Protection from What?

By now most of you will be familiar with the automobile company that calls itself Tesla Motors; some of you may also be familiar with its products, which are considered to be some of the most advanced electric vehicles in the world. What you may not have realized is that in addition to changing the way cars are designed, built, marketed, and refueled, Tesla Motors has also changed the way cars are sold, operating almost entirely online. There are display locations (the company calls them “Galleries”) in a number of states where you can examine a Tesla vehicle, and the company is working on how to arrange test drives, but nothing quite like the traditional franchised car dealerships used by all of the other companies that sell cars in the United States. As it stands, you can go online, choose all of the options you want in your Tesla product, including color scheme, place your order, and have the car delivered to your door

Compared to the traditional method of selling a car, this new approach has a number of advantages – the largest of which is cost. Tesla isn’t collecting franchise fees from its dealers, which must have some impact on their bottom line, but from a sales standpoint the company does not have the overhead a dealership experiences, either in payroll or physical plant; they also don’t have the dealer’s mark-up to consider. Tesla’s primary products to date have all be relatively expensive, but they’ve been able to offer them for sale at a lower price than any vehicle made for equivalent cost while still maintaining a greater margin than most of their competitors. You might expect the people who own the traditional car dealerships to see this as a direct threat to their business model, control of the market, and way of life, and to take any action necessary to stop Tesla’s sales operations. You would not be disappointed in that expectation…

You can pick up the story on the Bloomberg News site if you want to, but what they’re talking about is a bill that has already been passed by the Legislature here in Michigan, and is currently being reviewed by the Governor’s office, that will ban sales of Tesla products (or any other automobile sold using any channel other than a franchised dealership) within the state. Given that Michigan is home to all three of the major U.S. automakers, this legislation comes at the surprise of absolutely nobody. What I find surprising about it is the grounds the automobile companies and their governmental pawns are using to ban Tesla’s sales operations. “States are fully within their rights to protect consumers by choosing the way cars are sold and serviced,” said Charles Cyrill, a spokesman for The National Automobile Dealers Association, in an email to Bloomberg. He goes on to claim that without competition between dealers to keep the price down, there is nothing stopping the manufacturer from raising their prices…

As so often happens, I’m left wondering if the National Automobile Dealers Association is made up entirely of credulous idiots, or if they think the general public is so constituted. Dealerships do not usually compete with each other on price, because they are working from the same MSRP set by the manufacturer, and because they are working within protected territories guaranteed by their franchise agreements. But even if they did, the primary force holding down the price of a new car isn’t competition with other dealers; it’s the availability of equivalent products. If any giver carmaker raises their price above what the public is willing to pay for their product, all of their customers will just move to a more reasonably-priced alternative. That’s how a free-market economy works – at least, when it’s not being manipulated by powerful business interests through political influence…

Forcing Tesla to work through traditional dealerships would have no impact on the invoice price of the car – what it costs to buy one from the factory – it will only impact the price the customer has to pay for one, since the price differential is the dealerships’ only source of income. It has some benefit for the public, in the sense of creating jobs for franchise owners and car salespeople, but none whatsoever for the customers. In fact, the only real winners in this scenario are all of the other automobile dealerships and their franchising companies, who will have an easier time competing with Tesla on price if their newest competitor is forced to incur the same price structure under which everyone else labors…

How anyone manages to state with a straight face that such a bill represents anything other than blatant protectionism for the companies supporting the lobby group is beyond me, but perhaps that’s why Mr. Cyril chose to put this howler in an email instead of actually saying it in person. And while I’m sure we can all appreciate the U.S. auto industry’s efforts to protect consumers from more efficient direct sales channels, I highly doubt if anything this heavy-handed is going to help their public image – or keep Tesla from taking away still more of their market share…

Flying: Then and Now

Ask anyone who has had to travel by air in the last dozen years what they thought of the experience, and you’re probably going to hear language that you can’t use on television. Between the annoying and insulting security measures (that are mostly futile), passenger discomfort (which gets worse every year) and flight delays most people already hate the entire process before you even get to issues like endless new fees or the time you waste getting to the airport two hours early. But if you ask anybody who has been traveling by air for a while, they’ll probably tell you that things didn’t used to be like this; that air travel used to be a more formal, dignified and enjoyable experience. They usually won’t mention that it was also far more expensive, or that you were more than five times more likely to die in a plane crash…

An article that ran this week on the Huffington Post UK site compares a number of factors between the 1950s – when the advent of jet airliners and international carriers began making the airlines over – to the current state of the industry. And while I wouldn’t say there were a lot of surprises in the article, it was a bit odd to realize just how much cheaper and safer air travel has become just in my lifetime. For example, in 1952 the industry average was listed as 5.2 deaths per 100,000 hours of flying – about five times the current average. This isn’t really that surprising, when you consider advancements in navigation, automation, radar, electronics, and power systems (especially engine reliability), but even for an admitted airplane wonk like me a 500% difference is kind of amazing. Then there’s price – everyone knows that airfare had dropped since the U.S. deregulated our airline industry in 1978, but according to the Huffington people we’re talking about an 83% drop in fares on the New York to London run. And while it is true that the food, drink and service were all better, there really wasn’t much to do – in-flight movies did not appear until the late 1960s, and even into the 1970s the picture and sound were nothing to write home about…

This week also brought with it news about a potentially brighter future for all of us who get stuck in the Economy section of the aircraft; at least in terms of on-board comfort. An article off the Daily Mail website details several new changes in cabin and seating design that have the potential to create a more comfortable passenger environment without adding weight or taking up extra space (both of which would lower the profitability of the flight). None of this is exactly surprising either; the inclusion of cup holders that are separate from the meal tray, footrests usable in the Economy cabin, or seats that can recline without getting any closer to the passenger sitting behind you are all common-sense upgrades that people have been asking for almost from the beginning of modern air travel. The amazing part, at least to me, is that no one has made any particular effort to upgrade this aspect of the experience before now…

Airline seats are theoretically safer now – thanks to advanced construction materials and the like – but they haven’t really changed in design over the past two generations. And while air travel is essentially a commodity product these day (in that competition is mainly based on price) on a route with heavy traffic and significant competition any material advantage that makes one company’s service more attractive than the alternatives could major implications for the success of that firm. It’s early days as yet, but it might just be possible that we could start seeing change for the better in the airline industry…

Unless the new developments in rail transportation render the whole question moot, of course…

Decisions, Decisions

One of the cases I discuss with my students is about Southwest Airlines, and since this is a strategy class what we mostly discuss, both in class and in their written assignments, is changes the company could make in its strategy in light of the changing conditions within their industry. I get students from all of the various majors in the business school in my class, so I try to select cases that can be looked at from a variety of different angles and from the perspective of different disciplines. For example, the Southwest case was written just as the company had acquired Air Tran, and our Finance majors can analyze the deal and discuss the implications for the company’s future equity and capitalization, while the Human Resources students can talk about the difficulty in merging the two (very) different corporate cultures. It isn’t easy coming up with assignments that are interesting and fun (or at least, not boring) for this many different interests, and I’m sure I don’t always succeed. But the Southwest case is popular, and discussions of the anti-bag-fees policy are almost always spirited…

