Is the Airline Industry Guilty of Marketing Myopia?

When it comes to Customer Satisfaction and Profitability, the Airline Industry is to be found at the bottom of the log when industries are ranked.

Profitability-wise, the industry’s struggle is illustrated by its returns on capital being consistently below the cost of capital. According to IATA’s report titled “profitability and the air transport value chain” which was released in June 2013, the airline industry achieved a weighted average return on invested capital (ROIC) of 4.1% against a weighted average cost of capital (WACC) of 7-9%. The report also points out the fact that the airline industry has one of the lowest ROICs relative to other industries.

From the perspective of Customer Satisfaction, the latest authoritative American Consumer Satisfaction Index (ACSI) statistics indicate that the Airline Industry again ranks bottom in the industries list with a performance that betters only the Cable TV Industry. That the industry’s score is well below 70 on a 100 point scale is a clear indication of the magnitude of the problem.

The airline business’ profitability challenge is well understood and has been explained from an industry structure perspective whereby all the stakeholders in the value chain make bigger profits relative to airlines. The dismal score in customer satisfaction is however a surprise occurrence considering the fact that air travel is one of the leading symbols of the tremendous technological and scientific progress the world has gone through; progress that has so transformed the quality of life in the world we live in today.

The Great Achievements Airlines Score Daily

Profitability and Customer Satisfaction aside, there are feats the airline industry achieves on a daily basis that are almost unimaginable. For instance, between 3 to 4 million passengers fly safely on nearly 100,000 flights worldwide every day! Moreover, the level of safety airline travel has attained is so great that it is today considered safer to fly than to drive in a car. To illustrate the safety feat, Arnold Barnett, a professor of statistics at MIT asserts that in the last five years, the death risk for airline passengers in the United States has been one in 45 million flights! Put another way, this statistic means flying in the US has become so safe to the extent that one could take one flight every day for an average of 123,000 years before jumping on board a flight that will be involved in a fatal crash! That is just plain astonishing.

The chief instruments of today’s air travel, the jet airliners are in themselves very sophisticated machines. That a 650 tons behemoth can take off with several hundreds of souls on board and fly over 15,000 kilometers non-stop is no mean achievement; both from a scientific and design perspective. The flagship airliners of today’s jet age can fly high above bad weather, fly further and faster for convenience and are equipped with the technology and features that make flying as comfortable and as user friendly as may be possible for passengers. It is practically possible today for one to travel thousands of miles without experiencing any significant disruption to the daily flow of life.

The Puzzling Paradox

So with all of the feats discussed above, why does the airline industry struggle so significantly to meet the “satisfaction” needs of the passengers they fly safely all over the world? We will attempt to answer this question by focusing our analysis on two areas; The Anatomy of the Airline Customers’ Complaints and The industry’s Management Orientation.

Deep analysis of the Customer Complaints characterizing the industry will help us identify the areas where the industry falls short. Solutions can therefrom be prescribed. We will also examine the Industry’s Management Orientation and our focus during this analysis will chiefly be on the Marketing Function and the Chief Commercial Officer role. This focus on marketing is driven by the fact that marketing is directly responsible for Customer Satisfaction in any business setting.

Where do Airlines Fall Short in Customers’ View?

A review of the problem areas pointed out by customers in their evaluation of airlines at the Airline Quality website (www.airlinequality.com) reveals a common thread; a thread that cuts across the customer service failings of the industry and accounts for nearly two thirds of all the industry issues. Product Design and Service Execution is the industry’s number one issue.

The following are the top four areas where airlines fall short as pointed out by customers

  1. Inappropriate / Poor Quality Catering
  2. Poor Service by In-flight Attendants
  3. Inappropriate Leg Room or Seat / Cabin Comfort
  4. Inappropriate / Poor Quality In-flight Entertainment

The origin of all of the top failings listed above can be traced to Product Design. In fact nearly two thirds of all the failings pointed out by customers at the Airline Quality website arise out of inappropriately or poorly designed product!

This product design problem appears to be the byproduct of the industry’s focus on Cost and Resource Efficiency as the key drivers of airline business profitability. The goal it appears is to attain profitability by creating as practical a product as may be possible at the lowest cost possible and then passing on the cost savings to the end customers in the form of lower pricing (in the interest of being competitive) which in turn will stimulate volume leading to higher revenues. The downside of this approach however is its singular focus on cost and price reduction at the expense of consideration for customer needs. The resulting product ends up functional and fairly priced but out of touch with the needs of the people it is intended for; the customers.

A Look at Airlines Management Orientation

As an industry besieged with business model complexities and significant performance challenges, it is no suprise that that concepts (and to some extent fads!) such as Operational Efficiency, Rationalization, Turnaround Management, Consolidation, Productivity Improvement and Customer Resource Management (CRM) have characterized the industry’s management paradigm over the recent decades.

With the exception of CRM, the common ground for all these concepts (and maybe fads) is the fact that they all tend to look inwards from the airline’s perspective. They are efforts geared towards improving the operational and economic performance of airline chiefly by focusing on the operations of the internal environment. These initiatives really have no direct focus on helping the system to achieve an improved position for other stakeholders such as the industry’s end customers.

Moreover, from a product point of view, the focus of these initiatives seems to be to lower costs while retaining the product’s functional performance “as is”. No consideration is given to improving the product to better meet customers’ needs and market opportunities.

Could it be that the airline business’ complexity and its operational, safety and economic challenges are so great that they have effectively preoccuppied the industry’s management practice and left no spare capacity for the pursuit of other facets of management such as marketing? In my view, a market oriented business philosophy is what the industry needs if it is to improve its customer satisfaction rating.

Is it a Case of Marketing Myopia?

In his widely acclaimed ‘Marketing Myopia’ article, Levitt (1960) suggested that businesses need to be market oriented rather than product centered. Based on our preceding observations on the industry’s Product Design Failures and Management Orientation towards Internal Focus, could we safely conclude that the airline industry is guilty of marketing myopia?

