United Continental Holdings (NYSE:UAL) has been catching a flurry of heat recently as videos of a customer being forcibly dragged off one of their overbooked planes by Chicago law enforcement is circulating around the web.
In this clip from Industry Focus: Industrials, Motley Fool analysts Sean O'Reilly and Taylor Muckerman take a dive into how something like this happens. Find out how common voluntary and involuntary removals from flights are for airlines across the board, a few ways that United could have handled this better, what went wrong (or didn't go wrong) in their booking algorithm, and more.
A full transcript follows the video.
This video was recorded on April 13, 2017.
Sean O'Reilly: United Airlines.
Taylor Muckerman: Oh. They caught a bad rap, I think.
O'Reilly: Actually, we have math to prove it.
Muckerman: Their employee did not rip that guy out of his seat.
O'Reilly: You think?
Muckerman: I know. Those were law enforcement that ripped him out of his seat. They just told him he had to get up, and when he wouldn't, the law stepped in and threw him into the next row and knocked him unconscious.
O'Reilly: The flight was overbooked.
O'Reilly: Right. Which is actually the cool math I have for everybody.
Muckerman: Oh, lay it on us. You and your maths.
O'Reilly: I understand there's a reason the world freaked out when Warren Buffett and his company, Berkshire Hathaway, bought stakes in American and Southwest, and that's because he has ripped on the airline industry for 40 years. It's because it's capital intensive, low margin, you're at the mercy of the weather, people --
Muckerman: But it's becoming more monopolistic, just like the railroads he dearly loves, just like the global cellphone market when he bought into Apple.
O'Reilly: If only my teacher from high school were here, he would say it's duopolistic, sir. Or, an oligopoly.
Muckerman: Oligopolistic. We'll go with that, oligopolistic.
O'Reilly: But, they're still overbooking, and the reason is, think about it this way. United Airlines has over 4,000 flights every single day.
Muckerman: That's a lot of flights.
O'Reilly: And that's just them. And I have long said, I complain about the lines at the airport, and I complain about missing a flight or the flight being delayed or whatever. But at the end of the day, if you step back, what airlines are doing is amazing, every single day. Not one of these crashes out of the sky.
Muckerman: It's an amazing feat of logistics, yes.
O'Reilly: I am traversing across an entire continent, something that used to take months.
Muckerman: A few hundred other people on your plane only, and all your belongings.
O'Reilly: Technically, if you step back, it's actually very impressive what all these airlines do.
Muckerman: People get soft; they just expect it. They don't think about everything that goes into it, all the guys and gals driving the baggage trucks, getting your ticket handled on time. Just because you got offloaded, sorry.
O'Reilly: Deep. Taylor. Hard, God. By the way, during the Gold Rush, do you know how most people got to California? It was not on land.
O'Reilly: No, they would get on a ship, and you would go around South America, basically. It took a month and a half.
Muckerman: And they had, probably, less personal space than they do on an airplane.
O'Reilly: That's really hard to believe, but I believe you.
Muckerman: I'm reading a book about Vasco da Gama; these people were on ships for weeks coming from Europe to the United States and South America, and they literally couldn't even do a snow angel on the floor of these ships.
O'Reilly: And then you would get off and they would immediately check you for lice.
Muckerman: You think the pretzels on those planes are bad; try eating the rat-infested --
O'Reilly: I'm a Southwest man and I have love for their pretzels. I made a ticker symbol joke there. Anyway, point being, even if, let's pretend all of these fights have one missing seat. And you and I both know this is a very good rate, but let's pretend this seat could have been sold for $100, the ticket. That's a good deal. Four thousand flights a day, $100 for that one missing seat, that's $400,000 in missed revenue per day. You want these flights full. Every single one of them.
Muckerman: Yeah, makes it easier to estimate fueling, makes it easier to estimate staffing, stocking food and drinks.
O'Reilly: It doesn't matter how big of a company you are; $400,000 per day is something.
Muckerman: More than people make in a year.
O'Reilly: This actually gets even better. Apparently -- and I'm sure all the airlines do this -- they, of course, have a super algorithm, like the thing that runs Google, they have this to figure out if they should overbook a plane. It even calculates which flights to book based upon the data that they have for all the people on the flight. If you miss a bunch of flights, historically, if you have missed a bunch of flights, they are more likely to overbook that flight that you're on. That's ...
