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The scandal over the forcible removal of a passenger from an overbooked United Airlines flight from Chicago to Louisville, Ky. earlier this week promises to bring lessons on several fronts. It will of course compel United Airlines to review its policies on dealing with passengers on oversold flights, and critics hope it will spur a more humane response to such situations. But the incident also exposes the fact that airlines like United have little flexibility in handling unanticipated situations with shorter-haul flights, and they face pressures to maintain profit margins and cope with demand surges without commensurately expanding capacity.
Public outrage has been swift, brutal and widespread since a video went viral of the eviction of David Dao, a physician. Seeing a marketplace backlash, investors also sold off shares of United Continental Holdings. It fell 3.4% in four days, wiping out nearly $1 billion in market cap. United CEO Oscar Munoz has apologized, but his initial attempt was considered inadequate. Moreover, in a letter to employees, he praised them “for following established procedures.” After public outrage continued, Munoz followed up with a full, but delayed apology. “We are going to fix what’s broken so this never happens again,” Munoz said in a subsequent press release.
“The apology from Munoz is late, but it’s great to have it; at least 30 million people in China have viewed it,” said Wharton management professor Michael Useem, who is also director of the school’s Center for Leadership and Change Management. The ejection of Dao, a Vietnam native who now lives in Elizabethtown, Ky., has caused uproar on social media sites in China, where many wondered if Dao was targeted due to his ethnicity. “The apology is critical for restoring a notion among the viewing public that that’s not going to happen to us,” Useem added.
In the U.K., companies in similar situations often have “a quick, sensible and sensitive response,” said Kenneth Button, professor of public policy at George Mason University’s Schar School of Policy and Government and an expert on transportation policy. However, in the U.S., company CEOs or spokespersons are fearful of facing legal action for what they say and tend to be reticent in their initial comments, he noted. The resulting delay in issuing a more considered response is “damaging” to all types of companies and not just airlines, he added.
The apology masks deeper problems that United faces, and the Sunday incident was a symptom of those. United Airlines has been under pressure from investors to strengthen its senior management with people who have more experience in airline operations, especially since Munoz came from the railroad industry, noted John Strong, professor of finance and economics at the College of William & Mary’s Raymond A. Mason School of Business. The airline also faces pressures to improve its profitability, which is just about a third of what other major carriers make, he added. “That puts lots of pressure on the system to push to the limit all the time.” He noted that this is particularly true of small airline operations at hub airports, and described them as “the most unreliable and most inconsistent.”
Useem, Button and Strong discussed the wider implications of the United Airlines incident on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)
“We do learn most about what can go wrong when things do go wrong, and now we have to reconstruct.”–Michael Useem
Will Public Outrage Last?
The backlash over the incident may wane over time, according to Maurice E. Schweitzer, Wharton professor of operations, information and decisions, whose research focuses on deception, trust and emotions. “Consumer facing corporations, such as United, care about their image. [But] media attention on their misdeeds tends to be fleeting. The news cycle moves very quickly, and we shift our attention away from negative events,” he said.
But a public show of remorse can make a difference, noted Schweitzer, who also closely studies corporate apologies. “An effective corporate apology can dramatically shift perceptions, but even a mediocre one, such as the one United delivered, will help,” he said. Many have called for a boycott of United after the incident, but Schweitzer said such protests are generally ineffective, because they require sustained effort and leadership. “As consumers shift attention, they often choose convenience over principles to which they are not deeply committed.”
“People just want a cheap way going from A to B,” said Button. Added Strong: “It is an extraordinarily price-sensitive market.”
Useem noted that many people have said they would boycott United flights but he expected that sentiment to pass. Rather than boycotts, United Airlines reviewing its policies is where action should begin, he said.
That seemed to be the direction from the stock market, too, as investors stopped punishing United’s stock after Munoz offered his apology. “The share markets sometimes are episodic in character; they react shortly and then they recover,” said Strong.
However, United would have to watch out for any dip in bookings in China, where the reaction was dramatic and which happens to be a huge and important market for the airline, said Strong. “If United has a negative reaction in the Chinese market, that has a significant impact on the overall performance of the airline.”
