Recent events in the financial and banking industries have caused many to reevaluate their thoughts relating to government regulation of industry. The “sine qua non” is the need to find ways to reduce the influence of special interest groups (so that Congress is not the fox guarding the chicken coop). But that still leaves the question of: when is government regulation (assuming it is “effective” regulation) appropriate?
An answer may be found by looking at two very different industries, in both cases from the consumer’s point of view. The issue is responsiveness to customer needs (customer service).
The airline industry has seen hard times. The once-world-standard-setting airlines of Pan Am and TWA are history. Eastern, Braniff and People Express are gone while others struggle on. There are many reasons for the problems, but one of the most important may have been a transition in management. Founders, committed to the excitement of aviation, were supplanted by managers who focused on financial statements and somewhere customers -- and employees -- got lost in the shuffle. Airlines took on huge debt structures. They lost their flexibility to deal with economic fluctuations, let alone the ability to weather economic reversals. And deregulation rendered the consumer -- the customer on whom they depend -- a largely irrelevant part of the equation.
The concept of deregulation was to let free-market forces foster competition, thereby driving down prices while improving service and creating customer loyalty. But there is a catch. The entry level into the industry is not like opening a new candy store. Enormous investment is required, and political muscle is needed to obtain routes, space at airports for reception areas and gates. There is a “protective barrier” that dulls the impact of competitive action.
A plane that flies full generates more profit than one that is less than full. So the airlines cancel flights, resulting in situations where many flights may be oversold. The consumer loses flexibility to travel where and when he or she wants. This is one trade-off -- a bad one for the traveler.
The fare calculations conform to no known form of logic. One passenger, sitting next to another, may have paid many times more for his/her seat. Most airlines quote fares devoid of substantial taxes and airport fees, and every attempt is made to collect “add-ons." An airline will charge an additional fee and wait to see if the other airlines follow. More and more these days, the others do and the fee becomes permanent. The consumer has no choice.
Today’s add-on fees include checked luggage, the ability to book a seat in advance, preferred seating (e.g. an aisle vs. a center seat, snacks and meals (even on long flights). A telephone call to make a reservation will most likely incur and extra fee. And non-refundability, change fees, and even standby-change fees are the industry norm. The email confirmation I received for a recently purchased flight from Phoenix (a morning departure) said it all. It listed the “benefits” that I would receive: a seat assignment at check-in; $20 for the first checked bag and $30 for the second; the ability to purchase Direct TV, snacks, and premium beverages; a $100 charge to standby for another flight to the same airport on the same day; a $100 change fee; and mileage in their frequent flyer program. Can you imagine what the non-benefits were?
Actually, I found out. They were unable to deliver me to my destination in a timely fashion. The problem: the plane they planned to use had been hit by lightening and had to be inspected. Rather than assign another aircraft, they let everyone dangle. Because it was spring break, their next flight to my destination which was not overbooked would get me there more than 24 hours after I had been scheduled to arrive -- too late to attend the function I was hosting. They said the problem was “weather related,” so it was not their responsibility and what I did between now and then was up to me. They finally did help by finding the last two seats out of Phoenix that day, on a red-eye special. But as is the norm under deregulation, tickets are no longer transferable between airlines, so we had to pay the full last-minute fare for the tickets (three times what I had contracted for) and now have to do battle to get a refund for services not provided.
As an aside, unfortunately I have had reason to contact the airlines for a bereavement fare. On the Internet, I found a last minute fare (normally, under $400) for $800. I called the airline about the bereavement fares they offer. They expressed their sympathy and then told me that I could buy a ticket for the same seat as on the Internet for $1,300. Their explanation: the bereavement tickets are changeable at no additional fee. So much for airlines with a heart!
Now let’s switch to an industry with very different characteristics. We subscribe to a service that delivers DVDs to our home. Competition is stiff, not only from other providers, but the consumer has alternatives to pursue (TV, the movies, the Internet, etc.). I’ve had several problems with the disks that I’ve received. Each time a call to the telephone number they provided resulted in a human at the other end in less than a minute (no infuriating waits, listening to canned music or advertising and having to press number after number to get to where you want to be -- as you will find with most airlines). The first response was “we are sorry you are having a problem, thanks for bringing it to our attention, how can we help you?” On each occasion, within a few minutes, the problem was resolved in a manner that builds brand loyalty and leaves the consumer feeling “there’s a company that cares.”
The point in all this is that regulation is probably the last thing needed in the second situation, and probably one of the most important measures that should be taken in the former. When companies lose sight of the fact that they exist to provide service to people, they no longer have the right to exist. Theoretically, the free market should take care of their demise. But when they are providing essential services in industries where entry is limited, and where collusion is permitted -- they can survive. Those are the industries that should be targeted for government regulation -- if only we can get the regulators to truly regulate with a balanced approach to the needs of the public and of the industry. In the long run, the two sets of interests should coincide. The sad part of this story (at least as regards industries that need regulation) is that companies don’t make decisions. It’s people within the companies who make the rules and who have become callous to the needs of their fellow human beings.
