Hard Landing
Page 20
Braniff’s powerful hub vividly demonstrated another inviolate rule of the airline business: Whoever has the most flights from a city gets a disproportionate share of the passengers. Frequency enhanced convenience—the convenience of flying the day of your meeting, not the night before; the convenience of arriving just an hour before your business was scheduled to begin. Frequency also preserved valuable flexibility: a business traveler could catch a later flight if his meeting ran over, or surprise the family by grabbing an early flight home. The marketing benefit of frequent service was so ironclad that it was expressed in its own mathematical representation, called the S-curve, a graph that showed that by maintaining 60 percent of the flights from a city, for instance, an airline invariably drew much more than 60 percent of the passengers.
Though Braniff’s was among the earliest and most brilliant demonstrations of hub power, the company’s glory days were not to last. The beginning of the end, improbably enough, had begun with the Watergate scandal.
With their gaily painted airplanes and smartly robed flight attendants, Acker and Lawrence in the early 1970s eagerly wanted more destinations to serve, but the government was making none available, except overseas, as part of the slow dissolution of Pan Am’s monopoly. The White House played a prominent role in these foreign route awards. Just as American had, Braniff felt the hot breath of the Committee to Reelect the President. Before long Acker and Lawrence went to Washington to deliver personally an envelope bearing $40,000 in hundred-dollar bills to the Nixon people.
After the illegal contribution was made known, the Securities and Exchange Commission launched an investigation of the internal money-laundering maneuvers conducted to generate the cash off the books. A story began to circulate in the industry that Braniff was being pressured to offer up a human sacrifice, just as American had ousted George Spater. Acker, meanwhile, had also been called before a grand jury investigating whether Braniff used illegal dirty tricks in its effort to block Southwest from going into business.
In the midst of all these controversies Acker announced he was quitting Braniff. Acker told people he yearned to escape from the shadow of Harding Lawrence, who had become the more visible figure in Braniff’s success. Throughout the airline industry, however, people were convinced that Acker had another motive in leaving: to protect Lawrence, and Braniff itself, from the long arm of the law.
With Acker departed, Braniff was without its ballast. Previously a Spartan, cost-conscious operation, Braniff soon opened a massive new headquarters campus at DFW, with a pair of olive trees flown in from Greece for the courtyard. (They died the following winter.) Having already hired Alexander Calder to paint the exteriors of some of the company’s airplanes in garish designs, Lawrence now commissioned Calder to produce dozens of works for the walls of corporate offices. Lawrence installed his 32-year-old son in a high-visibility vice president’s job. The company chose an advertising slogan that reflected the image of the chairman as much as the image of the airline: “When you’ve got it, flaunt it!”
Lawrence was convinced that deregulation would be a disaster and that Congress would quickly reverse it. Not one to waste an expansion opportunity, Lawrence in the hours before deregulation became law instructed his man in line outside the CAB to apply for every new route he could lay his hands on. Lawrence got his wish, winning dozens of routes. But under the government’s use-it-or-lose-it policy, Braniff had to begin flying the new routes almost immediately. Lawrence dispersed many of the planes from his hub in Dallas to such far-flung destinations as Albany, Birmingham, and Cleveland. He borrowed massively in a crash campaign to bring in still more planes. On one day alone at the peak of the expansion Braniff commenced service to 16 additional cities, a feat that no airline had ever come close to achieving. Lawrence had also added service to London and other cities overseas. As the expansion ran amok, Braniff’s newly hired flight attendants literally lost track of where they were landing as they announced the arrival of their flights. From 1975, when Acker had left, to 1980, when American was moving to town, Braniff nearly doubled in size, from the tenth largest U.S. airline to the eighth.
Bob Crandall was practically rubbing his hands together as he watched Harding Lawrence disassemble Braniff’s beautiful hub at DFW. Just then the perfect plan popped out of the Crandall idea factory.
Tom Plaskett, Crandall’s successor in the marketing department, had been brooding sternly over ways to cut costs. In the delicate dance of planes, employees, and passengers at DFW, American, it appeared, was inefficiently matching ground crews with flight schedules. As it switched more planes into Dallas, American was clustering arrivals and departures around peak times of day, helping passengers to make connections without forcing them to idle away hours in the molded plastic chairs of the airport. (Frozen yogurt was not yet a commonplace diversion.) But while it convenienced passengers to bunch arrivals and departures, the practice also created long stretches in which baggage handlers and other members of the ground crew had little to do. By spacing flights more evenly, it would seem, American could avoid scheduling work crews at the level dictated by the peak of operations.
Nothing might have pleased Plaskett more than to race to Crandall with his plan to cut manpower costs at DFW, but Plaskett had to do his homework first. The issue was delicate because American’s head scheduler was close to Crandall and resisted reporting to Plaskett. So Plaskett went to Melvin E. Olsen, a more junior executive in the scheduling department. Mel Olsen had started out as a baggage handler for Western Airlines, chasing laboratory mice around the cargo hold whenever a box bound for the University of California at San Diego broke open. Olsen had been displaying computer expertise long before he had so much as touched one. After becoming a schedule analyst at Western in the 1960s he had kept track of the fleet by running an ice pick through a series of hand-punched cards in which the holes matched up according to aircraft types.