Levitt’s judgment that business has to be viewed as a customer satisfying process endured for decades but has of late been challenged with a number of marketing literature pointing out its weaknesses and putting forward improvements to the concept. In ‘Balancing Internal and External Marketing’, Lings (1999) argues that the chief weakness in Levitt’s concept is its lack of an internal marketing dimension. According to Lings, a conceptual model which balances internal and external marketing orientations is necessary for today’s service markets where managers have to compete for scarce resources both in the internal and external markets.

What is undisputable from the preceding observations however is the fact that a market oriented business philosophy is necessary for success in today’s competitive markets. The airline industry itself is characterized by stiff competition and as such, it is critical that airlines have market orientation as a significant success element in their business philosophies and strategies.

Whose Responsibility is it to Fix the Problem?

Ultimately, the solution to the airline industry’s customer satisfaction challenge can be defined in terms of the need to fix the Product Design and Business Philosophy flaws. The desire to fix these shortcomings has seen the industry pursue internally focused strategies when focus should be on the external market. The fact that focus should be on the external market puts responsibility onto the shoulders of the Marketing function and the Chief Commercial Officer function where it reports.

On the road to the desired end, the Chief Commercial Officer must play his/her role in shaping the airline’s business philosophy to embody customer value creation as the core success element. The product must be designed with customer needs in mind and must be packed with value that is capable of sustaining profitability when extracted back from the market by the airline. In my view the formula looks something like this;

  1. Get it right on Network and Schedule: Here in lies the fundamental value potential. Focus should be on issues such as Total Market Value on Offer, Product QSI and potential Market Share, Aircraft Economics, Schedule Integrity etc.
  2. Get it right on Physical/Hard Aspects of the Product: Areas of focus include Seat Comfort, Leg Room, Cabin Configuration,  etc
  3. Get it right with Soft Aspects of the Product e.g. Service OnGround and On-board
  4. Get it right in Marketing and Sales: The sales and marketing philosophy must be value driven, i.e it should be centered on extracting from the market the maximum value possible for the product; the value that was intentionally packed into the product at the design stage.
  5. etc

In my view, the keys to resolving the industry’s customer service issue are in the hands of the Chief Commercial Officers in the industry. They must play the roles required of them to help the industry overcome the strong and negative influence that the complexity of the traditional airline business model has had on the industry’s product and business philosophy through the years. In the absence of their technical product knowledge and market oriented inputs, the industry’s product would remain as problematic as it has been and needless to say, there would be no end in sight for the customer satisfaction problem that has plagued the industry in the recent decades.

The Customer Need Airlines Somehow Just Can’t Satisfy

  1. For the Airline Industry, comfort aboard the airliners is one of the key factors that determine customer satisfaction. This comfort is itself driven by certain aspects of the airline product. As industry analysts and research indicate, the need for comfort is higher on long haul flights compared to short and medium haul flights. Long haul flights are defined as non-stop flights that remain airborne for periods longer than 6 hours.

    Going by the feedback available on the internet, the airline industry isn’t doing a good job at meeting its customers’ need for comfort. The passenger feedback sphere is dominated by negative reviews criticizing airlines’ on-board product; mainly on grounds of a perceived lack in certain features that are important for passenger comfort. In an article written for the Denver Post and titled “Most hated thing about flying? Uncomfortable airplane seats” Chris Michaud asserts that the airplane seat is currently the most hated part of the airline experience. He credits this assertion to the 2013 findings of the authoritative American Consumer Satisfaction Index (ACSI) for the transportation industry.

    Boeing and Airbus who are the dominant suppliers of airliners used for long haul flights seem to be in agreement. Both declare that the features of an airline seat are critical drivers of passenger comfort. This inference can be drawn from the assertions made in the publicity materials they use to market their wide body airliners. Both identify Space, Seat Pitch and Seat Width as the key factors that drive Passenger Comfort on board.  Seat Pitch refers to the distance between rows of seats while Seat Width is the measure of the lateral size of one seat. Combining the two measures yields the personal space available to a passenger on board a plane. What comes out clearly also is the fact that varying row configurations (number of seats side by side) results in significantly different comfort levels. Boeing for example points out that the 3-3-3 configuration across a cabin increases the probability of a passenger sitting next to an empty seat when cabin loads are lower in the sixties range.

    Who has the Say on Seat Pitch and Seat Width?

    Considering the fact that both Boeing and Airbus have esteemed comfort so highly and demonstrated a considerable measure of cockiness highlighting the significant investments they have made in research and technology in order to maximize the passenger comfort aspects of their products, one would have expected them to be implicit with their recommendations to the airlines on the best configurations to apply on their products. However, as it is, they both stop short of prescribing and leave the decision to the airlines. My theory is that Boeing and Airbus leave it to the airlines to determine their own configurations since this decision plays a critical role in airline economics.

    A “simple” Problem that Requires a Complex Solution

    Based on our observation in the preceding paragraph, the responsibility for the negative passengers’ reviews on grounds of Seat Pitch and Seat Width lye’s on the shoulders of the airlines. On the surface, this should be a simple and straightforward problem that airlines should be able to solve simply by reviewing the number of rows and columns of seats configured on board their aircraft. However, rather intricate economic dynamics come into play and end up transforming this seemingly simple problem into a genuinely daunting one.

    The economics of the airline industry are quite complicated and this is chiefly due to the widely accepted assessment that there isn’t sufficient demand to sustain the industry if the industry was to charge only the price capable of delivering economic profit. Making matters worse is the fact that in spite of the apparent lack of demand, entry into the industry is easy and is largely driven by factors other than economics. The end result is a business environment characterized by cutthroat competition which ultimately hands significant bargaining power to customers at the expense of the airlines.  The airlines aren’t lucky either with their suppliers. The latter have stronger bargaining power relative to the airlines, a phenomenon that pushes airlines costs up and diminishes profitability.

