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United Debacle Shows Airline Lost Faith in Its Own Business Model

3 minute read
Updated: | Originally published: ;

Many things are baffling about the decision by United Airlines employees to have a passenger dragged bleeding from one of their airplanes as other patrons taped the debacle on their smartphones.

But with company CEO Oscar Munoz declaring that he “emphatically” backs the employees despite a plunge in the company’s stock price, it’s amazing that the boss seems not to understand his own business model.

These are good times in the airline business. Low fuel prices have contributed to an unusually profitable stretch. So has industry consolidation, including the 2010 merger of United with Continental Airlines to create the world’s largest carrier. Dominance of regional hubs leaves the surviving airlines to operate as near monopolies.

Munoz’s defiance in the face of public outrage suggests that he is counting on his monopoly power to carry him through this mess. But he could easily have avoided the hammering of United stock—investors bailing out of the super-hot shares cut close to $1.5 billion from the company’s value Tuesday morning—if he had focused on a different aspect of today’s airline business.

I’m talking about dynamic pricing. It’s a familiar concept to anyone who has booked an airline ticket in recent years. Computer power now lets the carriers to adjust their ticket prices constantly to the ebbs and flows of supply and demand. This power allows United to measure exactly how many people want to travel to a given place at a given time, and how badly they want to go, and how comfortable they want to be, and how much luggage they want to carry, and how frugal they want, or need, to be. The airline applies these variables like pliers to squeeze out as much revenue as the market will bear.

Guess what? The same thing was playing out aboard the disastrous flight from Chicago to Louisville—only the other way around. Passengers on the overbooked flight were dynamically pricing their willingness to surrender their seats. According to reports, airline employees offered $400 travel vouchers in hopes of finding four people willing to wait for a later flight. They got no takers. So they doubled the offer to $800—but still the passengers were more interested in getting to their destination as quickly as possible.

Conveniently for the airlines, friendly regulators at the Department of Transportation have capped the amount that carriers are allowed to pay passengers who are bumped involuntarily. At $800, United was at, or near, the cap. At that point, it became cheaper for the airline to order four passengers off the plane than to raise the offer for volunteers.

So United gave up on dynamic pricing and resorted to monopoly thuggery. And that was a foolish thing to do. Instead, they should have continued their exploration of the real value of those four seats. I bet they would have found the price pretty quickly after they crossed the magic $1,000 threshold. But whatever the price of the seats would have amounted to, I am absolutely certain they would have cost far less than $1.5 billion.

So add hypocrisy to the rest of United’s offenses. Munoz and his minions are all in favor of supply and demand as long as they control the supply and can use it to wring every penny from our demand. But when the tables are turned even briefly—when United wants some of those seats back—they aren’t willing to play by their own rules.

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