United Breaks Guitars

On March 31, 2008, Dave Carroll, a musician from Halifax boarded a United Airlines flight to Nebraska.  He and his band checked their guitars, safely enclosed in cases.  His flight connected through Chicago’s O’Hare airport and as he was waiting to deplane and catch his connection, a passenger in the row behind one of his bandmates exclaimed that the baggage handlers were throwing guitars around as they unloaded the cargo hold.  Mr. Carol alerted flight attendants, but they did nothing. 

When Mr. Carroll’s guitar case came out on the baggage claim in Nebraska, he opened it and found that the neck of the guitar had snapped, ruining the $2,300 instrument.  Mr. Carol subsequently filed a formal complaint with United and asked that they pay for the damage.  Mr. Carroll spent 9 months going back and forth with United customer service, being bounced from department to department, waiting on hold for hours, and finally being told that the final word from United was “no”.  He was informed that since he had not reported the damage within 24 hours of his flight, United could not consider his request.

Being a musician, Mr. Carroll decided to write a song (three of them in fact) to vent his frustration.  He and his band-mates shot low-budget music videos, the first of which they posted to YouTube on July 6th, 2009.  By the end of the day, more than 150,000 people had seen it, prompting United to reach out to Mr. Carroll saying they hoped to right the wrong, but it was too late. In the following two days, the view count climbed to 500,000, by mid-August the number was 5 million - and it didn’t stop there.  Here is the first installment of their trilogy.  Please take a moment to enjoy it (and note the view count). 

https://www.youtube.com/watch?v=5YGc4zOqozo

The video struck a chord. Mr. Carroll received thousands of emails with similar stories of frustration at United’s customer service. Taylor Guitars, the maker of Mr. Carrol’s damaged instrument, sent him two brand new guitars. United finally offered Mr. Carroll $1,200 in vouchers for future travel on United (an amount equivalent to the cost Mr. Carroll incurred to repair his guitar). After all he had been through, Mr. Carroll declined the offer.

How did this happen? Mr. Carroll’s experience was the result of notoriously poor stakeholder management that has haunted United Airlines for most of its history. In 2006, United emerged from a very long bankruptcy process in which it defaulted on its pension, and employees had to concede hundreds of millions of dollars of compensation - that is, those who weren’t laid off.  Just two years later, United executives greatly enriched themselves through a stock vesting money grab scheme the New York Times called “insanity squared”. In more recent years, United merged with Continental Airlines, but things haven’t changed much.

What ails the current United Airlines is what ailed the pre-merger United and the pre-merger Continental. The cultures stank. There was little or no commitment from the top to do good work. And customer-facing employees at both airlines were burned out, overwhelmed or distracted as they absorbed the brunt of flyer dissatisfaction. Combining two wrongs cannot and did not make anything right. It just made things worse.

Employees at both carriers found reason to despise [recently former United CEO Jeff] Smisek. Since no post-merger contracts were ever forged, United employees couldn't work former Continental flights and vice versa. Layoffs were common and Smisek outsourced work to lowest-bidder third-party operations. Disgruntled, disheartened cabin crews and gate agents often took out their frustrations on bewildered passengers. 

 - Joe Brancatelli, Biz Journal Columnist January 21, 2016 [1]

Mr. Carroll found himself trapped in an indifferent and highly dysfunctional culture. It would have been very simple for the flight attendants he alerted to open the door of the jet bridge and confront the baggage handlers, or to use the radio to alert their supervisor, but in an indifferent culture why would they?  Even if they had, I doubt the baggage handlers would have responded well. It’s not like they didn’t know that they should not throw guitars. This is the ugly side of reciprocity at work. United executives demonstrate again and again that they don’t care about United employees, so the employees respond in kind. A particularly egregious example happened in 2000 when, during a “civil war” between employees and executives, there were weeks when 75% of United flights were late and passengers and baggage were regularly left stranded in distant places.