If you don’t fly commercial, you may not be aware that some years ago all of the major airlines started charging an extra fee for every piece of checked baggage, starting at around $25 and escalating rapidly from there. Some carriers have kept the fee structure basic, some have jacked the price up to see how high it can go, and others have tied it into other promotions, offering free bags for their frequent flier customers, people who sign up for their branded credit cards, or whatever. Only Southwest, out of the major carriers, has persisted in allowing customers to check two bags per person without charging extra – despite the fact that the airline industry as a whole is making roughly $3.5 billion on bag fees each year, according to an article this week in the Wall Street Journal. Many of my undergraduates have suggested that Southwest consider adding such a fee, given that these charges are now the industry standard and appear to be gradually gaining acceptance. But it’s never the Marketing majors who make that suggestion…

In the same article, the CEO of Southwest is quoted as saying that adding bag fees could end up costing the company in excess of $1 billion per year in lost revenue, as customers abandon Southwest in reaction to the change. On the face of it this seems alarmist – the company still has a number of other strategic advantages, such as lower fares and convenience of travel, not to mention overall customer satisfaction in most other areas of its operations. But there is no denying that the “Bags Fly Free” slogan is an important part of Southwest’s brand image, both in terms of the actual savings (at $35 or $50 per bag it doesn’t take long before we’re talking a significant expense) and also in terms of the company’s image as different from all of the other large airlines; a maverick organization that takes care of its loyal customers. And therein lies the question of strategy…

Southwest has spent most of its corporate existence working on a low-cost strategy – minimizing all possible costs in order to offer the lowest price to the customer while still earning a greater profit on each ticket than any competitor. But to continue on as they have, both of those things must remain true. If they depart from that strategy they may lose customers, as they will almost certainly lose their price advantage over the other airlines. But if they continue to pass up a major revenue stream like the checked baggage fees they run the risk of becoming less profitable than the other airlines, becoming a less attractive investment than other airlines, and losing the support of investors, which will impact their stock price and eventually their cost of capital. Not to mention earning less money in absolute terms…

Sooner or later, Southwest is going to have to decide if they believe they can make more money flying more people (and more people per flight, as well) without baggage fees than they could make by implementing them. Their traditional strategy has served them well so far, but can they continue with it if the add-on fees the competition is charging become the industry standard? Stay tuned, folks…

Getting More Complicated

If you tell people that the world in general, and the world of business in particular, are becoming more complicated all the time it’s unlikely that anyone will argue with you. Just in our lifetimes – and I’m not really all that old – we’ve seen things like the fall of Soviet Communism, the rise of e-commerce, and the development of a truly global economy, just to name three examples from the last twenty years. There was a time when all an American company needed to do in order to be considered a success was to develop a product (or reverse-engineer an existing one) and then sell it for a better price or with better features and quality for the same price than the competition. Today we have to contend with such diverse problems as the socio-political impact of our success or failure, whether our business is culturally, ethnically, ethically or ecologically sensitive, whether there is any way that our business could be considered a security risk by either Homeland Security or the NSA, and whether the Chinese government has decided to pick on our pricing decisions…

In case you missed it, you can find the original story on the Wall Street Journal site here; they have some good commentary and support information. Apparently, China’s state-run broadcasting network has started airing a 20-minute program attacking Starbucks for allegedly charging higher prices and gaining higher profits in China than they do in other parts of the world. Starbucks has replied that its pricing is based on a variety of factors, such as labor, real estate, and infrastructure in the country in which they are operating. The article doesn’t mention it, but given the company’s usual strategy involves moving large amounts of product from Seattle to wherever their store is, and requires a number of local commodities (notably water) that can be difficult or expensive to obtain in other parts of the world, they may even be telling the truth. What is unusual about the situation is that it’s a national government doing the criticizing, as opposed to the citizens voting with their feet…

Most places in the world that have free-market economies also have limitations on what price you can charge for goods and services – occasionally governmental regulations, but mostly just what customers are willing to pay for that product. You couldn’t get away with charging $500 a cup for coffee in the US – not because that’s illegal, but because no one would pay that. As I’ve observed in earlier posts, there are a few places in the US where you can find specialty coffees going for as much as $10 or $12 a cup, but that’s rare, with $2 to $3 being more common. Some people refuse to pay even that much, considering that they can make their own coffee at home for as little as a few cents a cup. But that’s because in the United States coffee is a staple food item that most people take for granted as part of their regular diet; in China things are a bit different…

Several of my colleagues from China have told me over the years that in their country, Starbucks is a luxury product, and indeed a status symbol. If you are drinking Starbucks in China you are clearly a person of sophistication and taste, not to mention wealthy and powerful enough to be able to afford a cup of coffee that costs as much as some people make in a whole day! The equivalent in our terms might be people spending $200 on a bottle of champagne – it’s an example of conspicuous consumption, if not outright wretched excess, but ultimately no better or worse than squandering your paycheck on any other high-status but non-essential purchase. If people in China are willing to pay those prices for the product then it is difficult to fault the company for charging them, and if people in China were not willing to pay such prices the company would have to lower them until a new price point appeared…

In a free-market economy, the idea of not charging more for a product in a place where people will pay that higher price literally makes no sense – this is why cups of beer that cost less than a quarter are sold for $7 at sporting venues, for example. If Starbucks was offering sub-standard products, or ones that were actively hazardous to their customers then the government would certainly have a point. But unless I’m missing something in the article, all the company is doing here is selling customers a product that they wish to purchase at a price that they are willing to pay. And yet, a national government is still taking them to task over it…

No doubt about it; the world is getting more complicated again…

Fifteen Years of Joe

Over the years I have brought you a number of stories about comically overpriced consumer items in this space. My regular readers (assuming I have readers) will remember the tale of the $100,000 safety razor, the $60,000 mattress, the $40 bottle of water, and the $200,000 bottle of Scotch – all absurd examples of conspicuous consumption, prestige products taken to the extreme, or ridiculous assumptions of value added where no value could possibly be added that would account for the price differential. And yet, somehow, none of it quite measures up to a gizmo priced at $11,111 that will produce a product that you can obtain on virtually any street corner in America for around $2…

If you missed the original story – or were too revolted to click on the link until now – you can pick up the original story off the Marketwatch site here; if not I’ll just spoil it for you and tell you that it’s the curious tale of an $11,111 coffee maker. The price was deliberately chosen (along with the name and several other characteristics) to repeatedly suggest the number 1 – as in, this is the best coffee maker on the market. And apparently it can, in fact, produce a really exceptional pot of coffee, nuanced to conform to the operator’s ideal brew on every possible dimension used by people who worry about such things. None of which really changes the fact that, as far as I can tell, you’re paying in excess of $11,000 for an appliance that can be obtained for $29.99 (or roughly 370 times the basic cost)…

