Not Even Trying

Suppose for a moment that you were a parent traveling with children, possibly small children, and when you attempted to book tickets in the same row with your children (and spouse) you were told that the airline was going to charge you an additional fee for letting your party sit together. Let us further suppose that you asked the justification for this peculiar charge, and were told that there was no particular reason for the practice; the airline was just doing it as a way to wring more revenue from each flight, because they can. And, just to cap things off, let us suppose that you asked what the CEO of the airline thought about this practice, only to be told that the whole thing had been his idea in the first place. Would you still book the tickets?

Since you’re reading this story on my blog (assuming I have readers) you’ve probably figured out by now that this is an actual policy at United Airlines, according to an interview with their CEO on the Flyer Talk site this week. United President Scott Kirby claimed that the practice was just a matter of the company charging extra for a superior product – effectively, increasing the price because of value added – and defended it on the grounds that all companies charge extra for more valuable products or services, and airlines shouldn’t be any different. Whether he was missing the point deliberately or just brushing off the reporter isn’t clear from the article, but I feel it’s worth raising the issue anyway…

In general, any business policy that involves forcibly separating parents from their children – or extorting money from them in exchange for not doing so – is going to cause trouble, particularly if there isn’t any objective reason for doing so. Leaving aside over-protective parents who literally carry their children everywhere until the kids are school-age, most people find travel with small children stressful enough without having to worry about where they might be or what they might be doing/breaking/ingesting at any given moment. For that matter, most other travelers don’t particularly want to have to consider the complications of sitting with unaccompanied children just because the airline wants to make a few extra dollars. If this story is accurate, though, United is running the risk of irritating every customer on a given flight…

Now, I’ve made no secret of the fact that I consider annoying the customer to be a colossally bad idea; I’ve gone so far as to suggest that the Second Law of Business should be not to do this. In the case of a company like United, which is already having public image and customer relations issues due to things like having customers dragged off of flights (and possibly beaten), this policy goes beyond “stupid” and is careening directly toward “complete fiduciary misconduct.” While I can admire Mr. Kirby’s honesty and candor, I can’t help feeling that he’s not even trying to understand the potential shortcomings of the policy he is defending. If I still owned stock in United (I don’t) I might be trying to sell it, but I’d almost certainly be trying to oust the CEO at the next proxy vote…

From this perspective, I can’t actually tell if this policy (or admitting to it in public, at least) is insanely brave, utterly tone-deaf, or unbelievably arrogant. All I can tell you for sure is that none of these are adjectives that I want to associate with a company with which I do business, or with the senior management personnel of such a company. If United wants to improve relations with its customer, or at least stop being the punchline of jokes written by millions of scruffy bloggers across the Internet, they need to at least try to consider the needs of their passengers. Before things get any worse…

Is It Worth the Cost?

I haven’t been in the market for a new car for some time now, and as a result I was only vaguely aware of Ford repositioning its product line. I don’t recall seeing ads for the Fusion or Taurus sedans for some time now, and it has been a while since the company has allocated any marketing resources for the Fiesta or Focus lines, at least on any channel where I would have seen them. It’s not as if this is a particularly radical action anyway; every large company that makes consumer products has to reposition at least some of its products from time to time as customer preferences change and the economy fluctuates. But apparently these most recent moves are raising the prospect of reduced sales going forward…

You can pick up the article from the Automotive News site if you want to, but what they’re talking about is a survey that indicates that at least some percentage of Ford owners will purchase their next vehicle from another company if their preferred model of sedan isn’t available. The findings aren’t conclusive – the sample size isn’t big enough, for one thing – but it suggests that the company’s plan to replace sedan models with SUVs and crossovers offered at a similar sticker price may have failed to take into account the fact that some people don’t like SUV body types, or that some people are more loyal to the kind of car they want to drive than they are to the brand identity…

What is really odd about these findings is that they are almost directly contradicted by trends in purchasing decisions in recent years. Whether SUV types really have higher profit margins than sedans or not depends on whom you ask, but the market has definitely been trending toward them for some time now, and it’s hardly surprising that Ford would try to produce more products in the categories in which they sell the most units. From a strategic viewpoint, the real question is whether Ford can achieve enough additional sales – or, failing that, secure enough additional revenue – through this change in their product mix to make up for whatever they lose by discontinuing the sedan models…

Now, I don’t mean to imply that this kind of forecasting is easy, or that the consumer preference analysis that drives it is something that anyone can just throw together on the spot. One could argue that eliminating products with lower purchase prices and higher gas mileage (e.g. lower operational costs) might be viewed negatively by people in some market segments; one could also argue that if you alienate buyers at the entry levels of your product line you have dramatically reduced the possibility that they will ever graduate to the more lucrative levels. On the other hand, there may also be savings that can be realized by producing a smaller number of models, requiring a more limited variety of parts, which are not obvious from the published information. At least, that seems to be the way Ford is placing its bets…

