Lessons Airlines Can Learn From PCs

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As I first wrote in March of this year, I have a clear and simple perspective on the airline industry: It's a business that is commoditizing. When commoditization happens to an industry, the product in question (in this case, a seat on an airplane) goes from being a differentiated, branded product to a commodity where price becomes the primary reason that customers pick one company's product over another.

This is a pattern that has played out in many other industries, including the PC industry. Like airline seats, PCs were once branded, differentiated products sold through high-cost distribution channels. The industry was dominated by the likes of HP (NYSE: HPQ) and IBM (NYSE: IBM), but these incumbents didn't change either quickly or radically enough when the industry began to commoditize. Ultimately, they got crushed by innovative start-ups such as Dell (Nasdaq: DELL) that recognized the commoditization pattern early and built a business model specifically designed to offer low-priced computers direct, either by catalog or online.

In my opinion, the airline industry is currently going through the same evolution. The announcement this week that Continental (NYSE: CAL) and United Airlines were joining other legacy carriers in charging an additional fee for tickets not purchased either online or at airport self-service kiosks is an important step toward commoditization. The move will push increasing numbers of customers to shop online, where price comparisons are easier and differentiation by service or brand loyalty is much more difficult.

In a commodity business, the economics are simple -- the lowest-cost supplier wins. And as Dell proved, it's much easier to create a low-cost structure from scratch than it is to take a high-cost structure and transform it. The recent struggles by legacy carriers to get their cost structures in line with the low-cost carriers illustrate that the pattern of the PC industry is repeating itself with airlines.

Given their bleak prospects, I'm a bit surprised that none of the legacy carriers are attempting a radical strategic remake. One option could be to shrink in size and focus exclusively on the more profitable business travelers. The Boston-New York-Washington shuttle is an example of a niche market segment that is highly profitable. Perhaps a regular, business-class-only red-eye from major West Coast cities to East Coast business centers could be a viable and profitable service for Delta (NYSE: DAL) and its peers. One can imagine a service modeled on trans-Atlantic business class, with flat beds, dinner before the flight, and showers and breakfast on arrival. Such a service would be difficult for JetBlue (Nasdaq: JBLU), Southwest (NYSE: LUV), and the other low-cost carriers to attack.

At every new step toward full commoditization of the airline industry -- such as the announcement about ticket fees this week -- the survival of the legacy carriers becomes increasingly at risk. Without some creative, radical strategic change soon, it's just a matter of time before they all run aground.

Fool contributor Salim Haji lives in Denver and does not own shares in any of the companies mentioned.