“Should we de-peak DFW?” Plaskett asked Olsen.
Instinctively Olsen knew the answer was no; if anything, he thought, American should move in the opposite direction. It was all a question of elementary mathematics.
Every single airline market involved an origin and destination—a city pair. Airlines traditionally served these markets by flying “point to point” with convenient, nonstop service. But by requiring passengers to change planes at a hub airport, an airline could vastly increase the number of city pairs it served. In its effort to ensnare passengers from Eastern in the southeastern United States, Delta, for instance, had long followed this practice in Atlanta, giving rise to the often-repeated Dixie complaint that whether flying to heaven or hell, you had to change planes in Atlanta. Braniff, and later American itself, was conducting the same sort of schedules in and out of Dallas.
Olsen realized that in a mathematically perfect world the number of markets an airline could serve from a hub increased exponentially as the number of cities from the hub increased arithmetically. This presupposed, however, that every passenger on every arriving flight had the opportunity to get aboard any one of the departing flights, all of which required the airline to schedule the arrivals as closely together as possible, and the departures as well. Olsen knew that to gain the full geometrical advantages of a hub, flights would have to be precisely timed to arrive and depart in “complexes” or “banks.”
The beauty of complexing appeared even greater when Olsen ran computer simulations on the costs involved. As the number of cities was increased around a hub, the number of passengers flying through it increased exponentially, but the number of people on the ground required to service the flights rose only arithmetically. Using American’s cost and travel-pattern data at DFW, he found that each city added to an existing bank of flights brought in 73 new passengers a day, at an average fare of $180—a total of $13,140 in additional revenue. But the incremental cost of servicing those additional passengers totaled only $560. American shouldn’t be de-peaking DFW, Olsen realized. American should be adding as many f
lights as possible and scheduling them in bunches as tight as possible.
Olsen presented the results to Plaskett, who immediately grasped their significance. “Mel,” Plaskett said, “I want to show this to Mr. Crandall.”
Crandall had several good reasons to latch on to Olsen’s findings. For one, this was leverage you had to love—a program that would increase costs, yes, but would increase revenues by a much greater factor. For another, Crandall knew that deregulation, reduced to its essence, meant grabbing and keeping airline passengers—controlling them for their entire journey. Olsen’s plan would help American avoid handing off connecting passengers to competing airlines. Third, the expansion would also help American seize more of the business in Dallas from which Braniff now appeared to be walking away.
Finally, it was evident that a third party was now planning to make the scene at DFW: Delta Air Lines. Gravely for American, Delta was threatening to make DFW its next proving ground for the hub concept it was applying so successfully against Eastern in Atlanta. There was no way Bob Crandall was going to let Delta get the jump on American at DFW. Crandall ordered the airline to plan for peaking DFW beginning with its summer schedule in June 1981.
But which new cities should American serve from Dallas? Crandall began reviewing a list of destinations that could be added to the flight schedules; as it happened, he chose cities that the weakened Braniff already served—Austin, Amarillo, Corpus Christi, Midland, Lubbock, and others.
The big day was barely four months away, and the local managers at DFW were beside themselves with anxiety. It can’t be done.… That’s too many flights! … We need more belt loaders! But Crandall would tolerate no such treason. Hearing of any obstacle to the hub plan, he immediately blew it away.
While gearing up for the big hub buildup, Crandall’s people were also putting the finishing touches on a secret project that had been years in the making—a device they recognized would have even greater value as a way of addicting passengers to American’s big new hub.
The project dated to Crandall’s years as the marketing chief. When policy makers began using the word “deregulation,” Crandall began asking how American could maintain the loyalty of its long-standing customers, to say nothing of preventing new competitors from grabbing any first-time travelers. Crandall wanted some way of building brand loyalty for airline seats, which were essentially commodity products.
Meanwhile the endless computer studies at American had turned up another fascinating fact. Although American carried 25 million passengers a year, something like 40 percent of its business came from about 5 percent of its customers. There were that many repeat customers—“frequent fliers,” one might call them. Any incremental customer was welcome, of course, but every incremental frequent flier was, on average, nearly 10 times more valuable.
The idea of targeting repeat customers was an old one in the airline business, and as with so many marketing innovations it began at American under C. R. Smith. About the time he was introducing the DC-3 in 1936, Smith was made an honorary Texas Ranger. Couldn’t American, he asked, issue membership plaques in a club for good customers? Marketing its DC-3S as “Flagships,” American expanded on the nautical theme by naming this new organization the Admirals Club.
More than 40 years later Crandall’s people were looking for ways to reawaken such brand loyalty. “Do we even know who our frequent customers are?” they asked. The answer was not really. Before the great travel agent onslaught of the 1970s, back when businesspeople (and their secretaries) made most of the airline reservations, Sabre was programmed to search for multiple appearances of the same telephone number and periodically compile a list of the names associated with those numbers. (Surnames were too common and misspelled too frequently to be of much value in searching electronically.) The telephone area code located the individual in a particular state; American then searched driver’s license records for addresses. Through this laborious and expensive process American was able to maintain a mailing list of repeat customers totaling about 150,000.
