Aviation is hell because airline exec pay is solely based on quarterly profits

There was a time when airline execs were paid based on a mix of on-time arrivals, accurate and timely baggage delivery, and profits. Now it's just profits.

Thus "innovations" like charging for checked bags, charging for carry on bags, for seat selection, for a sufficiency of leg-room and seat-width, and so on. In a world where profits -- and thus take-home pay for the (usually) man at the top -- come from the premium, business and first cabins, the imersation of people in the other classes is a profit-maximization strategy that relies on treating half the people in the sky as badly as possible.

Of course, chasing quarterly profits at the expense of long-term viability has many consequences. British Airways will spend tens of millions of pounds making its statutory compensation payments to stranded and delayed passengers who've been left behind by a computer crash that followed shortly after the company's decision to shave a few pennies by firing its long-term IT staff and outsourcing its technology to India.

This will get a lot worse: many major US airlines now routinely fly their planes to South America for cheap, non-union maintenance conducted by a workforce that doesn't speak English -- but works entirely from highly technical, extremely specific English-only maintenance documentation. What could possibly go wrong?

Rich bonus packages for top executives are now largely tied to short-term income targets and fatter profit margins instead of customer service. Of course, bolstering profits — and in turn, stock prices — has always been a big part of management’s responsibility to shareholders, but making it virtually the only criterion for executive pay is new.

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.

United has also scaled back bonuses linked to reliability and customer satisfaction for senior executives in recent years. But in the wake of what happened in April, bonuses “will be made more comprehensively subject to progress in 2017 on significant improvement in the customer experience,” the company said in a financial filing.

“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.”

These new incentives also partly explain why airlines are packing seats more densely and squeezing more passengers into the back of the plane. “Densification is driven by the desire to sweat the assets and generate revenues without having to commit capital to building new planes,” Mr. Baker said.

Route to Air Travel Discomfort Starts on Wall Street [Nelson D Schwartz/New York Times]

(via Naked Capitalism)