Or, if you like, you’re paying roughly 5,555 times the price of one cup of coffee for this machine – and that doesn’t include the electricity, water, milk or cream, sweetener, coffee cups or coffee beans you will need to operate the machine and drink your beverage. Even without these (admittedly much lower) costs being factored in, you are paying the equivalent of well over fifteen year’s worth of coffee by the cup. And the differential between this method and coffee brewed at home on that $29.99 coffee maker is almost unbelievable…

Now, in fairness, this super-luxury coffee maker does appear to be an amazing piece of engineering. And true coffee snobs (or connoisseurs, as they would prefer you call them) insist that the difference between generic coffee beans prepared on your plastic $29.99 coffee maker and custom-roasted beans heated to exactly your perfect temperature and brewed to all of your personal specifications is comparable to the difference between a $500 bottle of wine and a pint of Thunderbird ($1.09 at your neighborhood liquor store). But considering that our old friends at the Dana Street Roasting Company will cheerfully roast your coffee to almost any specifications, and coffee makers with precision controls are available for only a few hundred dollars, this still seems excessive…

I should also admit that I’m not much of a coffee drinker myself, so even if somebody did offer me a cup of supercoffee I probably wouldn’t know the difference anyway. And it’s hard to deny that this purchase makes more sense than spending $200,000 on a bottle of whiskey that some people could probably finish off in an evening or two. But personally, given those choices, I’d still rather have lunch every day for three or four years – or a nice cup of diet cola every day for the next twenty-five years…

A Self-Correcting Market?

Everyone who has ever studied economics, at whatever level, is already aware of the concept of a self-correcting market; one where any excessive advantage will be removed by other people (or firms) entering the market to exploit those advantages. You can’t sell gasoline for $10 per gallon in 2011, because if there are any other gasoline retailers in your market they can sell gas $5 and appropriate all of your customers (and profits); and if there isn’t already another gasoline retailer in your market, there soon will be. It’s sometimes associated with Adam Smith’s “Invisible Hand” concept – in this case, new retailers would arise to sell gas at half the price, not because they are good or noble, but rather because they can make a huge amount of money by doing so. It’s almost as if an “invisible hand” – which in this case represents their own self-interest – is guiding them toward an action that will ultimately benefit everyone in the community (except for whoever used to have the $10 monopoly of gasoline). Unfortunately, it doesn’t appear that US Airways has ever studied economics…

According to a story that popped up on the Pittsburgh Post-Gazette website this week, starting in January US Air will be the only airline flying between Philadelphia and Pittsburgh, since Southwest has not been able to make a profit flying that route and is dropping it. Southwest had been offering comparable airfares, but US Air was offering assigned seats and frequent-flyer miles that could be used on other airlines through the Star Alliance system, and that gave US Air enough of an edge to make the route unprofitable for Southwest. Under the circumstances, you might expect US Air to raise fares on that route a bit, in order to raise profits as well as to give themselves something they can “slash” later in order to offer “special discount fares” without actually making less money. You probably wouldn’t expect an increase of nearly 600% (from $118 to $698), however…

Now, it’s possible that US Air anticipates that someone else was going to come into the Philadelphia to Pittsburgh run in a few months, and is trying to squeeze some money out of the route while they have an exclusive hold on it; it’s also possible that they believe that their entrenched position, first-mover advantage and goodwill combined with issues in the local economy will make the route too unattractive for anyone to want to start flying it. What they don’t appear to grasp is that even if nobody wanted to get in on the Philadelphia to Pittsburgh run before, they will now – because someone could charge four or five times the previous standard fare for this flight, and yet still undercut the US Air ticket by more than $100. And that doesn’t even consider transportation options which do not involve airliners…

Depending on your exact destination, the two cities are roughly 300 miles apart along Interstate 76. This implies a five-hour trip at moderate speeds, but when we consider that most travelers have to get to the airport two hours before departure, then spend an hour or so in the air, and then wait to deplane and reclaim their baggage, the time differential is only an hour or so. If you need to rent a car at your destination city, this may completely eliminate any time advantage, and even allowing for 31 cents per mile for the trip, you’d still save $500 easily on the round trip. If you’re travelling on business with a four-person team, you could save $2,000 if you drive, and your time differential will still be negligible…

Bus and train travel will remain problematic for business travelers and some other customers, but it seems likely that some additional commuter service will arise between the two cities – because the margin we’re talking about here is rather extreme. All you need to do in order to be competitive in the current market conditions is transport one person round-trip from Pittsburg to Philadelphia and back for less than $698 and less than 5 hours. The problem, of course, is that once a cheaper (and less obnoxious) way of getting from Philadelphia to Pittsburg and back is in place, it’s not just going to go away again once US Air lowers ticket prices to try to compete. Without really meaning to, US Air may just have given birth to entire new industries of competitors…

I don’t own stock in US Air, but if I did, I think I’d see about having an invisible hand (or even a visible one) slap whoever made this particular business mistake upside the head – while I still could…

How Stuff Works: Variable Costs

Today in our occasional series on How Stuff Works I thought it might be helpful to explain what variable costs are and how they differ from fixed costs. It’s one of those concepts that isn’t really as simple as the people from Accounting like to make it sound, and even people who really should know better can often get tripped up by the difference – as is being illustrated in Georgia right now, where the recent change in immigration law has driven off all of the undocumented workers who used to find employment in the summer picking crops. People on the pro-immigrant side are claiming that the crops will be lost because no one else will be willing to do these jobs, while those on the anti-immigrant side are saying that labor costs have never represented more than 10% of the total cost we pay for produce, so any change in who harvests the crops shouldn’t matter. I look at this and point out that both sides appear to know more about politics than they do about economics…

To begin with, the contention that no one will harvest crops except for undocumented workers is nonsense; it would be more correct to say that no one else will do these jobs for the horrific wages normally offered. But if you raise the hourly rate enough, eventually people will agree to do the job; try offering people $100 an hour, for example, and see if people are willing to tend the fields for the equivalent of $365,000 per year. Wages are an example of a variable cost: the amount it costs the company varies depending on how many people you employ and the rate at which you pay them, which in turn varies on the amount of work that must be done, how much of it each worker can do in an hour, and how much money people are willing to accept in return for that labor. In the case of agricultural firms, most of the other costs are set, or fixed, in advance: the mortgage on the land, the property tax you pay, the cost of the equipment (if any) and so on are all known well in advance; only consumables like water, fertilizer and seeds will vary depending on what you want to grow (and how much of it) – as will the number of people you need to accomplish these tasks…

