Thoughts On United Airlines

Other than the link to my earlier commentary on airline bailouts, here are some more thoughts about United’s bankruptcy. Ownership, and in the case of United it’s employee stock ownership (ESOP), is something that we economists tout as an important tool in aligning the incentives of employees, management, and customers. However, ownership is neither necessary nor sufficient to ensure that alignment in the real world, unlike in the sterilized blackboard universe of graduate mechanism design classes. As a counterexample look at Southwest Airlines (of course): one of the most unionized airlines in the industry, without an ESOP ownership structure, and they continue to be profitable and have happy employees, management and customers.

Now let me put on my management consultant hat: if you implement that ownership through an ESOP but you don’t think about the mission and the culture of the organization, and how each and every employee contributes to that mission, then you’re going to get power struggles and sniping and conflict and, voila, a lack of incentive alignment among employees, management and customers. That’s where Southwest’s business model can inform the failures of United’s business model: Southwest engages every single employee in the mission of getting customers where they want, cheaply and efficiently, and having fun in the process. United’s employees have not been enrolled in the mission sufficiently to get incentive alignment and to keep customers happy.

I stopped flying United in July, swearing never to set foot on a United flight unless absolutely necessary, because they don’t deliver on the mission of customer service coupled with safety that should be paramount in the industry.

This article by Robert Hall at the Hoover Institution (with thanks to John Irons for the link) does a very nice job of pointing out the difference between the old airline model and the new airline model. It’s a complex comparison, involving bailouts, hub-and-spoke versus point-to-point route structures, and other issues, but he is making the important point: airline business models need to evolve.