CEO Oscar Munos is well-aware that he has a culture problem, but he does not seem to grasp the nugget of stakeholder orientation.  In a CNN Money article from April 18th, 2017[2], the astute reader can see that Munos is trying to fix the culture by siding with employees over customers (likely a reversal from his predecessors).  But that thinking still fails to reject the trade-offs he is facing and it will not work. What’s more, United still views “customer service” as a way to limit costs. They (and many other companies) create byzantine processes which remove all discretion from the front-line employees to actually resolve customer issues. This tremendously short-sighted system is designed to have customers simply give up in frustration and go away, saving the airline money in the short term (not having to pay for hotels, meals and guitar repairs for example), while demonstrating to customers that they don’t care. After all, it is really the shareholder who is the supreme stakeholder, right?

Wrong. As we are learning in this module, placing shareholders (or any other stakeholder) in the supreme stakeholder position, is the worst position you can put them in.  These problems are not unique to United Airlines.  Most of the major air carriers struggle with the same problems.  There is one notable exception however, as we will see in the next example.

Bags Fly Free

In January of 2010, most of the major airlines began to charge fees for checked bags. A few years earlier, charges for 2nd bags and for bags weighing more than 50lbs became common, but in the face of rising oil prices, airlines saw an opportunity to increase revenues by charging for the first checked bag as well. The sudden attractiveness of this approach was no accident since the IRS had just announced that bag fees were not subjects to the 7.5% tax that the government charges on airplane tickets. In the first three quarters of 2010, U.S. airlines had raked in a combined $2.5 Billion in bag fees, up an order of magnitude from a decade earlier: total bag fees collected in 2000 came to $210 Million.

Adding bag fees certainly benefits the shareholders, and just as certainly, it doesn’t benefit the customer. Employees and customers alike also suffer from increased hassle as passengers try to skirt fees by carrying on more and heavier bags. Limited overhead bin space fills up and flights are delayed because a few bags won’t fit and have to be checked at the last minute. Worse still is the increased risk to flight attendants as they assist passenger after passenger on flight after flight in getting heavy carry-on bags from the aisle up into overhead bins. The repetitive stress of this activity could cause a spike in injuries and detract from efforts to create a good culture in the workplace. What is an airline to do?

In a corporate culture where the shareholder is the supreme stakeholder, instituting checked bag fees is a no-brainer. But in a culture that tries to align the interests of all of its stakeholders, this choice is not so clear.

Where stakeholders’ interests conflict, the executive must find a way to rethink the problems so that these interests can go together, so that even more value can be created for each. If trade-offs have to be made, as often happens in the real world, then the executive must figure out how to make the trade-offs, and immediately begin improving the trade-offs for all sides. A stakeholder approach to business is about creating as much value as possible for stakeholders, without resorting to trade-offs. [3]

Southwest resisted the rush to institute bag fees. They studied the issue and found that they could make an extra $200 Million if they matched what the other airlines were charging for bags. But Southwest practices stakeholder orientation, and they rejected the trade-off between the interests of their shareholders and their other stakeholders who would surely lose the trade. It was a tough call, but Southwest decided to buck the trend. The new bag fees created a significant cost for customers that Southwest didn’t like, but according to a consultant familiar with the C-Suite deliberations at the time, risking increased workplace injury was an absolute deal breaker.

Instead, of pitting stakeholders against each other, Southwest spotted an opportunity to align stakeholder interests. Not charging for checking bags had suddenly become a competitive advantage for Southwest. They decided to make a big deal out of the fact that at Southwest, “Bags fly free”.

https://www.youtube.com/watch?v=Cfy2xUP_zW0 

So, what happened? 

Stakeholder Orientation found a powerful new case-study in support of its validity. Southwest’s revenue rose by $1.6 billion in the first nine months of 2010, compared with that period in 2007, even as its capacity declined by 1 percent. Part of that growth in sales, Southwest believes, came from new customers fleeing bag fees. [Southwest CEO Gary] Kelly calls his rivals’ approach “a gift.”[4]

[1] Brancatelli, J.(2016). How United Airlines got to its sorry state, and why it can't take off again. The Business Journals, January 21, 2016. Retrieved from www.bizjournals.com.

[2] Ostrower, J. (2017). United CEO Oscar Munoz is walking a tightrope to fix an airline. CNN Money, April 18, 2017. Retrieved from www.money.cnn.com.