On the other hand, the contention that labor costs have never made up more than 10% of the price you pay for produce at the supermarket is just as silly. People can’t live without food; if your grocery bill suddenly rises you may cut back in other areas (entertainment, travel, other consumer products) and you might write to your government officials, but you can’t just stop buying food. But, by the same token, farmers need to make enough money selling their crops in order to pay their own costs and feed their own families, which means that if their labor costs suddenly double, they will have to pass the increase in price along to the buyer – which ultimately means the consumer. It’s possible to estimate variable costs from past experience: in this case, labor has usually made up about 10% of the costs involved in raising food crops. But if the price of labor were to suddenly drop – if there were no jobs, no welfare programs, no safety nets, and no other way to make a living, or of somebody invented a series of really inexpensive robots that could do the same jobs for less than an unskilled worker’s wages – then those historical projections would be meaningless. And if the price of labor were to suddenly rise – say, if some idiot drove off all of the people who were willing to work for a certain low wage level – then the historical pricing information would also be useless…

Personally, I’ve always felt that the contention that foreigners were coming into this country to take away jobs from those hypothetical “hard-working Americans” was xenophobic, racist, protectionist crap, but I’ll admit I’m no expert on either politics or agriculture. I do, however, have two graduate degrees in Business, and I’m fairly sure that the people who passed this so-called “Immigration Reform” act in a state where the largest industry is Agriculture weren’t thinking things through – and that people on both sides of this issue appear to be unclear on the concept of variable costs. Hopefully, the rapid influx of cheaper produce from states (and countries) that still have cheap agricultural labor forces will help explain the difference – or at least stabilize food prices before there are riots in the streets…

What Do They Know?

Very early on in this blog I wrote about our family trip to Disneyland; a few months later I wrote about my amazement at learning about the Disney Institute program (where members of the Company will teach your organization to do things the Disney way) and my overall admiration for the company. Since then, a number of people have expressed their surprise to me when I’ve acknowledged that I do not own stock in the company, and that the 2007 trip was the first time I’d been to the park in at least twenty years. It’s important to note that while I admire the company, and in particular the way the park operations have made money during times when no other aspect of their business was profitable, I don’t have any personal connection to Disney – and most of the people I’ve known who have worked there have been dubious at best about wanting to go back. But when I see the company making moves that do not make sense, I find myself wondering what they know that we don’t…

A note that turned up in the Orlando Sentinel website last week mentioned that Disney is raising prices at the Disney World facility for the second time in less than a year; they’re also planning price increases in their other amusement parks, including Disneyland in California. With families all over the country still struggling to make mortgage payments and afford food and clothing this seemed a bit tone-deaf to me – an impression that was rendered even more surreal by the little temperature information block at the top of the Sentinel website (it was 99 degrees Fahrenheit as of 6:00 PM on June 13th). Coming as this does on the same day when we’re hearing about further increases in both gasoline and airline ticket prices, even more preposterous TSA outrages, and air traffic control failures, it doesn’t sound like the best of times to be doing things to discourage travel. If any other company were to do such I thing I’d just assume it was another boneheaded move, but when it’s Disney, you have to wonder…

Do the folks running the Disney Empire know something we don’t? Is it possible that improvements in the economy will result in greater disposable income, which will lead people to take summer vacations in Orlando? Or that recovery in various International economic indicators will bring enough foreign visitors to South Florida to make up the difference? Does this Disney pricing change constitute their belief that many exceptional experiences will be had this summer and fall, causing people to commemorate them by “going to Disneyland!” as the commercials urge them to? Or does this action suggest that calamity and woe are going to spread across the American scene, forcing people to book Disney vacations just to get their children to stop crying for long enough to acknowledge the trip?

I kid, of course, but as usual there is a serious point under my humorous mockery. No corporation is anything more than the sum of its people, and even the combined insight and knowledge of dozens of forward planners and thousands of employees will not keep such institutions from making disastrous (and stupid) choices from time to time. But it’s also true that the Walt Disney Company is much larger than you or me; it’s also much wealthier, much more powerful, and has many more resources to gain and analyze data. So when I see such an entity doing things that seem like madness to me, I always want to ask: “What do they know that I don’t?”

Value Added: You’re Doing It Wrong

I had occasion to travel by air earlier this month, and I found myself staring in amazement at the array of services being offered for purchase aboard some of the aircraft I was on. Checked baggage fees have become the industry standard, of course, and everyone knows about the food-for-purchase schemes that have so many of us buying and packing our own meals, but my on my flight from Los Angeles to Minneapolis the aircraft was outfitted with onboard Wi-Fi and also had video entertainment terminals set into each seat back. In both cases these are essentially sunk costs – meaning that there is effectively no difference between how much it costs to operate the airplane when these devices are in use and when they aren’t. Give this scenario, you might reasonably think that the airline would offer the use of these services at some minor level, in the hopes of making a lot of incremental income off a high volume of sales. Unless you are already familiar with the U.S. airline industry, of course – in which case you had already realized that the in-flight Wi-Fi was $15 and the handful of games and functions on the seatback unit was $5…

Now, if you travel for business, you may be able to get your employer to pay for your on-board Wi-Fi; you might even be able to justify it to the people in Accounting, assuming that you actually used to it work on something and not just to pass the time playing World of Warcraft. But most people wouldn’t shell out that kind of money on a short flight if they had to pay it out of pocket, and with most passengers already carrying a smart phone, a laptop computer, a tablet computer, a book reader, a hand-held video game system, or all of the above, it seems unlikely that anyone would give you the price equivalent of 5 iPhone games to use a crappy little seatback device for a couple of hours, either. It seemed to me that a better approach would be to use these options as a selling point, in order to sell more tickets and increase customer satisfaction with the service. After all, with passengers already being nickel-and-dimed with all manner of essential (and formerly free) services, there has to be a limit to how many optional fees they will want to deal with…

It wasn’t until I saw this story on MSNBC that the true idiocy of the concept really registered. According to the article, a recent survey showed that only about a quarter of the people flying these days are paying for food, while fewer than 15% of all passengers are paying for in-flight entertainment, onboard Internet services like these, or priority boarding rights. Moreover, each of the four flights I was on this month had to pull a large number of roller-board style carry-on bags and deposit them in the cargo hold, because the overhead compartments have become so clogged with by people trying to avoid the checked bag fees. I think we can reasonably conclude that while the checked bag fees may be making money, they’re definitely not making any friends for the carriers that use them; we can also conclude that if the airlines are pinning their hopes for remaining profitable on these supposedly value-added products (that do not add value because they offer too little and cost far too much) we should probably prepare ourselves for another round of mergers, bankruptcies, and pleas to the Federal government to bail them out of bankruptcy…

It’s all the more annoying, in my opinion, because most of the things you would need to do in order to improve customer relations with airline passengers is already common knowledge, not just in that industry but to the general public – but that’s a post for another day…