    Taking the industry’s pricing practice as an example to illustrate the aforementioned complexity, we can highlight the contradictory goals of discounting (in order to stimulate demand) while also going after price maximization (in order to maximize revenues) as an aspect of complexity that makes pricing such an intricate affair. Moreover, the fact that all of this is done against a background of stiff competition creates a phenomenon where the pressure to discount prices tends to exceed the ability to push fares upwards.

    Strategy is the Key

    In scenarios such as the one we are facing here with the passenger comfort problem, creativity and distinct performance capabilities become critical strategy elements. They would also serve as differentiation and factors. Organizations that are distinctively competent and creatively astute can successfully carve out (for themselves) profitable and sustainable niches from the wider market. Once created, the differentiation must be sustained for longstanding exploitation and gain.

    From a marketing strategy perspective for instance, an approach such as the Six Strategies for Niche Marketing advanced by Clemons, Nunes and Reilly (2010) would be a possibility. According to the authors, the six marketing principles which are listed below can allow a company to manage the complexity of the niche marketing strategy and lead the company to reap superior profitability. They emphasize that this would only apply if the six principles are applied in an integrated way. The six principles are as follows;

    1. Target Carefully: Sweet Spot offerings must be different from the mainstream, must be superior in value and must resonate powerfully with their intended consumers
    2. Listen to your Consumers: The key is to “really” listen to your consumers. This requires tuning into the consumer channels. The key however is to react quickly to whatever is picked up.
    3. Control Production Costs: Costs must be managed for profitability
    4. Control Distribution Costs
    5. Remember that Some Apparent Losers are worth Keeping: Some offerings may not be profitable in themselves but will contribute to the overall profitability of the company portfolio
    6. Prune the Product Portfolio Ruthlessly: Drop the offerings that do not contribute to profitability directly or indirectly

    Jet Blue’s Example

    The industry has examples of players who have used the strategies and approaches that are in line with the six principles discussed above to achieve superior performance. We could look at Jet Blue as an example. Jet Blue has distinguished its product from the “commoditized” industry offering by putting forward a superior product at a discounted value. By setting its Seat Pitch and Seat Width offers at levels superior to the industry average, Jet Blue has decisively satisfied her customers’ top need of comfort while also maximizing the customer’s value by minimizing cost. The combination of those two aspects have endowed JetBlue’s offering with such a compelling value.

    The success of Jet Blue’s strategy is indicated by the fact that the low-cost carrier is not part of the industry’s negative statistics with regards to comfort. Rather, the airline is a leader with an enviable list of awards received over the years for its customer friendly product and service. For example, the JD Power and Associates award for Customer Satisfaction in the Low Cost Airlines category has been Jet Blue’s for the last seven consecutive years. In an article titled “Jet Blue looks to stand out in industry’s middle seat” Karen Jacob’s states that the low-cost airline has been profitable since 2009 even though its return on investment is lower compared to its larger competitors in the US market. Perhaps what it misses profit-wise is made up for by the superior customer satisfaction which guarantees long running success as opposed to short term high profitability followed by losses.

    In order to appreciate the magnitude of Jet Blue’s effort, one would have to consider the fact that the 32-34 inches of seat pitch and 17.8 -18.25 inches of seat width that this Low Cost carrier is offering on its narrow body regional jets is superior to the average of the same features as offered by full service carriers on wide body fleet. The result is a short to medium haul product that is superior to a significant proportion of the industry’s long haul product.

    As it turns out, Jet Blue’s is a case of a bold move aimed at distinguishing the low-cost carrier’s offering from the crowd while at the same time ensuring that the offering is great enough to resonate powerfully with the target market. That goal has been achieved.

    Could Current Capacity Slack facilitate Seat Pitch/Width Improvement?

    Jet Blue’s example above proves that in spite of the complexity of its economics and competitive nature, room exists within which industry players can play in pursuit of differentiation that would enable them to carve out profitable niches from the general market. Options exist such as the following for the seat pitch and seat width domain;

    1. Current Capacity Slack can be utilized to Improve Seat Pitch/Width: Since the average load factor in the industry is never 100%, the underutilized space can be applied towards improving seat pitch and width. The lower the average load factor, the bigger will be the room available to play with.
    2. Seat Pitch/Width Based Product Differentiation in Coach: There is opportunity to shift to product differentiation based on seat pitch for the economy cabin. This approach may even be more understandable for customers compared to the current approach which uses rules and restrictions such as minimum stay. The value that can accrue to a seller when customers understand product feature is well captured in the blog post titled “Jet Blue Demonstrates the Right Way to Increase Your Fees” posted on the “Cranky Flyer” blog in May 2013. The blogger praises Jet Blue’s methodology chiefly because it is logical and more understandable from a customer’s perspective when compared to the general industry approach.
    3. Extra Seat Pitch in Low Season: Seat Pitch can be varied with seasonality. Extra pitch may be offered in low season and promoted as a benefit to attract new customers or reinforce product value and drive loyalty. Such an approach is superior to discounting prices in order to attract volume. This is possible since aircraft can be reconfigured back and forth without significant cost.
    4. Etc

    All of the above can be done at various scales. The extra pitch and width may be offered uniformly across the entire cabin. It is also possible for a multiple of products differentiated on the basis of seat pitch and width across the cabin. It is all up to the airline to do its analysis and determine its approach.

