yet all the people you know are idiots.”

    Kahneman (a psychologist) gets Nobel prize in economics, in part for debunking Friedman’s theories involving rational man

    and more recent, Understanding decisions: The power of combining psychology and economics
    https://www.eurekalert.org/pub_releases/2017-04/cmu-udt041817.php

    another take on United case, Pilots: United Airlines bankruptcy never should have happened
    http://www.washingtonexaminer.com/pilots-united-airlines-bankruptcy-never-should-have-happened/article/5954

    In a scenario eerily reminiscent of Enron, top-level corporate officers cashed out as their lower-level employees lost billions. The pension liabilities were then transferred to taxpayers via PBGC, which is now close to insolvency itself

    • A couple of thoughts, given time to read Chet’s intro.

      Thanks for taking up the topic, and I’m pleased to have inspired it.

      A LOT of BIG companies are pouriing a LOT of money into self driving
      vehicles. I would say, it’s become a race, and priority for several, and they
      would not be doing it unless there were huge rewards.

      I can only leave it to your imagination, but my instinct is this is NOT, not by a
      long shot, nessesarily all good.

      Issues of personel fredom, those who drive for recration,
      and further licience for insurance companies to fleece one and all,
      and in conjuction with those who control the self driving enviroment.
      Are but a very few issues that pop into mind, and I’m sure there
      are many more and far more nefarious.

      It basically will comes down to control, control and monitoring
      of everyone’s movements, everywhere, all time time.

      And of course, those who operate ABOVE and OUTSIDE, THE LAW will not
      be encumbered, it’s all about controling, and fleecing the majority of the civil
      population, which is a continuation of the strip mining
      of the middle classes, where any remaining disposable income and assets remain.

      I gather from Chet’s inference that the airline sector has in effect imunised
      themselves from compeative pressures, it’s turned into a cartell,
      like BIG oil.

      It’s now rigged, I’d just call it yet another racket.

      Bad enough ? Sadly However, it’s a whole lot worse than all that, from what I gather
      from lhw0. It’s become a wide open smash and grab looting, free for all,
      with any governance (cops) no where in sight, and anything, anything,
      what so ever, goes.

      Is it any surprise mind you ?
      look who we’ve put in charge;

      http://www.businessinsider.com/krugman-trump-kleptocracy-russia-2016-11

      • other (private-equity) trivia:

        after former president of AMEX, leaves IBM to head up Carlyle, Carlyle will acquire major beltway bandit … which will employee Snowden. There is enormous uptic in government outsourcing last decade, frequently to beltway bandits owned by large private equity companies (gov. agencies can’t lobby congress, also companies can’t lobby congress with money from gov contracts, but private equity companies are free to lobby congress on behalf of companies they own).

        spies like us, 70% of intelligence budget and half the people
        http://www.investingdaily.com/17693/spies-like-us/

        companies in the private equity mill under heavy pressure to generate revenue for their parents, including cutting corners every way possible. Private equity subsidiaries doing outsource security clearances were found to filling out the paperwork, but not actually doing background checks.

        more recent leakers have also been found to be employed by some company that employed Snowden. Also OPM was another private equity subsidiary

        OPM Contractor’s Parent Firm Has a Troubled History
        https://firstlook.org/theintercept/2015/06/24/opm-contractor-veritas/

        It also contributes to rapidly spreading “Success of Failure” culture, series of failures generates far more profit than immediate success
        http://www.govexec.com/excellence/management-matters/2007/04/the-success-of-failure/24107/

        over half of corporate defaults are companies currently or formally in private equity mill

        Mitt Romney Is The Real Super-Fraud: Here’s The Proof, Chapter And Verse
        http://davidstockmanscontracorner.com/mitt-romney-is-the-real-super-fraud-heres-the-proof-chapter-and-verse/

        During his 16-years at Bain Capital, fully one-fourth or $600 million of the firms cumulative $2.5 billion of profits were scalped from companies which went bankrupt soon after Mitt and his partners got out of town with the loot.

        private-equity has also gotten into buying hospitals, clinics and medical practices and milking them for every penny possible.

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