Choose Your Price – For Charity

Two concepts we’ve talked about in this space over the past couple of years have been the choose-your-own-price business model and non-traditional non-profit business models. For those joining us late, the choose-you-own model is exactly what it sounds like: instead of setting a price for the product or service, customers are encouraged to pay whatever they feel the product or service is worth. In most of the published cases to date this has resulted in a higher-than-expected revenue stream, indicating that while some people will take advantage of such setups, enough other people will pay more than retail price to make up the difference. By the same token, non-profit organizations have a hard time soliciting donations during an economic downturn, and have thus turned to a number of non-traditional fund-raising methods, including entrepreneurial businesses where all profits go to support the agency’s mission. It seemed obvious that sooner or later someone would combine these two ideas…

You can pick up the story from the local television news station here if you want to, but for the past year one of the Panera Bread locations in St. Louis has been operating on a name-your-price basis, with all of the profits going to charity. The company officials quoted in the story admit that there have been a few problems with people taking advantage of the program to scam free food off of the place, but there have also been cases of people leaving $500 for a $15 meal, which makes up for a lot of freeloaders. In general, the store only makes about 80% of the retail equivalent, but that’s still enough to generate a significant amount of profit – while feeding a significant number of people who actually can’t afford any food. I don’t know what Panera’s overall margin is like, but apparently there’s enough overall to absorb the difference between name-your-price and regular operations, while still offering opportunities to feed the hungry and train people without job skills. The company is now planning to open a new one of these every few months around the country…

Now, we should probably note that not all such operations are charity-related; nor do all of them work quite this way. In the famous Radiohead example, the band was selling an album for whatever visitors to their web site cared to pay, which did include nothing, and despite the fact that an estimated third of the visitors selected a price of zero, the average sale price was around $4. This is significantly cheaper than the $12 to $19 a CD copy would have cost in a record store, but was also much more than the $1.10 the band would have received from their record company per copy sold through conventional channels. It’s also worth noting that most entrepreneurial operations started by non-profits function on conventional business lines, and do not allow people to select their own prices. Still, you have to wonder how well either of these concepts would translate into other types of business…

The great thing about non-profit entrepreneurship is that it doesn’t rely upon the generosity of strangers; it generates money by earning it in exchange for goods or services, and can often be used for the purpose of providing jobs and job training to people who need those things. Over the years we have seen enough evidence to conclude that name-your-price operations can make even more money than the conventional approach, assuming they’re done right. And while it would be naïve to expect either type of operation to replace the more traditional types of business on a wide scale any time soon, they do serve as excellent reminders that the common way of doing things isn’t necessarily the best way…

Differentiation Fail

When you study management strategy (not that I am for one moment suggesting that anyone ought to study management strategy), you quickly learn that all of the articles suggesting that there are dozens or hundreds of different strategies are mostly crap; just as there are really only three kinds of story (comedy, tragedy and history), so to there are really only three kinds of business strategy: low-cost, differentiation, and specialization. Every so often somebody claims to have come up with a completely new approach – usually for the purpose of trying to convince everyone to pay $30 for their new book – but these three categories hold up surprisingly well. What most people fail to grasp is that any of the types require parity in the other two dimensions to be effective in the first place; otherwise all you’ve created is an elaborate way to waste money…

Low-cost strategy is the easiest to understand; your logic is simply “buy our product because it costs the least!” But if your product is so shoddy as to be completely useless there will be no market – or niche – for it, and if your product is identical to every other product on the market – if it isn’t differentiated in any way – there will be no real reason for customers to select your offerings over the competition. By the same token, if your product is completely new, innovative and distinctive but costs 50 times what the competition’s equivalent does, it’s not likely to sell well unless it can deliver 50 times the value – which is generally hard to do. This isn’t usually a problem, since very few companies deliberately market a product that costs even ten times what the competition is charging, but as far as I can tell from the chatter online, somebody should have explained this to the Dyson people before they launched their new "air multiplier" product…

As the linked Consumer Reports article notes, the new Dyson product does, as advertised, produce a smooth, powerful current of air, ideal for improving the circulation in your room. It’s just that the basic model costs $300 and doesn’t do anything that a $10 box fan can’t do; the claim that conventional fans produce a “choppy” air current does not appear to hold up under testing. Even if it did, most of the comments I’ve seen online so far suggest that there’s no way anybody is going to pay 30 times the price for this thing. Sure, the “Air Multiplier” is a cool-looking gizmo, and the fact that it doesn’t have any exposed fan blades might appeal to anyone who lives with an entity stupid enough to try sticking random body parts into a fan, but it doesn’t seem to be worth the price…

What makes this all the more puzzling, in my opinion, is that the company has generally demonstrated a better grasp of pricing strategy in the past. The basic Dyson vacuum cleaner (which we’ve had for two years now and swear by) is an excellent piece of engineering, and only about 50% more expensive than the equivalent competitor. I had no problem paying $300 for it instead of the $200 competitive equivalent, but there’s no way I would have paid $6,000 for it or any other vacuum cleaner; even a Roomba robotic vacuum cleaner, which actually vacuums the room without a human operator, isn’t more than twice the cost of a conventional vacuum, and some of them are even cheaper than the Dyson…

I have no idea what possessed the Dyson people to set the price on this product as high as they did; all I know is that they aren’t likely to sell a lot of them. The store around the corner from us has had a display of these things up for the last month, and they don’t appear to be moving, while the same store has sold out of box fans at least twice since last summer. Unless Dyson can somehow add value, lower the price, or find a niche market for these devices (people with a morbid and crippling fear of moving fan blades, perhaps?) they will have failed to market this product – because differentiation by itself does not appear to have been enough…

Something’s in the Air

I read with great interest a number of news stories over the past few days concerning the volcano erupting in Iceland, and how the disruption of air travel over half of the world has led a number of hotels to jack up the prices they are charging stranded travelers. All in all, I’m not sure what I find more appalling: the lack of long-term customer relations strategy I’m seeing, or all of the comments you tend to find on such stories by people who don’t appear to have the whole “supply and demand” thing down yet. Although I suppose we should probably start by admitting that the whole situation is going to end up making somebody look bad, no matter what you do…

First of all, there have been a number of stories online about hotels raising their prices by as much as 400%, since they know the stranded tourists can’t just leave. I’m always a bit skeptical of such stories, because unless the city in which they are happening is alleged to have more transient passengers than hotel rooms in it, such things are pure nonsense. If a given hotel were to raise their nightly rate by 400% it’s much more likely that some competitor would take advantage of the situation by only raising its rates by 300%, or perhaps 200%, than it would be to follow suit; within a matter of hours the entire market would be competitive again. Unless we are talking about relatively small cities, places unaccustomed to high volumes of passenger traffic, or places where a monopoly on hotel rooms by one firm or owner exists (all of which are problematic for other reasons, too), this situation is unlikely at best…

But for the sake of argument, let’s suppose that there is a place somewhere in the world affected by the volcano where every guest room in town is already rented, and the hotels are all charging everything they can get away with charging. Let us further suppose that you own a hotel there, and you know that you can rent the room that just opened up for $400 USD per night this week. Why would you offer that room for $200 USD? Are you supposed to take a 33% cut in your profits just because somebody’s flight was cancelled? If so, should you make less money on your rooms EVERY time somebody has a flight cancelled? What about people who were just late getting up and/or too hung over to clear security in time, and wound up missing their flights; should you subsidize them, too? What about weeks when there’s a convention in town? Should you intentionally cut profits just because demand for your rooms is high?

