As airlines try to pacify Wall Street by squeezing customers, they may actually be leaving revenue on the table.
That’s because caring about customers matters for an airline’s bottom line. It’s no accident that Alaska Airlines has one of the best operating margins of any airline in the world.
Delta differentiates its product somewhat from United and American with better on-time performance, their recent IT meltdown notwithstanding. But they’re the ones that started the industry trend towards giving customers less for the same money.
Instead of trying to continually drive down price while giving customers more, the three major airlines try to give customers less by taking away the ability to change tickets for a fee, to have advance seats assignments, and for elites to be able to upgrade — unless they spend more on a ticket.
US airlines used to differentiate themselves through their frequent flyer programs, trying to be more rewarding, but with planes generally full they’ve invested less in marketing and give customers less for flying. It still makes sense to concentrate flying on a single airline when possible because flying as an elite member is better than being a non-elite.
While airlines act as though price is the only thing that matters, and incremental revenue is all that matters, customers do choose or rule out airlines based on value propositions and experience. Speaking only for myself I used to go out of my way to fly American even when they were a bit more money or when I had to connect versus taking another carrier’s non-stop. I don’t do this as much anymore, which means less revenue for American. I’ve flown only two American segments since requalifying for Executive Platinum two months ago.
This is just anecdotal, but one firm tried to quantify the financial effects of customer perception. And they found that it makes a huge difference.
C Space took a look at what would happen to Delta’s financial performance, if it could adopt a more customer-pleasing approach and somehow close the 4 point gap in the survey between its own Customer Quotient score and that of Alaska’s.
“It generated a return on asset improvement from 8.5 percent to 10.4 percent, per our calculation, Trevail says. “That translates to a $991 million increase in operating income and a revenue increase of $8.8 billion annually. So you see, improving a company’s CQ score a mere 4 points can have massive impact on a company’s bottom line.”
That’s orders of magnitude more than Delta claims to be making upselling customers to get back things like advance seat assignments they used to get as part of their ticket.
American plans to follow Delta. And that’s United’s plans as well:
Indeed, there’s nothing even inherently wrong with a la carte pricing. But it’s clear when American will stop allowing customers to check bags to their final destination when traveling on separate tickets — even when both are American Airlines tickets, and even if it means having to clear immigration and customs to collect bags just in order to re-check them — that customers aren’t at the center of major US airline decision-making.
It’s hardly a novel idea that you’ll maximize shareholder return over the long term by focusing on your customers and figuring out how you can deliver increasingly greater value to them at the same or lower prices. Airline brand and reputation matters, and airlines even sometimes believe it which is why they do spend on advertising. But the best advertising of a mediocre product only calls attention to the gaps in product.
So before you advertise, think about what you’re delivering for your customers and think about whether you’re making your product easier or harder for your customers to use when adopting changes.