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 The Brancatelli File

joe THE BIG SIX AND THE LESSON
OF THE BIG STORES


BY JOE BRANCATELLI

January 29, 2004 -- Stick with me for a little bit of personal and business history and I'm confident that we'll learn something about the future of the Big Six carriers.

Once upon a time--in other words, when I had hair--I was a hotshot young reporter for a big group of retailing newspapers. I was the guy they parachuted in whenever a big department store dropped a department or went out of business. I wrote a three-part series when a chain like W.T. Grant went under or when Klein's closed in New York. And I even produced the big monthly sales-report stories. They invariably noted the declining sales at the big stores and the huge gains at a little-known regional chain out of Arkansas called Wal-Mart.

In an incredibly compressed time frame during the mid-1970s, I was on the scene as the old temples of commerce started coming apart at their pricey seams and the next generation of retailers--the big-box chains, the category killers, the product specialists, the super-discounters--began to change the bricks-and-mortar retail landscape of America.

In those days, I spent a lot of time interviewing polished, avuncular department-store executives--many of them scions of the families who founded the nation's greatest retailers. They wore handmade suits and terrific ties and they had fabulous leather couches in their gigantic corner offices atop their famous downtown flagship stores. And, at least to a young reporter whose father was the sole proprietor of a little neighborhood shoe store, they seemed to know everything about retailing.

So I took notes as they explained why their department store eliminated the major-appliance department (stoves weren't profitable) or closed the tea room (matrons eating finger sandwiches wasn't a good use of floor space) or cut labor-intensive customer services (costs were too high) or deferred much-needed maintenance on their flagship stores (repairing the crystal chandeliers or the wooden escalators was impractical). I listened as they explained their decision to stop selling furniture or hi-fi gear or rugs or fireplace irons or any of dozens of other products and services that had once defined their stores.

They--and their profit-and-loss analyses--were persuasive in their logic: If the big stores were to survive and prosper against the discount stores, they would have to cut costs, trim service and look and feel a lot more like the discount stores they were battling.

They were wrong, of course. The 1980s and 1990s brought disaster to the big department stores. Great names and great stores--B. Altman's in New York; Woodward & Lothrop in Washington; Stix, Baer and Fuller in St. Louis; G.C. Murphy, Montgomery Ward and dozens more--all disappeared.

One of the reasons that the big stores collapsed is that they stopped being great retailing temples. Cut enough departments from a department store and it's not worth shopping there anymore. Cut enough frills--the restaurants, the beauty salons, the piano department, whatever--and it's no fun shopping there anymore. Cut enough service and let your landmark stores go to seed and all the customer sees is an ersatz discount store with a famous old name and really high prices.

By now you've figured out that this is where we come to today's lesson about the Big Six. The Big Six have spent years doing exactly what most of the big stores did: cutting, slashing, burning, trimming, deferring and degrading until they're not noticeably different from the discount airlines they are trying to fight. Just as the big stores stopped doing what made them great, the Big Six are unraveling what made them great--and provided the justification for charging more.

Think about it: What differentiates a Big Six carrier from well-managed, fast-growing discount airlines like Southwest or JetBlue or Air Tran or Frontier?

First-class cabins. Big Six airlines have them. Discounters don't. International routes. Big Six airlines have them. Discounters don't. Domestic networks that serve cities large and small. Big Six airlines have them. Discounters don't.

But those features are exactly the products and services that the Big Six are throwing overboard as they vainly chase the discount carriers.

Take first-class cabins. If anything could convince a road-weary business traveler to stick with a Big Six carrier, it's a big, comfy chair up front. But your chance of getting a first-class seat on a Big Six flight is shrinking rapidly.

According to a report called Missed Connections II, 49 percent of the domestic flights of the Big Six are now operated with regional jets (RJs) or turboprops. And since almost none of those planes have first-class cabins, that means you've only got a one-in-two shot of booking a Big Six flight with a first-class cabin. According to the latest Airline Industry Metrics report from the Inspector General of the Department of Transportation, more than 70 percent of the flights at Delta's Cincinnati hub are now RJs, which means 70 percent of the flights have no first-class seats. The number is 44 percent at United's hub at Washington/Dulles and 40 percent at Chicago/O'Hare, a hub for both United and American. At Continental's hubs in Houston and Newark, RJ flights are 39 and 38 percent of the respective flight totals.