    Sources of Information:

    1. Clemons E., Nunes, P., & Reilly, M. (2010, May 24). Six Strategies for Successful Niche Marketing. Retrieved from http://online.wsj.com/news/articles/SB10001424052748704130904574644084205858424
    2. Michaud, C. (2013, June 18). Most hated thing about flying? Uncomfortable airplane seats.  Retrieved from http://www.denverpost.com/tourism/ci_23484106/most-hated-thing-about-flying-uncomfortable-airplane-seats. June, 18, 2013.
    3. Costello, C. (2013, June 18). Customer Satisfaction with Airlines Is a Dismal Failure. Retrieved from http://www.smartertravel.com/blogs/today-in-travel/customer-satisfaction-with-airlines-is-dismal-failure.html?id=15220556. June, 18, 2013.
    4. Tinseth, Randy. (2010, March 08). Dreamweaver. Retrieved from http://www.boeingblogs.com/randy/archives/2010/03/dream_weaver.html.
    5. Passenger Comfort and Space. (n.d). Retrieved from http://www.airbus.com/innovation/well-being/inside/passenger-comfort-space/
    6. The American Customer Satisfaction Index. (2013, June 18). ACSI Transportation, Accommodation, and Restaurant Report 2013. Retrieved from http://www.theacsi.org/news-and-resources/customer-satisfaction-reports/customer-satisfaction-reports-2013/acsi-transportation-accommodation-and-restaurant-report-2013
    7. Our Planes. (n.d). Retrieved http://www.jetblue.com/travel/planes/
    8. Jet Blue Demonstrates the Right Way to Increase Your Fees. (2013, May 20). Retrieved from http://crankyflier.com/2013/05/20/jetblue-demonstrates-the-right-way-to-increase-your-change-fee/
    9. JetBlue looks to stand out in industry’s middle seat. (2013, Mar 26). Retrieved from http://www.reuters.com/article/2013/03/26/us-jetblue-outlook-idUSBRE92P0DY20130326

     

Is the Airline Industry Guilty of Marketing Myopia?

According to research information available from reputable sources, the Airline Industry’s position would generally be at the bottom of the log if industries were to be ranked on the basis of profitability and Customer Satisfaction.

Profitability-wise, the industry’s struggle is illustrated by its returns on capital that are consistently below the cost of capital. According to IATA’s report titled “profitability and the air transport value chain” which was released in June 2013, the industry achieved a weighted average return on invested capital (ROIC) of 4.1% against a weighted average cost of capital (WACC) of 7-9%. The report also points out the fact that the airline industry has one of the lowest ROICs of all industries.

From the perspective of Customer Satisfaction, the latest authoritative American Consumer Satisfaction Index (ACSI) statistics indicate that the Airline Industry again ranks at the bottom in the industries list with a performance that betters only the Cable TV Industry. That the industry’s score is well below 70 on a 100 point scale is a clear indication of the magnitude of the problem.

The industry’s profitability challenge is well documented and has been explained from an industry structure perspective whereby all the stakeholders in the value chain make bigger profits compared to airlines. The dismal score in customer satisfaction is however a surprise occurrence. The surprise is on the basis of the fact that air travel is one of the leading symbols of the tremendous technological and scientific progress the world has gone through; progress that has so transformed the quality of life in the world we live in today. One would therefore expect air travel to be a pleasurable indulgence.

The Great Achievements Airlines Score Daily

Profitability and Customer Satisfaction aside, the airline industry achieves a number of nearly unimaginable feats on a daily basis. For instance, between 3 to 4 million passengers fly safely on nearly 100,000 flights worldwide every day! Moreover, the level of safety airline travel has attained is so great that it is today considered safer to fly than to drive. To illustrate the safety feat, Arnold Barnett, a professor of statistics at MIT asserts that in the last five years, the death risk for airline passengers in the United States has been one in 45 million flights! Put another way, this statistic means flying in the US has become so safe to the extent that one could take one flight every day for an average of 123,000 years before jumping on board a flight that will be involved in a fatal crash. That is just plain astonishing.

The chief instruments of today’s air travel, the jet airliners are in themselves very sophisticated machines. That a 650 tons behemoth can take off with several hundreds of souls on board and fly over 15,000 kilometers non-stop is no mean achievement from a scientific and design perspective. The flagship airliners of today’s jet age can fly high above bad weather; fly further and faster for convenience and are equipped with the technology and features that are intended to make flying as comfortable and as user friendly as may be possible for passengers. It is practically possible today for one to travel thousands of miles without experiencing any significant disruption to the daily flow of life.

Why would a Modern Sophisticated Industry Struggle to Satisfy Customer Needs

With all of the feats and technological advances discussed above, why would the airline industry struggle so significantly to satisfy the needs of her customers? We will attempt to answer this question by splitting our analysis into two streams. The first stream will delve into the Anatomy of the Airline Customers’ Complaints while the second will dissect the industry’s Management Orientation. The analysis of the Customer Complaints characterizing the industry will help us identify the areas where the industry falls short and therefrom enable us to prescribe solutions. The examination of the industry’s Management practice will focus on the Marketing function and the Chief Commercial Officer role since they are directly responsible for Customer Satisfaction.

Where do Airlines Fall Short in Customers View?

An analysis of the customer service challenges raised by customers in their evaluation of airlines at the Airline Quality website (www.airlinequality.com) reveals a common thread that cuts across and accounts for nearly two thirds of the industry’s customer service failings. This common thread is Product design.

The following are the top four areas where airlines fall short as raised by customers at the Airline Quality website;

  1. Inappropriate / Poor Quality Catering
  2. Poor Service by In-flight Attendants
  3. Inappropriate Leg Room or Seat / Cabin Comfort
  4. Inappropriate / Poor Quality In-flight Entertainment

All of the above service failings can be traced to product design. As previously mentioned, nearly two thirds of all the failings pointed out by customers at the Airline Quality website arise out of inappropriately or poorly designed product!

This product design problem looks to be the result of the industry’s productivity and efficiency improvement initiatives that are exerting so much pressure and pushing the industry out of balance in its efforts to create as practical a product (functionality wise) as may be possible at the lowest cost. The upside of these productivity and efficiency driven initiatives is that the resulting cost savings generate competitive advantage and also get passed on to customers in the form of lower pricing. Their downside is that the overwhelming focus on cost and price reduction push things off balance and the industry pays a price in the form of an end product which is fairly priced but which is of reduced functional quality and misaligned with respect to customer needs.