Muckerman: So you're saying they're rooting out the problem.
O'Reilly: They're trying.
Muckerman: They need to put a scarlet letter on those people's tickets so that when they do show up, someone can stand up and say, "Boo, this man!"
O'Reilly: The ticket should have a little sad cat like, "I'm really sorry," like the meme.
Muckerman: You automatically get stuck in the middle seat of the exit row and you can't recline, if you actually show up.
O'Reilly: Oh, man! So mean!
Muckerman: Or the jump seat.
O'Reilly: That's like, passenger ratings, like Uber driver ratings.
Muckerman: Exactly. Start it up, United. Start it up.
O'Reilly: So the video surfaced recently, it was not pleasant to watch.
Muckerman: It was graphic.
O'Reilly: The CEO, rightly, feels horrified and said it can never happen again. But I did happen to look up, this is a rarity. United Airlines, not even the airline industry, but United, bumped less than 0.1% of passengers last year. The last thing I had to say, and this is what I was thinking, but I heard they said, "We're offering a $200 flight voucher," and they ratcheted it up three times. I think the final value was $800 to get off the plane. If, in my opinion, the algorithm failed and they can't get customers to get off the plane, they ratchet it up three times, I think Econ 101 says they just need to keep going. There is a price that somebody would have gotten off that plane for.
Muckerman: Oh, for sure. But the thing is, I was thinking, if it was a Saturday or Sunday the next day, absolutely that ticket goes for $800, people get off, they spend another day in Chicago or wherever they were, but it was a Monday. I'm not saying everyone has Saturday and Sunday off, but a lot of people have work at 8 or 9 a.m. on a Monday morning. This particular guy said he was a doctor and had patients to tend to.
O'Reilly: My point is this -- if the algorithm fails, which, you guys created it, you guys made the algorithm, I don't think anybody else made that for you, if your algorithm fails, you should probably be paying to fix the problem. And, given what happened to the stock price this week ... this is crazy, but, $5,000, some crazy number, to fix your algorithm not working or breaking. Plus, you need to move your employees, you want to keep them happy. It just seems like, once you start talking about $1,000 to stay in the city an extra day --
Muckerman: I don't think their algorithm was broken. I think the data you spoke of earlier, they're doing pretty darn well with it, the fact that this is the first time this has happened and it made the news cycle.
O'Reilly: So it works 99.9% of the time; why would you not pay $5,000 at that point?
Muckerman: OK. United Airlines: 120 voluntary denials of boarding per 100,000 boardings, 120. That's people who get up for the money or the hotel stay. Involuntary, like this gentleman, denials of boarding, Twelve out of 100,000.
O'Reilly: It's a lot of people.
Muckerman: They're ahead of Southwest and Alaska Airlines and American and Delta, but the worst offenders, SkyWest and ExpressJet at 180 voluntary denials per 100,000 and 16 involuntary for SkyWest per 100,000, and 20 per 100,000 for ExpressJet.
O'Reilly: So, 50% and 70% more. Actually 80%.
Muckerman: Yeah. I didn't do the math in my head just now. But, for 100,000, they're only telling 12 people that don't agree to the terms that they still have to get off.
O'Reilly: Right. It just seems like if your system is breaking down, and this is where the human heart comes in, this is where you're like... it's like Amazon. I remember this one time Amazon.com had a customer problem, and one of their mid-level managers did all these analyses if they should pay the guy off or not, and they went to the upper management and they had all these spreadsheets, and they were like, "No, just give them the refund, we don't care. The customer is ... "
Muckerman: Going to spend more money with you.
O'Reilly: Yeah, the customer just needs to be happy.
Muckerman: Their market cap dropped a lot more than $1,000 because of this.
O'Reilly: That's my point. There's a point where I will spend an extra day wherever for $1,000.
Muckerman: Yeah, even if it's a flight credit, that should inspire them to give even more money, because it's just coming right back to you. They're going to fly on your plane, they might buy a mini-bottle of Crown Royal, they're going to pay an extra bag fee, come on. And then your market cap doesn't drop by a few million.
O'Reilly: Yeah, when I was like, just keep raising the price, this is what makes a market, kids, come on. Anyway. All right, I guess we're done. Anything else? That's all she wrote?
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Sean O'Reilly has no position in any stocks mentioned. Taylor Muckerman owns shares of Alphabet (C shares) and Amazon. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Amazon, Apple, and Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.