I’m going to try to keep an eye on this one as the next few model years hit the market. It’s possible that the Forward Planning team at the Ford Motor Company knows more about the way their market is developing than the folks at Automotive News (or various scruffy bloggers) do. But it’s important to remember that they’ve been wrong before, too…

Ignorance is Curable

I was wandering around on one of the news aggregation sites, as I am wont to do, when I found a posting about the newest Kaman helicopter design being offered for sale. As an unabashed aircraft wonk, I was glad to see one of the pioneering companies in aerospace getting back into the civilian market in a (potentially) big way, but I found the posting itself annoying – the user who posted it was mocking the intermeshed contra-rotating twin rotor design which makes the aircraft lighter, safer, and far more stable than more conventional helicopter designs, implying that there is something dangerous about a design in which the rotor blades pass over and under the same point. In a pre-Internet age this would just be displaying one’s ignorance, but today there’s really no excuse for this kind of brainless nonsense…

Anyone with a working Internet connection could have found out that Kaman Aircraft introduced its first intermeshed design 71 years ago, with the K-125 prototype, in a ten-second search. Only a few additional seconds would be required to find the Kaman HH-43 Huskie, a similar design built for the U.S. Air Force, Navy, and Marine Corps that was in service for over 20 years as a search-and-rescue platform. You’d have to care about helicopters and/or military history to notice that the Huskie flew more rescue missions during the Vietnam War than any other type of helicopter, while establishing an unequalled safety record, but even if you’re just looking at the new Kaman designs you should at least have noticed how effective these aircraft are, especially for the price…

Now, I don’t mean to suggest that anyone who does not make a hobby of either unusual aircraft or military history (or preferably both) would or even should know about the Kaman intermeshed rotor types, let alone be able to explain the significant advantages provided by its drive system. Nor would I ever suggest that all new technologies should be embraced from the moment of their introduction, or imply that there have never been fatally flawed aircraft offered for sale. What I am pointing out here is that this isn’t just a mature technology; it’s more than seven decades old. Intermeshed rotor designs were in service twenty-two years before the packet-switching technology that makes the Internet possible was invented, and nearly thirty years before Jobs and Wozniak built the first personal computer…

I don’t expect that anyone who is in charge of acquiring new aircraft for any company that operates helicopters is going to get their purchase information from a random commenter on an Internet news aggregation site, any more than I expect random readers of this blog (assuming I have readers) to care about the history of esoteric helicopters. But making fun of any technology just because it is unfamiliar to you is asinine, and in a business context it’s another one of the ways in which people manage to destroy perfectly good companies just because they weren’t paying attention…

I strongly recommend that anyone who has a need for helicopters capable of transporting medium-sized external slung loads check out the new offerings from Kaman aircraft. And even more strongly that anyone who finds themselves confronted by what appears to be an exotic new technology take another few seconds and make sure that it wasn’t decades old before they were born before they make any decisions about it…

Pork in Space! Rides Again

I’ve written in this space any number of times about “pork-barrel” spending by the Federal government; mostly stories about expenditures of tax dollars that make no sense from any operational standpoint but are good for companies that donate money to the politicians who vote for those expenditures. It’s important to note that this behavior is not limited to any one political party, geographic region, or level of government; the projects vary a bit depending on who is controlling the budget at the time, but whether the government is spending money on airplanes that the military is sending directly to the Boneyard or entitlement programs that don’t help anyone, the principle is the same. That said, the current Administration’s new “Space Force” initiative is a particularly silly example of the process…

If you missed it, back in March the President announced that he had just come up with the idea of a new (sixth) branch of the U.S. military, which he called the “Space Force.” This isn’t really a new idea, of course; several previous attempts have been made to establish a permanent armed service in space, most recently in 2016 with the ill-fated “Space Corps” proposal. These have generally failed, either because there was no clear mission for the space service to perform, the proposed technology was either unavailable or economically unfeasible, or because the proposed installations contravened the Outer Space Treaty of 1967 (which prohibits the placement of weapons of mass destruction in orbit, on the Moon, or on any other celestial body). None of this has kept various administrations from shoveling money into those projects, however…