A Look at Airlines Management Orientation

As an industry besieged with business model complexities and significant performance challenges, it is only natural that concepts (and to some extent fads) such as Operational Efficiency, Rationalization, Turnaround Management, Consolidation, Productivity Improvement and Customer Resource Management (CRM) have been the buzz words that have characterized the industry’s management paradigm over the years.

With the exception of CRM, the common ground for all these concepts is the fact that they all look inwards. They are efforts geared towards improving operational and economic performance and they focus on the operations of the internal environment. These initiatives have no direct interest on helping the system to achieve an improved position for other stakeholders, the end customers included.

Moreover, from an “impact on product” point of view, such concepts normally aim at lowering costs while maintaining functional performance and product features as is. Product improvement so as to better meet customers’ needs and market opportunities are normally not be part of such initiatives.

The question to ask then is whether it could be that the airline industry’s internal complexities (such as its complicated business model along with its safety and economic demands) are so great that they can engage the full capacity of the industry’s management resource and effectively prevent it from being able to focus across the full spectrum as is required to pursue a balanced business philosophy; a philosophy that is market and customer oriented?

Is it a Case of Marketing Myopia?

In his widely acclaimed ‘Marketing Myopia’ article, Levitt (1960) suggested that businesses need to be market oriented rather than product centered. Based on our preceding observations on the industry’s product design shortcoming and inward-focused management orientation, could we safely conclude that the airline industry is guilty of marketing myopia?

Levitt’s judgment that business has to be viewed as a customer satisfying process endured for decades but has of late been challenged with a number of marketing literature pointing out its weaknesses and putting forward improvements to the concept. In ‘Balancing Internal and External Marketing’, Lings (1999) argues that the chief weakness in Levitt’s concept is its lack of an internal marketing dimension. According to Lings, a conceptual model which balances internal and external marketing orientations is necessary for today’s service markets where managers have to compete for scarce resources both in the internal and external markets.

What is indisputable from the preceding observations is the fact that a market oriented business philosophy is necessary for success in today’s competitive markets. The airline industry itself is characterized by stiff competition and this makes it critical that players desiring success in the industry adopt a well balanced philosophy that gives market orientation the commensurate consideration it deserves in their business strategy.

Whose Responsibility is it?

Ultimately, the solution to the airline industry’s customer satisfaction challenge can be defined as the need to fix the Product Design and Business Philosophy flaws. It is the business philosophy flaw which has seen the industry go off-balance, putting more weight on internally focus relative to external market focus. The same contributes to the product design flaw. The responsibility to fix this can be said to fall on the shoulders of the Strategy  Function. The Strategy Function in turn would depend significantly on the inputs of the Marketing function and the Chief Commercial Officer role where it reports.

On the road to the desired end, the following deliverables should be targeted and realized;

  1. Business model reviewed with the aim to reduce the complexities associated with the traditional airline business model
  2. Any remaining complexities from 1 above are managed so that they don’t interfere with Product Design
  3. Lastly, balance must be struck between internal and external orientation in business philosophy.

Conclusion

The keys to resolving the industry’s customer satisfaction issue as well as the industry’s profitability challenge to a good extent lie in the hands of the Chief Marketing Officer role and the Chief Commercial Officer role where it reports. These senior officers have a significant part to play in helping the industry overcome the strong and negative influence that the complexity of the traditional airline business model has had on the industry’s product and business philosophy through the years. In the absence of their technical product knowledge and market oriented inputs, the industry’s business  philosophy would remain overwhelmingly internally focused and the end product problematic and misaligned with customer needs.

The Airline Industry and its Pursuit of the Elusive Customer Satisfaction

The passenger side of the Airline Industry scores significantly lower than other industries when it comes to customer satisfaction. Taking the airlines operating in North America (USA) for example; a significant persistent gap is seen between the Customer Satisfaction Index (CSI) for Airlines and the same for the All-Industries Average. Research data published by the University of Michigan’s Ross School of Business under the title of the American Customer Satisfaction Index (ACSI) for the period between 1994 and 2012 shows the gap clearly. Furthermore, this data also indicates that the gap has widened by a massive 400% (from a 2 points to 8 points difference) in two decades. The graph below illustrates.

ACSI GRAPH

Comparison of Airline CSI against Average for 47 Industries. Data from The American Customer Satisfaction Index (ACSI) and The Bureau of Transportation Statistics (BTS).

Airlines Have Failed to Soar

The Airline Industry’s’ average ACSI score of 66 points over the two decades that the ACSI study measured puts the Industry second last in the list of 47 industries. That score is modest considering that it is registered on a 100 points scale. It is also significantly lower than the overall average for the 47 industries measured; lower by 8 points (or 11%). Only Subscription Television Service has a lower score!

Cyclic Trend

The following observations can be seen on the ACSI score trend for the Airline industry between 1994 and 2012;

  1. Starting with a score of 72 in 1994, a year-on-year declining trend persisted until the index hit the two-decades low of 61 in 2001
  2. The index then shot up sharply (from the 2001 low of 61 points) to hit 67 in two years
  3. The sharp rise mentioned in “2” above was followed by a period of gradual decline that brought the index down, almost to the lowest level of 61 registered over the period evaluated
  4. The drop in “3” above was then followed by another recovery phase which culminated in the index hitting the highest level (67 points) for the period evaluated

A cyclic trend can be deduced from the observations listed above.

Why is Airline Customer Satisfaction a Problem?

A number of factors interact to create the customer satisfaction scenario described in the preceding paragraphs. These factors can be grouped into two categories; those that drive the perceived value for airline services downwards and those that drive the oscillation between low and high satisfaction scores (cyclic trend).

Factors Driving Down Perceived Value:

The key ones here include the fact that the utility customers obtain from Airline Service is strongly linked to Time, is Highly Perishable and is to a good extent subject to Emotions. This strong linkage between value and time is a challenge for airlines since service recovery for Irregular Operations is usually time-consuming and resource intensive. Noteworthy too is the fact that the Industry’s product is a Premium Product (Due to Cost of production) while a significant portion of its market is of Discretionary nature and therefore Price Sensitive. More still, lack of transparency in the way Airline services are priced and marketed (due to the industry’s yield management concept) leaves customers with doubts over the “value-for-money” they get when purchasing airline products. From a customer’s perspective, these factors combine to create a scenario of significant negative pressure on the perceived value for airline services.