“If United has a negative reaction in the Chinese market, that has a significant impact on the overall performance of the airline.”–John Strong
Focus on Correcting Policies
According to Useem, Munoz’s apology is only “a small, first step” towards rethinking United’s policies. He said the problems in the United case were caused not as much by the airline staff as by the policies laid out by the company’s management. “This is Enterprise Management 101,” he said, adding that in the days ahead, United’s management would have to review its policies that led to a passenger being dragged out. He compared the United case with those at Volkswagen and Wells Fargo, where the pressure to perform against odds led employees to shortchange their customers.
Useem said airlines typically are prepared with crisis management responses, such as to accidents, but United was clearly not prepared well enough in the latest case. He noted that when United Airlines initially explained that it had removed four passengers from the controversial flight, “it was not because of overbooking but because the company had a policy of flying pilots at the expense of passengers if needed.” That policy was “a time bomb waiting to happen,” he added. “We do learn most about what can go wrong when things do go wrong, and now we have to reconstruct,” he said.
Button called for a closer look at what exactly went wrong last Sunday, and who was guilty of forcibly dragging out Dr. Dao. He noted that United CEO Munoz had defended his staff, and wondered if the root of the problem was actually at the airport. “We tend not to think of that,” he said.
An Industry-wide Phenomenon
Button said the problem is not unique to United. He pointed out that a similar situation caused, for example, the massive delays Delta Air Lines had to deal with last week during a storm in Atlanta. Airline passengers being forced to give up their seats is not a new occurrence. Following news of the incident involving Dao, another United passenger, Geoff Fearns, came forward with his experience of being forced out of a first-class seat on a different United Airlines flight to make room for another, higher-priority passenger, and assigned a coach-class seat under threat of being handcuffed. Unloading passengers is not unusual among airlines, noted Button, who blamed United’s latest controversy on its “bad luck.”
The situation of United Airlines having to deal with an overbooked flight was to be expected, and the airline had not prepared itself for it, said Strong. In fact, the airline seemed to have dug its own pit in this case. United’s operations at Chicago’s O’Hare airport are running about 88% full, which means about 25% of its flights are completely full, Strong explained. To make matters more difficult, smaller flights account for 60% of the total flights out of O’Hare, and they tend to offer lesser maneuvering room than longer-haul flights. “United has built no cushion in its system to take care of irregular operations, delays, crew changes and so on,” he noted.
“An effective corporate apology can dramatically shift perceptions, but even a mediocre one, such as the one United delivered, will help.”–Maurice Schweitzer
According to Strong, the airlines in the current industry cycle have been “so keen to not expand capacity.” He explained how that led to the difficult situation last Sunday at O’Hare airport. The 5 p.m. flight in question was the day’s last run between Chicago and Louisville. That translates into a very tight situation for passengers looking forward to landing in Louisville in good time before the weekday begins. In fact, the four United Airlines employees who were accommodated at the last moment on that flight needed to be in Louisville to work on a United flight on Monday, the following day. A canceled flight on that or any other route from Chicago is not uncommon, but it could cause chaos. “When I take one flight out of a bank of flights, that gives me much less room for error and much less cushion to accommodate four more pilots,” said Strong.
Even in those difficult settings, mechanisms exist to better manage them, said Strong. One is to ensure that situations that call for denying seats to valid passengers on oversold flights are handled in the gate area and preferably at the check-in counter. He noted that with some airlines that have overbooked flights, passengers get a message at the check-in kiosk asking them to volunteer their seat with an offer of cash compensation. “There are ways to use technology to make this situation more manageable, economically handled better, and with less disruption at the gate and on the plane,” he said. United and other airlines have to be quick in rolling out such technology to avoid unpleasant situations, he advised.
Airlines also need to review the incentive they offer passengers who are being asked to voluntarily give up their seats for others, said Strong. The rule of thumb is four times the price of a one-way ticket, and regulations stipulate that airlines could offer up to $1,350 a seat, he noted. United offered the four passengers it bumped on last Sunday’s flight compensation of around $800, according to media reports. Strong advised that airlines could do better and offer higher amounts that go up to $1,500 or $2,000 in special cases. “Don’t look to the government regulators to guide that, but rather to the market forces and the value of the oversold situation,” he said.
For now, Munoz has promised a complete scan of United’s practices. “This will include a thorough review of crew movement, our policies for incentivizing volunteers in these situations, how we handle oversold situations, and an examination of how we partner with airport authorities and local law enforcement, he said in Tuesday’s press release.
Still, it’s a people industry, and mistakes can occur, Useem said. “Sometimes, human nature doesn’t come out the way we would think abstractly … and that’s what happened here.”