Dr. Melvyn Copen lives in both Georgia and Arizona. He is an educator and businessman who has worked and lived in many foreign countries and provides consulting services throughout the world. His column appears every other Wednesday. Please share your comments with him via e-mail at melcopen@hotmail.com.
An answer may be found by looking at two very different industries, in both cases from the consumer’s point of view. The issue is responsiveness to customer needs (customer service).
The airline industry has seen hard times. The once-world-standard-setting airlines of Pan Am and TWA are history. Eastern, Braniff and People Express are gone while others struggle on. There are many reasons for the problems, but one of the most important may have been a transition in management. Founders, committed to the excitement of aviation, were supplanted by managers who focused on financial statements and somewhere customers -- and employees -- got lost in the shuffle. Airlines took on huge debt structures. They lost their flexibility to deal with economic fluctuations, let alone the ability to weather economic reversals. And deregulation rendered the consumer -- the customer on whom they depend -- a largely irrelevant part of the equation.
The concept of deregulation was to let free-market forces foster competition, thereby driving down prices while improving service and creating customer loyalty. But there is a catch. The entry level into the industry is not like opening a new candy store. Enormous investment is required, and political muscle is needed to obtain routes, space at airports for reception areas and gates. There is a “protective barrier” that dulls the impact of competitive action.
A plane that flies full generates more profit than one that is less than full. So the airlines cancel flights, resulting in situations where many flights may be oversold. The consumer loses flexibility to travel where and when he or she wants. This is one trade-off -- a bad one for the traveler.
The fare calculations conform to no known form of logic. One passenger, sitting next to another, may have paid many times more for his/her seat. Most airlines quote fares devoid of substantial taxes and airport fees, and every attempt is made to collect “add-ons." An airline will charge an additional fee and wait to see if the other airlines follow. More and more these days, the others do and the fee becomes permanent. The consumer has no choice.
Today’s add-on fees include checked luggage, the ability to book a seat in advance, preferred seating (e.g. an aisle vs. a center seat, snacks and meals (even on long flights). A telephone call to make a reservation will most likely incur and extra fee. And non-refundability, change fees, and even standby-change fees are the industry norm. The email confirmation I received for a recently purchased flight from Phoenix (a morning departure) said it all. It listed the “benefits” that I would receive: a seat assignment at check-in; $20 for the first checked bag and $30 for the second; the ability to purchase Direct TV, snacks, and premium beverages; a $100 charge to standby for another flight to the same airport on the same day; a $100 change fee; and mileage in their frequent flyer program. Can you imagine what the non-benefits were?
Actually, I found out. They were unable to deliver me to my destination in a timely fashion. The problem: the plane they planned to use had been hit by lightening and had to be inspected. Rather than assign another aircraft, they let everyone dangle. Because it was spring break, their next flight to my destination which was not overbooked would get me there more than 24 hours after I had been scheduled to arrive -- too late to attend the function I was hosting. They said the problem was “weather related,” so it was not their responsibility and what I did between now and then was up to me. They finally did help by finding the last two seats out of Phoenix that day, on a red-eye special. But as is the norm under deregulation, tickets are no longer transferable between airlines, so we had to pay the full last-minute fare for the tickets (three times what I had contracted for) and now have to do battle to get a refund for services not provided.
As an aside, unfortunately I have had reason to contact the airlines for a bereavement fare. On the Internet, I found a last minute fare (normally, under $400) for $800. I called the airline about the bereavement fares they offer. They expressed their sympathy and then told me that I could buy a ticket for the same seat as on the Internet for $1,300. Their explanation: the bereavement tickets are changeable at no additional fee. So much for airlines with a heart!
Now let’s switch to an industry with very different characteristics. We subscribe to a service that delivers DVDs to our home. Competition is stiff, not only from other providers, but the consumer has alternatives to pursue (TV, the movies, the Internet, etc.). I’ve had several problems with the disks that I’ve received. Each time a call to the telephone number they provided resulted in a human at the other end in less than a minute (no infuriating waits, listening to canned music or advertising and having to press number after number to get to where you want to be -- as you will find with most airlines). The first response was “we are sorry you are having a problem, thanks for bringing it to our attention, how can we help you?” On each occasion, within a few minutes, the problem was resolved in a manner that builds brand loyalty and leaves the consumer feeling “there’s a company that cares.”
The point in all this is that regulation is probably the last thing needed in the second situation, and probably one of the most important measures that should be taken in the former. When companies lose sight of the fact that they exist to provide service to people, they no longer have the right to exist. Theoretically, the free market should take care of their demise. But when they are providing essential services in industries where entry is limited, and where collusion is permitted -- they can survive. Those are the industries that should be targeted for government regulation -- if only we can get the regulators to truly regulate with a balanced approach to the needs of the public and of the industry. In the long run, the two sets of interests should coincide. The sad part of this story (at least as regards industries that need regulation) is that companies don’t make decisions. It’s people within the companies who make the rules and who have become callous to the needs of their fellow human beings.
Dr. Melvyn Copen lives in both Georgia and Arizona. He is an educator and businessman who has worked and lived in many foreign countries and provides consulting services throughout the world. His column appears every other Wednesday. Please share your comments with him via e-mail at melcopen@hotmail.com.