Granted that in the case of an extraordinary situation, where tens of thousands of people are being affected in dozens of countries, it’s probably worth it in long-term goodwill to avoid gouging your customers for every dime you can get from them; it’s probably better not to hand your competition the opportunity to double their normal prices and still undercut you by 200%, if it comes to that. But all of the people out there in cyberspace who are wailing and gnashing about the cruel, heartless capitalists who are making money on a scarce resource by selling it for whatever the market is willing to pay for it need to take a moment and ask themselves if strict governmental control, international treaties, armed vigilante justice, or whatever other measures they’re advocating would really result in better travel experiences from the ones they’re having right now…

Large-scale experiments in Russia and certain other countries suggest that we’re better off the way we are. But that’s probably cold comfort when you find yourself with the choice of paying for another night in an expensive hotel or sleeping at the airport…

No Surprise

Some time ago I noted in this space the passage of a new Federal law intended to keep airlines from stranding passengers on the tarmac without food or water (or anything else) for long periods of time – a practice that even the most casual observer could have predicted would eventually cause trouble. It’s not that scheduling or dispatching functions for a transportation company the size of an airline are easy; obviously they’re not. It’s just that the practice of using a plane parked on the tarmac as a low-cost alternative to renting extra gates at a terminal is the sort of thing that saves the company money at their customers’ expense – which means that people are going to start agitating for regulation to prevent it as soon as it becomes a significant inconvenience. Unfortunately, the response to the regulations are equally predictable…

With the new “Three-hour” laws set to take effect in a couple of months, more and more airlines have begun cancelling flights instead of applying the familiar tarmac holds, according to this story from UPI online. With a three-hour violation potentially costing as much as $2.75 million for a medium-size airplane (100 passengers aboard) and a cancellation being effectively free, it would probably be difficult to find a single individual anywhere who would be surprised by this. A much more interesting question is what the next round in this war will be – assuming there is one…

Realistically, there is no way to determine which flights are cancelled because of matters beyond the airline’s control – weather, equipment malfunctions, lack of qualified personnel to operate the aircraft, lack of small lemon-soaked napkins for passenger hygiene – and which ones are caused because the company does not wish to pay for an extra gate fee, and would rather inconvenience 100 people than pay a hefty fine. Even if you could somehow pass a law about this issue, there would almost inevitably come a confrontation when some over-eager TSA type insists that the airline has to take off, the airline says the plane isn’t safe, the law enforcement personnel insist, and the plane crashes. But replacing one practice where the company makes money at the expense of its passengers with another is unlikely to end well, either for the airline or the customers…

In the end, this will probably be yet another opportunity for high-volume carriers like Southwest to gain a competitive advantage over their more conventional competitors. Southwest isn’t that much better about cancelled flights – they have all of the same reasons to scrub a takeoff that everyone else does. But if they become the only airline that does not suddenly show a massive increase in cancelled flights after the 29th of April of this year, when the new law goes into effect, it shouldn’t take much effort for them to capitalize on the situation. The major carriers would be well advised to look for another strategy…

In the case of the much-reviled baggage fees, the major carriers had a simple solution available to them from the beginning – leave the baggage alone, raise the cost of the flight enough to cover the increase in fuel costs or CEO salaries or whatever it is they’re trying to make up the cost of, and then proclaim to the world that they haven’t introduced any new fees. The increase in cost would be minimal on longer and more expensive flights ($25, the cost of a single bag fee, is not a large incremental increase on a $400 expense), and the airlines are already losing the fare wars to no-frills carriers like Southwest. Maybe there’s a similar fix possible in this case; maybe if they applied intelligence and creativity, the major carriers could find a solution that saves them money WITHOUT sticking their customers with the bill…

Of course, if they could use intelligence and creativity to solve problems, they’d never have gotten themselves into this situation in the first place…

Two Good Points

I was reading the online news this week when a story caught my eye about first class airline tickets becoming a thing of the past. We’ve discussed airline ticket pricing in this space before, so most of you already know that first class tickets are the largest single profit center on most flights – even if you double or triple the amount of service a first class passenger receives the 500% to 5,000% markup on the tickets will tend to make up for it. Of course, many of the people flying first class these days are just using free upgrades earned with frequent flyer miles, but (as we’ve also discussed in this space) that’s getting harder to do, and even when it’s possible those frequent-flyer coupons can only be “earned” by activities that bring in vast amounts of money to the airline in the first place. It seems highly unlikely that the airline industry would abandon that sort of profit center during an economic downturn, especially considering that it’s one of the last selling points they have that discount carriers like Southwest Airlines can’t provide. But then I considered the source of the article…

If you follow the link provided, you will notice that this story comes to us from the Melbourne (Australia) Herald-Sun and is based almost entirely on the performance of first class sections on Qantas Airlines. I’m not mocking Qantas, certainly; it’s a good company and a reasonably well-run airline, but I don’t really think that we should consider the flagship airline of Australia to be representative of all airlines in all parts of the world, which is what this story implies, and what the headline (“First Class to Become a Thing of the Past!”) declaims. Even assuming that the Herald-Sun is correct, and first class travel in the South Pacific and Southeast Asia is on the decline, this really doesn’t tell us much about how such fares are doing in more heavily traveled areas, such as the trans-Atlantic routes, the main trans-Pacific routes, domestic travel in the U.S., domestic travel in the E.U., or travel anywhere in Africa or South America…

In fact, it seems likely that the reason Qantas is having trouble with its first class tickets might have something to do with the super-premium service offered aboard the Airbus A380 and Boeing Dreamliner aircraft entering service in other parts of their market. Even without the use of premium tickets (and we know that the claim that the competition does not make use of such fares is factually incorrect) the competition is still drawing passengers with the promise of greater luxury and comfort. Qantas has not, traditionally, attempted to position itself as a high-end provider in the market, and thus has trouble being taken seriously as a competitor against airlines that feature private compartments, full-sized beds, and similar ultra-luxury options. This is unfortunate, because Qantas does, in fact, offer some very nice accommodations at quite reasonable prices. But, if they are not able to sell any of those tickets, then abandoning those fares may actually be a good strategic move. We’ll have to wait and see…

I call all of this to your attention because there are actually two good points to be made from this same article. One would be, of course, that just because a local provider is abandoning a market segment as unprofitable does not mean that this segment will die off in all markets world-wide. And, just as importantly, don’t assume that just because the strategy a specific company is planning to use makes no sense in YOUR region of the world, that it also makes no sense in their region of the world. One of the realities of the Global Economy is that it’s no longer safe to assume that market conditions in somebody else’s corner of the field exactly mirror the conditions in yours…