But in the early 1980s the same phone numbers were showing up over and over, by the hundreds and thousands—the phone numbers of travel agencies making reservations on behalf of their clients. American no longer had a reliable way of identifying repeat passengers. Travel agents were standing in the way of American’s contact with its customers. The wizards of Sabre were ordered to find a way of assigning a number to every frequent passenger, whether the reservation came through a travel agent or not.
Tom Plaskett had been supervising the brand loyalty project that Crandall had started but failed to complete as head of marketing. Plaskett at one point was reminded of the original brand loyalty scheme in the retailing trade S & H Green Stamps. Plaskett recalled his boyhood experience of licking the stamps that had accumulated in a kitchen drawer and fastening them in redemption books when the family needed a new toaster or some such, a ritual repeated in millions of postwar households across the country.
Plaskett’s Green Stamps reverie triggered a more recent memory. In a round of sales calls on major travel agencies and corporate accounts, Plaskett had been surprised to observe an old Admirals Club plaque hanging on a customer’s wall.
“What is that?” Plaskett asked.
The Admirals Club had long ago been discontinued in a cost-cutting move. The CAB also helped to push it out of existence by forcing airlines to open their airport lounges to anyone willing to pay an annual fee, eliminating the invitation-only exclusivity that gave the clubs cachet. Yet years later, Plaskett noted, here was this man still proudly displaying his Admirals Club membership. And on that plaque were affixed little gold stars that had been provided by American Airlines, one for every 100,000 miles the man had flown.
That was it. American could have its customers accumulate mileage instead of Green Stamps, earning free travel instead of household appliances.
The concept was not unheard-of among the airlines. Southwest Airlines already had a program in which secretaries got free travel after booking so many trips for their bosses. Lorenzo had been passing out scrip in $10 denominations to passengers at DFW—coupons good for future travel on Texas International. On the hotly competitive Los Angeles-to-San Francisco run, Western Airlines distributed punch cards to passengers good for a $50 discount after five validations, following a promotion long in use by West Coast car washes.
Still, the notion was controversial when broached inside American. This would be a frequent-flier program on a scale unseen in the airline industry. Some of the American people warned that it might be seen as a breach of a long-standing taboo against corporate discounting. Because frequent fliers tended to be business travelers on expense accounts, corporations could legitimately claim the free travel awards as their property. In that case American would be seen as rebating to major corporations, which could touch off a scramble by other airlines to begin cutting prices outright for their major corporate customers. The idea filled some of Crandall’s people with dread.
Plaskett and his supporters countered that individual customers would never allow their employers to take away their free travel awards. Although conducted in the open, this program in every respect would be nothing more than a kickback—the payment of something valuable to an individual in order to influence his decision in spending somebody else’s money. “It’s based on individual greed,” Plaskett would later comment.
While also gearing up for the big expansion at DFW, Crandall, Plaskett, and their underlings began putting the frequent-flier program in place. The element of surprise was critical. Other major airlines would have no choice but to match the program, but it would take them months to catch up, months in which American would have the entire field to itself. By having all the necessary Sabre programming written and debugged in advance, American would allow passengers to start accumulating mileage on the very day that it announced the program.
Everyone assigned to the project signed an oath of secrecy. One of Crandall’s top sal
espeople, Michael W. Gunn, was reminded of growing up near the Rose Bowl in Pasadena. Whenever Michigan came to play, giant screens went up around the sidelines to keep stadium visitors from watching the team practice that year’s Secret Play. This frequent-flier thing—it was just like the Secret Play, Gunn thought.
• • •
On June 11, 1981, at DFW, American Airlines conducted the biggest overnight expansion in airline history. The evening sky hanging over Dallas and Fort Worth suddenly resembled a suburban backyard teeming with fireflies. There were airplanes everywhere.
The noise, however, was less benign. DFW had been built with two parallel landing strips running north and south. Jets landed and took off over the pastures, lakes, and ghettos of light industry lying between Dallas and Fort Worth. But American’s mammoth expansion required the airport to make use of a third runway—an alternate, diagonal ribbon of concrete known as Runway 13L, intended mainly for use during heavy crosswinds. At the end of the diagonal runway lay the drywall subdivisions of Irving, population 105,000.
The roar of an old 727 accelerating on takeoff could crack the sky and split the ears, often approaching the threshold of pain at upwards of a mile away. Beyond Runway 13L, in the middle of an area that local boosters called the Metroplex, the jet din was radiating repeatedly, on a schedule like Chinese water torture for the eardrums. Tom Plaskett, who had been intimately involved in planning the flight expansion, happened to live 2.3 miles from the end of the runway. “My God,” he said, “what have I done?”
The ensuing community uproar was almost as loud. Overnight, pressure mounted on the FAA, the airport authority, and American itself to cut way back. Crandall thrust himself into battle mode. The whole Dallas expansion was suddenly in jeopardy. Crandall bought local TV time and recruited employees as lobbyists, telling them their jobs were in jeopardy. American wasn’t to blame for the noise problem at DFW, Crandall said. The culprit, he said, was Southwest Airlines.