The CSR Newsletters are a freely-available resource generated as a dynamic complement to the textbook, Strategic Corporate Social Responsibility: Sustainable Value Creation.

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Thursday, October 19, 2017

Strategic CSR - Airlines

The article in the url below discusses the extent to which executive compensation tied to shareholder interests distorts decision making in the airline industry. What is interesting, though, is not that this happens (it has been a feature of western capitalism for a while now), but how the degree of influence has shifted so dramatically in this particular industry in a relatively short period of time:
 
"Five years ago, American Airlines factored in on-time arrivals, lost baggage and consumer complaints to help calculate annual incentive payments for top management. Today, these bonuses are based exclusively on the company's pretax income and cost savings. … 'Fifteen years ago, airlines competed with each other over who could buy the most planes or have the most routes,' said Jamie Baker, a top airline industry analyst at JPMorgan Chase. 'Executives are just as competitive today, but it's about who can achieve an investment-grade rating first, who can be a component in the S. & P. 500, and who has better returns for investors.'"
 
The article argues that this heightened pressure results from the relatively low levels of economic growth in recent years. When growth is low, increased returns for shareholders come at the expense of the interests of other stakeholders:
 
"Mature industries — where double-digit annual profit growth is a reach in the best of times — are especially vulnerable to activist investors' demands for board seats, bigger stock repurchases and other short-term financial rewards. The pressure is especially brutal in the airline industry because the key expense, fuel, is for the most part beyond management control. Yet airline executives have largely convinced Wall Street that the bad old days of bankruptcies and fare wars are over, replaced by the kind of predictable annual profits more common among industrial companies. That's among the reasons fees have popped up in recent years for everything from checking bags to securing an assigned seat before boarding. Known on Wall Street as ancillary revenue, this stream of income is especially favored by investors because it doesn't swing sharply the way fares do."
 
What is equally interesting, however, is why the airline firms' other stakeholders allow this disproportionate transfer of capital to shareholders to continue:
 
"And so far, despite occasional bouts of air rage and frequent consumer complaints, Wall Street has been getting what it wants. United's stock has surged to more than $80 per share from $25 per share five years ago, with profit margins rising to 13.6 percent from 3.7 percent over the same period. Overall industry margins hit 16.3 percent, up from 5.2 percent in 2012."
 
The lack of resistance is placing a significant amount of pressure on the legacy carriers to follow suit or be left behind:
 
"The pressure on United, American and other giants is only going to increase with the rise of so-called ultra-low-cost carriers like Spirit, Frontier and Allegiant. In fact, American and United are rolling out a stripped-down new class called Basic Economy. Here, in exchange for the cheapest tickets, fliers can't choose their seats before checking in and are more likely to be stuck in the middle of the row. They board last and are less likely to be able to sit with companions. No carry-on luggage is permitted, forcing anyone without elite frequent-flier status to check anything larger than a backpack — for a fee."
 
Again, we have no-one to blame but ourselves for the standard of customer service we now have to endure every time we fly:
 
"'The response isn't to Wall Street. It's to customer behavior,' said Alex Dichter, a senior partner at McKinsey who works with major airlines. 'About 35 percent of customers are choosing on price, and price alone, and another 35 percent choose mostly on price.' Mr. Dichter noted that when American added two to four inches of legroom in coach in the early 2000s, 'as far as I know, the airline didn't see one bit of improvement in market share or pricing.' 'The great irony is that most C.E.O.s would love to compete on product and experience,' he added. 'It's much more fun. The problem is that customers aren't paying attention to that.'"
 
Take care
David
 
 
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Route to Air Travel Discomfort Starts on Wall Street
By Nelson D. Schwartz
May 28, 2017
The New York Times
Late Edition – Final
A1