In fact, it never really was. It’s just that today you will get news stories (and blog posts) bombarding your in-box in which some bright person will be trying to get you to expend much more attention and energy than the tempest in their local teapot really deserves…

Couldn’t Agree More

When the story first came out about the full-service airlines planning to charge for checked baggage – and more for each additional bag – I remember commenting that this was playing directly into the hands of Southwest Airlines, and any other discount carrier who decided to enact a similar “free luggage” policy. Even assuming that the profits made on the bag fees would cover the cost of passengers who were sufficiently irritated by the policy to change airlines – which I think we have reason to doubt – this still would not change the fact that many customers would jump ship to Southwest, increasing that airline’s profitability and cash position, and giving them a bigger club with which to beat on their full-service rivals. I didn’t make a big deal out of it at the time – it’s elementary business development theory and nothing that any first-year business school student couldn’t tell you without pausing to think. But now it seems like the President of Southwest agrees with me…

A few weeks back, the President of Southwest Airlines, Gary Kelly, was interviewed on CNBC regarding the new, increased baggage fees being charged by some of the major airlines. Kelly was pleased, to say the least, commenting that he hoped the competition would start charging $100 per bag, and more for the second one, and quipping that Southwest would be grateful for any customers the full-service airlines wanted to send him – implying that there would be quite a few of them. It’s a rather unkind remark, especially when you consider that Southwest recorded a profit of $116 million last year, during a period when most of their competition was in the red (and some of it was begging for Federal bail-out money). My question is: how come nobody else thought of an idea this simple?

Granted that Southwest has been one of the more profitable carriers for a while now, and therefore was in the best position to avoid following the industry trend toward new fees, it still seems amazing that no other company was able to figure out that baggage fees would end up being wildly unpopular, or to work out that taking the position of being the “only” airline not to charge them would be good for business. Certainly, there was no great difficulty in predicting that these new fee programs would spread industry-wide; even bloggers without any industry connections were able to work that out. Nor was it any great leap that these charges would generate widespread outrage; consumer advocates were practically foaming at the mouth as soon as these charges appeared. The only logical answer is that all of the companies in question believed that the bonanza of revenue to be gained with new fees would make up for the loss in business – which remains to be seen…

It’s bad science to claim that Southwest’s excellent year lies entirely in their refusal to charge baggage fees; there might well have been other factors involved. However, when you consider the implications of that refusal, a different picture emerges. If we consider that Southwest was moved to make this decision based on a superior understanding of what their key customer base actually wants – and of what actions might draw customers away from the competition – then this move is more than just an opportunistic move away from their industry’s mainstream, but rather the natural result of superior strategy and forward planning. It should be interesting to see what happens going forward; if the full-service carriers continue to annoy their customers to little financial benefit; if Southwest continues to give people service they want at prices that appeal to them; if the American public (or at least that part of it that travels by airplane) continues to vote with their feet…

Take the Train?

It’s a truism in America that public transportation is cheaper than driving one’s own car – and, in fact, many people are convinced that public transportation is ridden exclusively by those people who can not afford to drive. Of course, riding a bus or train is usually slower than driving, but most people will assure you that the amount you save on parking, gasoline, car repairs and insurance more than makes up for the time you are spending. Environmentalists praise public transportation, claiming that the lower emissions of one bus compared to 40 cars (or one train compared to 300 cars) is more than enough motivation for riding it. Some people will go so far as to praise the lower stress involved in riding over driving, or cite the ability to read, study, nap, or whatever during this time. But what happens when the country is in the grips of the worst recession in a generation, and the price of riding public transit isn’t cost effective?

A story reported this week in the Mercury News tells the sad tale of the Bay Area Rapid Transit system, better known in Northern California as BART. Often hailed as California’s greatest public works project ever, BARD connects most of the communities in and around the San Francisco Bay Area in a network of trains and subways convenient to both main airports and most of the business districts. But despite the pro-environmental and anti-big-business nature of the Bay Area, the BART system is currently losing on the order of $130 to $140 million each year – which has led to price hikes in an attempt to stem the losses, which has lowered ridership even further. People were reluctant to use BART when it was priced competitively – citing commutes that were as much as 8 times longer, in terms of minutes in transit, than driving a car – but with price hikes making driving cheaper, the system is doing even worse…

Some of the problem is political – the contract the city signed with the bus and train operator’s union is so disadvantageous for the city it’s surprising there haven’t been riots – and some of it is simple bureaucracy – none of the people who could change the situation has any personal or financial motivation for doing so – but most of it is just poor management. The city needs to encourage ridership any way it can, and placing various nuisance fees (what is an SFO round-trip surcharge, anyway? And in what world is it a good idea to more than double it when your ridership is already dropping?) on riders who are already dubious about your service is no way to run a railroad. Or, in this case, a public transit system…

In the long run, the City and State will continue to support the BART system, but with California’s budget already at the breaking point, the last thing they need is to put more strain of the highway system, run up costs for road repairs and bridge maintenance (above the levels those things are already at), and shovel more money into an inefficient public works project. Unless somebody in the City by the Bay wakes up and smells the smog, things are about to get worse for our friends in Northern California…

Cats and Dogs

So the kids are visiting from Atlanta, and they brought their dog with them, which makes for a certain amount of traffic control problems, as our house isn’t really set up for canine inhabitants. In particular, the living room furniture isn’t dog-proof; there’s a fair amount of stuff in our basement that would not take well to being chewed or otherwise played with, and of course we have a rather crotchety old cat who, as far as we can tell, has never spent any time around dogs. So before the arrival of our guests, I went around the corner to the Meijer hypermarket to see if I could find a couple of baby gates…

This did not prove difficult, as the Meijer has an entire section devoted to what Dave Barry calls “baby fixin’s” – everything from clothing to major pieces of indoor-outdoor furniture considerably more elaborate than my first apartment. Included in this inventory were a bewildering array of baby gates, ranging from small pieces of wicker that a healthy gerbil could push over to stainless steel and hardwood contraptions that would stop anyone under 6 feet tall/220 pounds and could be padlocked for added security. What, exactly, these are supposed to stop a baby from doing is a mystery to me; so is one line of baby gates that are so elaborate that the back of the box describes the 9 (yes, NINE!) different models the company produces and explains the features (out of a dozen or so) that different models include…

I’ve seen lines of television sets and home computers with fewer models – and fewer features to choose form. I’ve also seen cheaper television sets than some of these gates; in fact, there’s one in our bedroom right now. Feeling somewhat out of my depth, I went over to the pet section to see if there were any alternatives there. Sure enough, they carried two models of pet gate; a large (six-panel) item that can be used for a quick indoor pen or dog run, and a simple two-panel gate that can be wedged into doorways or other openings without hardware or installation. The smaller model was ideal for my purposes, and I was gratified to see that while it was a few dollars more than the cheapest baby gate, it was also much studier and better made. The equivalent product, on the baby aisle, would have been at least $15 more…

Not that this is surprising, of course. People are much more concerned with their children’s wellbeing than with that of any pet, and since most people will automatically assume that a better product must also be more expensive, it’s easy to get them to pay the extra $15 for a product that says “baby gate” on the package, even if it’s exactly the same as the product marketed in a package marked “pet gate” for structural, material, or engineering purposes. I can’t decide whether this represents a discount for pet owners or a mark-up for people with small children, but I can tell you this much: if you want to make the highest possible profit from your manufacturing activities, you should probably make products oriented toward creatures which actually HAVE money. Or at least, towards the needs of their offspring…

Now if we can just convince the cat to stop attacking the dog…

Surprise!