Factors Driving the Cycles in Satisfaction Scores

The cyclic trend of the customer satisfaction index is due to the cyclic nature of the industry’s profitability. As is normal of businesses under siege, periods of negative profitability induce Airlines to spend extra efforts towards Customer Satisfaction leading to improvement in CSI scores. CSI scores end up following the profitability and loss cycle patterns that are typical of the airline industry.

Customer Satisfaction variation with On-Time Performance

Graph showing the Relationship Between CSI and OTP in the US Airline Industry. Data from the Bureau of Transportation Statistics (BTS)

Emotions, Perish-ability and Time Pressure

It is a known fact that significant levels of emotions are attached to the Airline Industry and its perceived Customer Service problems. A search on the internet on this topic is guaranteed to yield a load of forums, sites and articles bashing airlines for their poor service and poor delivery on “value for money”. Dislike for Airlines and their alleged “poor customer service” is a topic people love to discuss and they do so with lots of emotional undertones. Complaints and allegations range from Indifferent and Incompetent Service to Nickel and Diming. Airlines are accused of attempting to extract more from customers for None Value-adding product features. Intentional Misleading with the aim to rip-off is also a charge Airlines have to answer to!

As players in the Airline industry, Airlines have an unfair share of constraints and challenges to deal with compared to other players in the industry value chain. However, that in itself should not be an excuse worthy of preventing the industry from restructuring itself so as to better deal with those constraints and challenges; the customers satisfaction problem included.

Even though some of the issues that drive the Industry CSI downwards arise from factors beyond the control of Airlines, it would help if Airlines structured themselves to handle those service issues adequately, speedily and at the first point of contact. What this means is that Airlines must posses the capability to handle these issues adequately and promptly at ALL customer touch points.

Flight related problems (delays, misconnections and cancellations) constitute the bigger portion of the customer service issues the airline industry  faces.  Airlines can gain valuable Customer Satisfaction Index (CSI) points if they can improve their ability to better handle these flight related problems; the main aim being to minimize Time Loss. It would make a great difference if  every customer touch point can have the capability to understand a disrupted customer’s problem; respond adequately to customer queries; reassure the customer and initiate the necessary steps to resolve the case conclusively and quickly. Such actions would go towards preserving the utility customers derive from airline service when delivered On-time.

The above can also be achieved if Airlines simplify their product and the interface between the Airline and the Customers with the aim to promote self-service at multiple points along the service chain. The benefit of this is that the Airline will be able to pass on to customers more and more of the simplified service responsibilities that they currently shoulder because of complexity. The time saved by relinquishing non-value-adding activities can be used for value-adding activities resulting in a positive impact on the Industry’s CSI score.

Overcoming the Challenges of a Complex and Pricey Product Targeted at Discretionary Spenders

The Simplification efforts previously mentioned should also be of value here. Simplified pricing structure and transparency in marketing should lead to better understanding of the product on the part of customers. This by extension should translate into an improved score for the product on the “value for money” front and ultimately an improved CSI score too.

While not much could be done to remedy the negative perception associable with the airline product because of its high cost which compares negatively against its intangibility and the shortness of its life, it can be hoped that the gains that could be realized from all the other areas discussed can still have a positive impact on the CSI for the Airline Industry.

“Low Cost” isn’t the Airline Industry’s Profitability Silver Bullet

Profitability is a key motive and the ultimate measure of success in any business. For the airline industry, it happens to be a challenge. To illustrate, we can refer to the observation made by Peter Morrell, a professor specializing in air transport economics and finance at the Cranfield University to the effect that US airlines have made an overall cumulative loss over the past 120 years. The big question then is why investors continue to pump money into the industry. Is it a case of “pig-headed denial of observed reality” as observed by Aida Edemariam? On deeper analysis, it turns out that the answer to the preceding question is a “No”. The truth is that the industry’s apparent profitability challenge is a tendency and not a rule. The airline business can be profitable just like any other.

Emergence of Low Cost Model

With the background of profitability challenges as highlighted in the opening paragraph, it is no surprise that cost has always been a point of focus for the airline industry in the recent past. This focus gave rise to the concept of “low cost airline” with its own independent value chain. Coincidentally, a good proportion of today’s consistently profitable airlines follow the low cost model. This coincidence has contributed to the emergence of the misconception that the low cost model is a sort of “off the shelf strategy package” or “silver bullet” capable of fixing the airline business’ profitability challenge. This fallacy is however exposed by the fact that the practices of low cost airlines vary significantly thus proving that the low cost model is more than a “standardized strategy package” for airline business profitability. Moreover, a deeper look at the practitioners of the model reveals a critical success factor that has received less attention from industry analysts.

Defining Features of the Low Cost Model

The features that have defined the low cost model in its evolution can be classified into four broad categories as follows;

  1. Supply Chain / Value Chain focused
  2. Business Simplification focused
  3. Efficiency focused
  4. Customer Value focused

Low Cost Value Chain versus Legacy Value Chain

On the supply front, the airline industry is characterized by oligopolistic tendencies. Consider air frames for example. Two suppliers, Boeing and Airbus dominate this chain. In product distribution, again no more than four suppliers have dominated the industry at any point in time. Against such background, airlines as buyers are Price Takers. The low cost supply chain practices are an attempt to swap the oligopoly driven value chain existing in the legacy environment for a new value chain where there is leeway for airlines to negotiate price. It is an attempt to get rid of the ‘Price Taker” tag that characterizes the legacy value chain.