What is remarkable about the current incarnation of the program is how little effort the government is making to convince anyone that it isn’t just a giant boondoggle, almost exactly the same concept as the 2016 “Space Corps” proposal only with additional pork-barrel funding for satellites, launch vehicles, and gold-plated bonuses for the extremely wealthy people who own the aerospace companies. It would be nice to think that this had anything to do with forward-thinking defense or security planning, or at the very least, that it was an intelligent effort to stimulate economic growth in a high-tech sector in which the U.S. still has a fairly strong position relative to the rest of the world. Unfortunately, it appears to be the result of significant lobbying efforts by the aerospace industry – and the extraordinary receptiveness of the current administration to anything that gives away public money to its political backers…

You can check out the excellent story about all of this from the Los Angeles Times if you’d like more details on the political aspects. On the business side, the question isn’t so much why our government wants to spend more money on flying pork (every U.S. administration wants to spend more money on every kind of pork), but why this proposal includes a massive duplication of personnel (particularly management levels), headquarters facilities, equipment, and spacecraft, when the Air Force, Army and Navy all have space-oriented units currently operating. One might quite reasonably suggest that an increased focus on (non-nuclear) space-based weapons could be important to national security, given the equivalent programs appearing in both the Russian and the Chinese militaries. What baffles me is why anyone, even aerospace industry lobbyists, would want to do so in the least financially responsible way possible…

Start with a Large One

There’s an old, old joke about how to make a small fortune on speculative investments: start with a large fortune. We’ve seen a lot of examples of this principle over the years, but I have to admit that the recent rise and fall of the parent company behind the “Movie Pass” subscription service is so extreme that it is genuinely hard to believe it is really happening. And the fact that apparently there are still investors out there who are holding on to the company’s stock in hopes of it making a comeback takes us well past the point where the whole things sounds like satire…

If you’re not familiar with Helios and Matheson Analytics, don’t worry about it; their business is almost entirely built around Movie Pass. If you’re not familiar with Movie Pass, the basic idea was that users would agree to pay a monthly fee for a specified period, in return for which they would be able to go to an unlimited number of movies. The number of movies per month was later lowered to a specific number, but regardless of how often you were allowed to use it, the business model was clearly based on having more subscribers who pay for the service and never use it than subscribers who go to the movies all of the time…

Now, we should probably concede that there have been many other subscription businesses based on this same model that have succeeded very well over the years. A familiar example would be “health clubs” – private gyms – that offer memberships at somewhat less than the actual cost of providing service to an additional customer. Since a certain number of their customers will sign a two-year contract and then use the facility less than a dozen times – in some cases the number of customers actually going to the gym has been recorded at less than 25% of those paying for the privilege – this model can be highly lucrative. Unfortunately, it is much easier to go to the movies than it is to go to the gym, and attendance was correspondingly higher…

Without auditing their books I can’t tell you how much of the resulting operations failure was predictable, but one fact that stands out in the Market Insider article and other accounts of the company’s failure is that Helios never managed to negotiate a discounted high-volume rate for the movie tickets it was providing to its subscribers. If the company had obtained such a rate – say $5 per movie – and then offered customers five movies per month for a subscription of $30 per month they would have made $60 on every customer who attended all 60 movies over the 12 months, and more than that on anyone who attended fewer than that. Meanwhile, if movie tickets cost from $10 to $15 each, the service is still a good deal for the customer, since they will break even if they go to two shows a month, and save money after three…

Marketing a service that provides a finite number of movies, even at a remarkably good price, would have been much more difficult than just advertising “unlimited” movies and hoping that the majority of your customers don’t attend more than a few movies each year, of course. By the same token, it would probably have been a good idea to get the bulk discounts on movie tickets before you started offering the service to the public, and it probably would have been an even better idea to figure out what would make movie studios want to offer you bulk discounts in the first place…

Given all of these issues, I’m not sure why investors are continuing to hold onto the stock when Helios has seen its stock value drop from somewhere over $100 a share to somewhere under 10 cents a share, but then I can’t explain why people would keep buying more shares as the company was leaning further and further into its death spiral, either. It’s possible that people don’t really understand how sunk costs work, or what escalation of commitment means…

But that’s a discussion for another day…

Two Tribes Go to War

I read with great interest the story on Fox Business this week about the falling out between Kroger and Visa. It’s a classic example of two parties each believing that they have the upper hand in a dispute, and refusing to budge because they expect their opponent to blink first. But as American author David Drake points out, wars generally start when both sides believe they can win, and more than half of the time they're wrong. In this case, Kroger believes that VISA needs them more than they need the credit card company, while Visa believes the same thing about the supermarket. There’s a chance that both of them are wrong, and an even bigger chance that the dispute will cost both of them more than it ought to…

