United Airlines and the Cuban Missile Crisis

An eon ago and half a continent away, your earnest correspondent was studying at a well-known Midwestern university.

The topic at hand was decision theory and various models were studied.

Using the Cuban missile crisis as a case study, we probed how the United States realized that the Soviets had installed nuclear tipped missiles within close striking range of our major cities. It turns out the Red Army deployment manual for nuclear missiles required that they be surrounded by a ring of defensive surface to air missiles (SAM). So while the nuclear missiles themselves were quite well hidden, they were each surrounded by an obvious circle of SAM sites, easily observable by our U2 spy planes. And thus the dastardly plot was revealed.

The culprit (from the Soviet point of view) was that deployment manual, and the Red Army’s blind obedience to it. We can only thank them for that.

The bureaucratic process model (also known as organizational process model) describes how most governments, corporations, and other organizations operate. Policies are formulated. Processes are documented. Rules and regulations are promulgated. These guidelines are all followed, else the risk of one’s job.

The only problem with this approach is that not every condition or combination of conditions can be anticipated, nor the proper response prescribed. A static rule book does not fit well in a dynamic world.

The recent United Airlines imbroglio is a case in point. Unless you’ve been living in the allegorical cave, you are aware of what happened, but here is a quick review of the essential facts. On Sunday evening, April 9, United Airlines needed to move four crew members from Chicago to Louisville to staff another flight the next morning. United Express 3411, sold out, had already boarded and was ready to depart. The gate agent halted the departure and informed the passengers that the flight wasn’t going anywhere until four of them deplaned. Initially $400 vouchers were offered, later increased to $800. No one accepted.

At that point a United manager decided that four passengers would be selected for involuntary eviction. Three of them grudgingly complied. Dr. David Dao did not, the cops were called, and the rest is already history.

United’s CEO Oscar Munoz, an award-winning communicator, blew it. Not once, but several times. Finally after being dope slapped by his customers, the public, and a growing cadre of legislators, he found wisdom. United has changed their policy and this should not happen again. Until, that is, an unanticipated combination of circumstances arises that the new policy prescriptions do not fit.

That is the problem with the bureaucratic process model. There is another way, values based.

Let’s say United recognized that their customers were the key to success, and that customer satisfaction was a valuable commodity. This would be a major departure from the view that passengers represent just so much squishy cargo.

The idea of vouchers to buy a customer’s cooperation is a step in the right direction but has several flaws. First, a voucher has varying value to different passengers. To a frequent United customer who plans future trips soon, an $800 voucher is worth pretty much face value. But to an accidental traveler, who doesn't plan any future United excursion, that voucher is fairly worthless. Solution – drop the vouchers, deal in cash.

Next, the preset limits delegated to gate agents and escalated through various level of management are a perfect example of a rigid approach designed to minimize costs, not maximize customer satisfaction. Try a reverse auction at the discretion of any United employee present.

A reverse auction is a bidding process where a buyer (the airline) is attempting to buy a valuable commodity from a seller (a passenger with a seat). Say that you, a passenger, make a rather ridiculous bid of $20,000 to give up your seat. There is little chance the airline will need to actually accept this bid, because some other passenger will likely counteroffer at $10,000, or less, and so on.

This is market based allocation, where a valuable commodity (the seat) is purchased from the lowest bidder. No involuntary eviction, no cops, customer value respected, and customer satisfaction maximized. What's the problem?

Only that executive management must express goals and values clearly and trust their employees to carry them out.

One wonders, if this approach works out well for the airlines, perhaps we could apply similar reasoning to our regulation-heavy government. Markets can work magic.

The Passing of a Queen

The Sears, Roebuck and Company, founded in 1886, is in trouble.

In the late nineteenth century, the novelty and utility of a mail order catalogue fueled the enormous growth of this revolutionary firm. Largely agrarian America had heretofore shopped in small town general stores with limited selections and relatively high prices. Sears exploited the postal system of the United States to distribute its catalogues, receive completed order forms, and ship the purchased goods to the happy shopper. Imagine Amazon.com at a snail’s pace.

This process may seem absurdly slow, but try to envision the status quo of the time. Instead of a limited range of expensive goods available locally, a world of possibilities was opened. The Sears catalogue, for those who haven’t seen one, offered a veritable cornucopia of goods to isolated farm families. Tools, linens, toys, clothing, and much more. According to the Sears historic archives, specialty catalogues included such items as “bicycles, books, clothing, groceries, pianos and organs, and sewing machines.” To read these catalogues was to dream of a richer existence than the wide, desolate reaches of rural America could offer.

By 1907, the firm had racked up annual sales of $50 million (over $20 billion in current dollars, approximately equal to Dollar General in 2016).

Obviously, an itch had been scratched.

This success translated into the construction of Sears stores in hundreds, then thousands of communities. The Sears Tower in Chicago rose to claim the “world’s tallest building” record for many years. The firm became a conglomerate, acquiring or creating many other concerns including Kmart, Dean Witter, Coldwell Banker, and Allstate Insurance.

But as of 2017, the ride was over. Sears had discontinued their catalogue in 1993, becoming dependent on in-store sales. But waves of competition and technological advances beat on the hapless firm, who just couldn’t seem to catch up. In our visits to a nearby North Attleboro Mall Sears store several years ago, we sensed the end. Shabby and drab, disheveled shelves, dispirited clerks. The success of Amazon and eBay and Walmart had stolen the thunder of this 130 year old queen of retail. God bless her memory, but the tides had turned.

Sears is now closing stores, laying off employees, and selling off well-known brands. Craftsman, the famous marque of life-warranty tools, for instance, has been sold to Black and Decker. There is a real threat that Sears will go bankrupt.

If that happens, thousands more jobs will be lost, hundreds of properties vacated, and stockholder investment reduced to rubble.

It will be a sad end to a wonderful enterprise that brought satisfaction and joy to millions.

But what will happen to the vacant buildings, the sacked employees, and the few remaining investor funds?

The buildings will come to life with economic use of greater utility. According to a recent article in “National Real Estate Investor,” the buildings will be repurposed.

“Office space is a workable solution thanks to usually ample parking space. In addition, in certain cases municipalities have bought the stores from Sears and turned them into charter schools or municipal offices. Community colleges have also picked up some of the properties. That solution works in cases where Sears owns the land the stores are built on. We have also seen the space reconfigured for office space—call centers, medical space (direct primary care, outpatient clinic).”

The workers are another story. Some of the older workers will remain unemployed or decide to retire early. The younger ones will largely find other jobs in going concerns – those more successful than Sears – perhaps in the very businesses mentioned above exploiting the now-vacant Sears locations.

Likewise investor funds, those few returned, will be invested in wiser investments. Perhaps some in the nascent Amazons or Teslas of tomorrow, to reap millions only a decade hence.

This is creative destruction. In a government managed economy, we might try to keep Sears alive, an ultimately wasteful expenditure of taxpayer funds.

But those same taxpayers, in their separate but superior role of free citizen and consumer, have voted to kill Sears. And will vote to support the up and coming competitors who tickle their fancy.

There is wisdom in their vote, something that bureaucracy can’t recreate.

Witness Venezuela.