Business Simplification and Efficiency

Business simplification and efficiency initiatives are also necessary since the legacy model tends to be quite complicated. Intricacies of managing network schedules and connectivity, operational disruptions, competition, pace of change in markets, global distribution and more create a complicated business. Regulation which is aimed at helping the industry achieve operational safety and standardization translates into constraints and add to the complication. These complications have cost and efficiency consequences. According to the International Air Transport Association (IATA), the current simplification project it is spearheading has the potential to reduce industry costs by up to US$18.1 billion every year.

Why the Airline Industry is a “Price Taker

The Low Cost model features discussed so far in the two preceding paragraphs have been given a lot of attention by industry analysts. The third category; Customer Value Focus; has received less attention yet in our view, it has contributed more to the success of the profitable low cost airlines.

As we saw earlier, the airline industry is a price taker in the value chain under the legacy environment. That position does not change when we examine the industry as seller. Airlines have generally not been able to set, maintain and control profit delivering pricing in the markets. This is largely driven by stiff competition, the perishable nature of the airline product, the assumption that charging one economic price would not generate enough revenues to deliver profitability and to a greater extent, the fallacy that the marginal cost of producing an extra seat is low and as such, an airline is better off putting bums on seats at lower pricing.

How Customer Value Focus is Driving Profitability for Ryanair and Southwest Airlines

Examining the customer value focused practices of successful low cost airlines reveals the critical role these practices play in the successes observed in low cost airlines. All successful low cost airlines have a profound business philosophy driving their customer value offer and by extension their commercial strategies. They go beyond the cost and efficiency optimization practices that have been given more attention by analysts and the industry and have falsely been considered as the key drivers of success in the low cost model.

Take Southwest Airlines and Ryanair for instance. Both are very successful low cost operators. Even though they have common practices in the cost and efficiency optimization category, it is their philosophies in the customer value category that differentiates them and drives their sustainable business success.

The consistent profitability of Southwest is down to its “business philosophy” that is centered on employee engagement and operational efficiency and reliability. This approach has enabled it to deliver superior customer value and enabled the company to extract a higher value from the markets. Even though Southwest has deployed resource and cost efficiency initiatives, these cannot be said to be the sources of its long running success. These cost and efficiency initiatives are practiced by all, can be easily copied by competitors and do not offer sustainable competitive advantage. What competitors have not been able to replicate is Southwest’s philosophy with regards to customer value creation.

The employee engagement philosophy is the secret behind Southwest’s ability to offer superior value to the market. The same has enabled the company to shed off the “price Taker” tag that characterizes the airline business in general. Southwest has transformed into a “Price Setter”. They literally decide on the value they want to pack into the product knowing well that they can only extract the same value back from the market. The premium value they build into the product is the reason they are able to take “profit delivering” value from the market.

Ryanair is another unique story. Europe’s most popular airline has the vision to one day offer its tickets for free (zero value) which means it will generate its revenues solely from ancillary sources! That is an audacious goal if at all they are serious about it. To vouch for it to some extent, Ryanair is today the most aggressive low cost airline in the world when it comes to ancillary revenues. Ryanair leads in terms of volume as well as proportion of total revenues generated from ancillary sources. Like the other low cost players and the industry in general, Ryanair also has cost and resource efficiency initiatives targeted at helping it optimize costs and boost profitability. What differentiates Ryanair though is its philosophy on how to generate revenues in the competitive airline industry. The philosophy of innovation drives their value offer and is anchored by the “Cheap Fares” and the “Us versus Them” psychological scenario they have been able to create and use to their advantage.

No Silver Bullet. It is all in the “Success Philosophy”

The contrast we have seen in the practices of Ryanair and Southwest highlights the fact that there is no one magic structure or formula that accounts for the successes observed in low cost airlines. Furthermore, the phenomenon that has come to be referred to as the low cost model also goes beyond focus on costs as we have seen in the discussions in the preceding paragraphs. The low cost reference perhaps arose out of the fact that the only common aspects observed in practitioners of the model related to cost and resource efficiency. Unfortunately, this cost driven reference ended up relegating the unique elements of the model to secondary level even though those elements are arguably of higher value.

Even though the key elements of the business philosophies driving customer value offer and success for Southwest and Ryanair are not cost-related, the two airlines are however famously known as low cost airlines and many imagine that the secret behind their success is lower costs. In my view, it is the “employee engagement driven customer value” and “Cheap Fares and Us versus Them psychological scenario philosophies that differentiate Southwest and RyanAir and has in turn enabled them to enjoy sustainable competitive advantage in the market. Cost and Resource Efficiency initiatives are common and cut across the industry (including the legacy model), can be easily copied and as such cannot offer sustainable competitive advantage.

Conclusion

Based on the above, airlines that want to succeed must go beyond the Cost and Resource Efficiency initiatives that have so far been widely and falsely viewed and accepted as the benchmark features of the low cost model. A unique business philosophy to drive success through Customer Value creation and Commercial Strategy in general is a must. Such philosophy would serve as a sustainable source of competitive advantage just as we have seen with the cases of Southwest and Ryanair.

Is Africa’s Aviation Safety Situation that Bad?

It is no secret that Africa’s civil aviation lags behind the rest of the world (and the industry average) by some distance. The continent falls short in areas such as infrastructure, security, resources, regulation, skilled workforce and safety. Of all these, Safety is so far the standout issue and it gets lots of mentions. In my view “Regulation” and “Skilled Workforce” deserve special attention too because they directly influence and magnify the other problem areas mentioned.

Putting Africa’s Apparent Safety Gap into Perspective

To put the magnitude of Africa’s safety gap into perspective, we will take the number of accidents involving western built jet aircraft as a measure and compare the number of accidents occurring for the industry as a whole to the number of accidents involving African operators on that measure. While the overall industry average in 2012 was one accident for every five million flights, Africa’s average was eighteen. That is eighteen times the industry average!

It is not ALL glum though. Africa’s score improves significantly when the context is changed just a bit. When only the IATA certified  and professionally run Commercial Airlines in Africa are considered, Africa’s accident statistics improves to match the overall industry average! These IATA certified airlines subscribe to and are under the regulation of internationally recognized safety and operations standards such as IATA’s Operational and Safety Audit (IOSA) and Safety Audit for Ground Operations (ISAGO) among others.