At the heart of this dispute is the fact that all credit card companies charge merchants a set amount for processing sales made using their cards – that’s how the credit card companies make their money, along with the interest they hope to collect from consumers who happen to be bad at math. For years, American Express had the highest fee structure, which is what led to a number of businesses refusing to take American Express cards. Master Card and Visa have traditionally had some of the lowest transaction fees, but apparently Kroger believes that it should be given a better rate than Visa wants to give them, based on the number of transactions Kroger sends in each day…

Visa, in turn, apparently believes that Kroger should be satisfied with paying the same rate that all of its competitors get. Every business wants to gain some competitive advantage over the other companies in their industry, but Visa does not see any reason why they should make less money per transaction in order to give Kroger a better bottom line. As a result, Kroger is threatening to stop taking credit cards with the Visa logo, and Visa is telling them to go ahead and refuse to accept payment and see what effect that has on their business…

Now, we should probably acknowledge that no business has any obligation to accept any particular form of payment. There are still a number of cash-only businesses operating in every community, and others who won’t take checks, vouchers, or Bitcoins. Kroger is only accepting the various credit cards as a convenience to its customers, and if it has enough loyal customers – or, at least, enough customers with more than one method of payment who still want to shop at Kroger if they can’t use their Visa cards – then this dispute shouldn’t affect them. Likewise, Visa has thousands (or millions) of other merchants who are still accepting their cards and paying their fees. What I think both companies are ignoring in this case is the competition…

The grocery industry normally operates on insanely low margins; food products can have as low as 0.8% margin, which makes it understandable that Kroger would want to save money on their merchant’s fees. Unfortunately, that also means that even a very small number of lost customers will impact their business. Visa doesn’t have the same problem – margin isn’t usually an issue for financial services firms. But Visa makes most of its money from the interest it charges cardholders, which means that the only thing that would be worse for them than not receiving merchant fees for transactions would be if people stop using their Visa cards for transactions on which they will end up paying interest…

It should be interesting to see which company blinks first. From where I’m sitting, each of them needs the other badly enough that they should really stop butting heads and work something out, but once again, I’m not the CEO of a major grocery or financial services company, and I don’t have access to their books anyway. Let’s just hope they figure this out before one or the other company fails and throws thousands of people who want no part of this feud out of work…

Still Waiting

About a month ago I brought you a short rant (short for me, anyway) about the realty of how corporate governance works, and in particular how the people who own and operate for-profit companies are under no obligation to act in the public interest rather than their own. Indeed, one could argue that the senior management personnel of any corporation have a fiduciary obligation to act in the best interest of their stockholders, regardless of any outside expectations, and should probably be fired if they do anything else. But apparently, no one has bothered to explain this concept (or share my post about it) with the current Administration, any of their more ardent followers, or the business reporters at The Atlantic…

The magazine appears on that list because earlier this week they published another article on the subject, explaining how Starbucks could have given every one of their employees a $7,000 raise with the proceeds from their tax break, and how Home Depot could have given out raises as high as $18,000 per employee. I’m not going to bother checking their math – somebody else almost certainly has, and the precise number isn’t important anyway. None of these companies are going to start offering people massive increases in salary any more than they are going to start manufacturing vast amounts of product that they can’t sell, because that’s not how a free-market economy works…

Companies don’t set their prices by calculating the very lowest amount they can charge without going bankrupt, they work out the highest price they can charge at which customers will still buy the product. Salaries work the same way – no employer is trying to offer its workers the highest possible amount of money, they’re trying to calculate the lowest amount they can pay before people will decide that the job isn’t worth the effort and walk away. These amounts may rise during times of high employment, or drop during downturns, but expecting a company to give away money when it doesn’t absolutely have to doesn’t even work in Command economies, let alone free-market ones…

Now, I don’t imagine that any of my readers (assuming I have readers) are really unclear on these concepts; all of this stuff is extremely basic economics. What seems to be getting lost on a lot of people who should really know better is that this is precisely why the idea of giving money to the owners and leadership of a company and expecting them to distribute it to their employees (or the public) for no apparent reason – the infamous “Trickle-Down Economics” – will never work. It’s not difficult to imagine why the tax reduction scam would be attractive to very wealthy people who will benefit from it directly, or to the elected officials who will be rewarded for passing it; what continues to baffle me is why anyone else would support this measure…

As I mentioned in my last post, I understand that economics can be a daunting subject, particularly for people who have spent decades being told that economics is difficult to understand. But the truth is, Trickle-Down economics can’t work in much the same sense that water won’t run uphill, trout don’t live in trees, and the ocean is not above the clouds. It didn’t work when the Reagan Administration tried it; it didn’t work when either Bush Administration tried it, and it isn’t going to work this time either. But it will suck $1.5 trillion out of our budget at a time when we supposedly can’t afford to heal the sick, feed the hungry, or educate anybody, let alone take care of the rest of the world…