I'd like to think that, in general, I'm a pretty good sport. I don't believe in the type of practical joke that destroys property or actually harms people, and if I'd been on the jury in the case where some idiot decided to give someone with a severe peanut allergy something containing peanut butter, I would have been voting for conviction for Murder in the Second Degree (under the Depraved Indifference statute) -- that's not funny. But in general I'll put up with most things, and I think I'm relatively good at laughing when the joke is on me. Or, at least, I did think so until we got our most recent cellular telephone bill...

Now, it's important to realize that my wife and I didn't set out to become AT&T customers in the first place; we had quit AT&T years ago because of their substandard service and baffling billing and gone with Cingular, only to end up back with AT&T when they bought Cingular out from under us. We were about to switch to another provider when AT&T bought them, too, and in an effort to keep anyone else from losing their jobs (or their companies) as a result of AT&T pursuing us, we just gave up. Fortunately, the influx of personnel from all of these other companies seems to have been a good influence on the AT&T core personnel, and their service and performance have been improving over the past few years. And the fact that they are nation-wide comes in handy when we travel, which is a good thing when you are relocating across the country...

So imagine our surprise when our first bill arrives in East Lansing for more than 3.5 times what we had been paying, more than half of it in "roaming charges." Fortunately for us, there's an AT&T Wireless store less than a mile from our new house, and we went down there the following day to ask just what in heaven's name was going on. This proved to be rather more involved than we had expected, because the people at the store didn't know either. In fact, when we showed them the bill they appeared to be as appalled as we had been ourselves; they agreed that they're a nationwide company and none of their current contracts include roaming charges. They had to get on the phone and call their own corporate customer service to try to find out what was going on. Which, of course, we could have done ourselves, but were hoping to avoid by just showing up in person and asking our question...

So we watched the AT&T guys sit on their own voicemail system and listen to their own recorded voice telling them how important their call was, a somewhat surreal experience that would have been a lot funnier under other circumstances, but wasn't bad even so. After a few whiles, they were able to determine that despite changing our coverage four times, our phones three times and our address twice, the computer still had us on our original Cingular calling plan, even though they'd been billing us under an AT&T plan (and rates) for at least 4 years at this point. Our original rate plan hadn't been with a nationwide network, as there were no such things in 2001, and had thus included roaming charges. No one present, including the person from Bangalore who was on the telephone with us, had ever seen such a thing before...

Our story may end well, however. The AT&T guys agreed to back all of the roaming charges off of our account and make sure that we don't have any more of them. They also transferred us to a cheaper calling plan that will bring our monthly bill back into a reasonable level, and explained how to go about exchanging our California telephone numbers for local ones (which we'll probably do next month after making sure that everyone had our new land-line number here in Michigan). I can't fault the AT&T guys at the AT&T store; they were handed a potato that was not merely hot but was in fact (metaphorically) radioactive, and they handled it with dignity and professionalism. Even the call center agent from Bangalore was very nice and helpful...

But I'd still urge any of you who are thinking about relocating or even extended travel to go check on your calling plan before setting out on your journey...

Fly vs. Drive

Since we’re on the road today anyway, let’s take a moment to consider the ages-old question of should we fly or drive to our destination? Back in our salad days, when gasoline was under $1 a gallon and you could get on an airplane with as much bottled water as you wanted (without taking off your shoes, belt, or undergarments in the process), the trade-off was simple: flying was faster, driving was cheaper. Thus, if you needed to get where you were going quickly, or if your idea of a fun time does not include days of highway driving, you would fly to your destination; otherwise you might drive. But under the current conditions, this is no longer a given…

First, let’s consider the trip we’re currently on. It’s about 2200 miles from LA to Lansing, or about 34 hours of road time at 65 mph; this does not, of course, include time for food, refueling or rest stops, let alone sleeping. If you’re willing to drive for 17 hours a day you could do it in two days, but most of us would take four. If we assume $150 per night for hotels and 20 miles per gallon of gas (both optimistic under present conditions), we are talking about at least $950 for the trip, not counting food or other needs. We should probably allow another $300 or so for routine maintenance on the vehicle, since 2200 miles is most of a service cycle, and this will be hard use (2200 miles in four days). Allowing for food and other necessities, it’s going to be somewhere on the order of $1,400 to make the trip…

If I’m traveling alone, this does not compare well to the $309 I’ll pay for a ticket with 2 stops (Las Vegas and Chicago, for example) or even to the $825 I’ll pay for one stop in Chicago. It doesn’t even compare well with flying to Chicago and renting a car for the rest of the way. If I’m traveling with a companion, however, it would be at least $600 and more likely $900 to fly with 2 stops, and $1,700 to fly with 1 stop – no longer a clear advantage to the airlines. And if I’ve got three people with me, it’s going to be at least $1,400 to fly, and more likely $3,200 – advantage car. Although flying is still faster…

Now let’s take a shorter example. It’s about 680 miles from East Lansing to New York City; a drive that will take all day (about 10 hours+) and cost about $150 in gas, and let’s say $100 in repair costs. If we fly through Cincinnati (there are no direct flights to or from Lansing to either coast) the cost will be $242, and the trip will take a bit over 6 hours – if the planes are on time. But this time factor does not consider having to be at the airport 2 hours before your plane leaves, or the time it takes getting from East Lansing to the Capital City Airport (10 minutes) or the time it takes getting from JFK to Manhattan (90 minutes or more). If I’m by myself, the price difference is a wash; if I’m traveling with anyone the car trip is significantly cheaper, just as you would expect. What is bizarre is that with the common delays in air travel and the need to change planes, the car trip DOES NOT take any longer…

Even worse, from where I’m sitting (which today is the driver’s seat of a Pontiac Torrent), is the surcharge we would face getting all of this cargo onto an airplane. With most U.S. carriers now charging extra for each checked bag, we’d be looking at another $300 to $900 in fees, assuming they’d let us check this much baggage in the first place, which they probably wouldn’t. This might not apply on a weekend trip to see my folks in New York, but it would definitely apply to the voyage we are currently undertaking…

The bottom line is that even the current gas crisis has not changed the equation all that much. It’s still cheaper to drive, and in the post 9/11 landscape, it isn’t always faster to fly, either. Which would make me feel a lot better if the price of gasoline wasn’t still rocketing up…