And the use of all-coach RJs is increasing dramatically. Earlier this month, for example, Northwest slashed its Memphis hub from 242 daily flights to 198. Last week, however, Northwest announced Memphis would grow to 213 flights in March. But what Northwest didn't say was this: All of the 44 daily flights cut earlier this month were operated with traditional jets offering first-class cabins. All of the 15 new flights will operate with one-class regional jets. A similar transformation is under way at Denver, where United is about to launch Ted, a service that offers no first-class seats.

Now let's consider international routes. Defenders of the Big Six often point to international flights and say, "Let's see you get overseas on a discounter." Well, I say this: See how far you can actually get on the Big Six. As they have retreated to code-share service with international carriers during the last 15 years, the Big Six have withdrawn flights from dozens of overseas markets.

No Big Six carrier flies to Africa anymore. Not a single flight. No Big Six airline flies to the Arab Middle East. Not a single flight. No Big Six carrier flies to Eastern Europe or Indochina. And with the exception of a single Delta flight to Moscow, no Big Six carrier flies to any destination in any of the republics of the former Soviet Union. No Big Six carrier flies to Scandinavia anymore, either.

The breadth of the Big Six's withdrawal from the international scene is almost inconceivable. The Big Six's entire U.S.-to-Australia schedule is represented by United's flights to Sydney and Melbourne. The Big Six offer exactly two flights to the Indian subcontinent; both of them originate in Europe. American and Delta claim to fly to the Pacific Rim, but their service starts and ends in Tokyo. United, which bought the comprehensive Pan Am Pacific route system, has shrunk it to nine cities. United also bought Pan Am's South American service; that has shrunk to four cities.

The Big Six have even retreated in Western Europe. American serves just five cities year-round on the European continent. United flies to just five cities, Northwest to only four cities. Delta, which inherited the comprehensive Pan Am European network, only flies to a fraction of the cities Pan Am once served. Continental, which now serves 10 continental European destinations, has actually emerged as the most aggressive competitor among the contracting Big Six.

Lastly, we come to the Big Six's putative depth of domestic service. The oft-heard claim is that the Big Six airlines fly to small cities that discounters don't serve. Then how can you explain the fact that about two dozen cities have lost all their Big Six service since 9/11? And how do you explain the DOT Inspector General's finding that non-hub airports have lost 19 percent of their scheduled air service since 1998. Short-haul flights, the ones that the Big Six use to connect small communities to the hubs, declined 43 percent in the last three years, the Inspector General also noted.

If the history of the battle between department stores and discount stores is any guide, the Big Six are toast, especially if they continue to recycle the playbook used by the big stores. The Big Six will continue to shrink, go bankrupt, merge and disappear until they become niche players. In fact, it's already happening. The DOT Inspector General's report says that the Big Six now represent only 54 percent of all domestic air service.

But there are also survival lessons for some of the Big Six in the ashes of the old-line department stores. Neiman-Marcus, Nordstrom and Bloomingdale's do just fine because they focus: Neiman on upmarket goods, Nordstrom on terrific service and Bloomingdale's on flashy merchandising.

Dayton-Hudson, one of the largest of the old-line department store groups, saved itself, too. It followed a two-tier strategy: It combined all of its traditional department stores into a single, strong brand (Marshall Field's) and went national with its style-oriented discount chain (Target). It even renamed the parent company Target.

Woolworth's, the iconic five-and-dime retailer, survives today, too. It closed all of its five-and-dimes, shuttered its discount-store chain (remember Woolco?), changed its corporate identity and concentrated on a specialty retailing chain that you may know: Foot Locker.

The airline industry already has a Wal-Mart (Southwest) and a Target (JetBlue). It's long past time for each of the Big Six to find a concept and save themselves or go the way of Pan Am, Gimbel's, Braniff, Arnold Constable, National Airlines, Jordan Marsh, Eastern Airlines, Joseph Horne, Bullock's, TWA, Frederick & Nelson and the Broadway.

This column originally appeared at JoeSentMe.com.

Copyright 1993-2004 by Joe Brancatelli. All rights reserved.