The two Worlds of Civil Aviation; the Regulated and the Unregulated

On the basis of the immediate preceding observation, the apparent huge gap between Africa and the rest of the world that gets mentioned all the time can literally be rephrased as the gap between the “Unregulated” and the “Regulated” worlds of Civil Aviation. As the rephrased statement points out, regulation plays a critical function in ensuring safety in aviation. Africa’s poor safety record is squarely a regulation and oversight problem.

The Airline Industry’s Primary Safety Oversight Body

Even though IATA also plays a significant role in promoting safety as we have seen courtesy of the standout safety record for Africa’s IATA certified commercial operators, the industry’s primary safety and oversight body is the International Civil Aviation Organization (ICAO). ICAO was formed purposefully to promote the safe and orderly development of international civil aviation worldwide. It sets standards and regulations necessary for aviation safety, security and efficiency among other measures. ICAO works to achieve its vision through the cooperation of its signatory member states. ICAO requires its member states to implement its civil aviation goals. From ICAO’s perspective of the performance of the civil aviation function, regulation is a critical role and it falls in the domain of the State (Government). Africa’s safety can therefore be attributed to the failure of African States to effectively enforce ICAO’s standards and regulations within their territories.  Inadequate financial resources, lack of skilled manpower, inadequate legislation and outright refusal to accord aviation the priority it deserves are some of the reasons that have been put forward as the factors behind the dismal performance by African states in discharging their regulatory and oversight role on the industry.

The Africa Strategic Improvement Plan

Driven by their concern over Africa’s safety record, ICAO joined hands with IATA to develop the Africa Strategic Improvement Action Plan which was finalized and tabled in July 2012. The plan aims at enhancing safety by addressing deficiencies and strengthening the function of regulatory oversight. The seven point plan was developed after analyzing accidents in Africa between 2006 and 2010. Its key recommendations include the establishment of independent and sufficiently funded civil aviation authorities, implementation of effective and transparent safety oversight systems and IOSA certification for all Carriers. The plan also aims for quick resolution for all outstanding Significant Safety Concerns (SSCs) for African countries.

A Role for Africa’s Up-to-Standard Operators

Even as IATA and ICAO do their part in efforts to turn around the industry’s safety performance in Africa, I also believe that the elite group of IATA certified African operators whose safety standards are at par with the rest of the world should chip in with a significant role. Africa’s aviation success stories such as Kenya Airways, Egypt AirEthiopian Airlines and South African Airways can positively influence the industry’s performance and development in the continent. Their influence can be pushed through technical programs sponsored through Africa’s aviation trade association AFRAA or directly in strategically arranged technical partnerships with state and regulatory authorities and other airlines and industry stakeholders. These African operators of intercontinental repute are the “carriers of hope” for the industry in Africa. They can help ICAO, IATA and AFRAA to successfully push through the enforcement of industry’s safety and operational regulations and standards in Africa.

Partnerships for the Development of Skilled Manpower

Development of skilled manpower is one critical area where the aforementioned technical partnerships can be applied. This would have tremendous impact on the industry’s problems since skilled manpower would positively impact the entire system, regulation included. Strategic partnership arrangements between the elite African operators and all the industry stakeholders in the continent for the purposes of skills development and transfer would do the industry a lot of good.

ICAO is already addressing the manpower issue through its capacity building efforts aimed at the establishment of the Association of African Aviation Training Organization (AATO). AATO is expected to ensure standardization and harmonization of training and training requirements in Africa. It is ICAO’s hope that this will result into improved skills that will eventually translate into safe and secure aviation operations in Africa. The elite carriers can play a significant support role to ICAO in this effort.

The Future looks Bright

In conclusion, we can confidently project a bright future for Africa’s aviation industry. The mere fact that the industry has been constrained means there is potential for improvement if the constraints can be dealt with.

The continent’s current trend of strong economic growth, favorable demographics and the oil and mining discoveries combine to provide a base that can enable the industry deal with all the constraints that have been holding it back. As economies take off, the excuse of inadequate financial resources which states have blamed for their inability to effectively implement ICAO’s safety standards and regulations will no longer be justifiable. Stronger financial performance of the industry should also support improved investment in human resources resulting in improved skills and  retention of skilled manpower. Last but not least, unwavering efforts by ICAO, IATA, AFRAA and Africa’s “carriers of hope” such as Kenya Airways, Ethiopian Airlines and South African Airways can and will push Africa’s aviation industry to the next level, putting it at par with the rest of the world.

The job is halfway done as the case of the IATA certified operators in Africa proves. All that remains is to bring the “unregulated” portion of the industry (in Africa) under regulation.

Welcome to the “View-from-the-Aisle-Seat” Blog

Welcome Greeting

Hello and Welcome to my blog. This is my very first blog post. As would be expected, I am over the moon about it. It has been weeks of looking forward to this moment. It is finally here so let the drums roll.

Target Audience

If you are an analyst or aviation enthusiast with a keen eye on topical issues in commercial aviation and management, then rest assured that you have found the right place to satisfy your thirst. I hope to serve thought provoking analyses and commentaries on topical issues on management as it is practiced today in the commercial aviation industry. I hope to especially share with you my unique insider’s perspective. In order not to make it All-work, No-play, I will serve some pieces with a light perspective from time to time. Be sure to check the “Aviation Themed Jokes” section for this.

Celebrating 12 Years in the Industry

On May 21st 2013, I celebrated twelve years of diligent service in the airline industry. What a journey it has been. There have been moments of joy and those of sadness. I have shed tears of triumph and those of defeat at different times in the journey. In as much as there are occasions that I will cherish forever, there also exist those I would love to erase out of my memory as quickly as could be possible. What is important though is the fact that overall, it’s been challenging, Interesting and enjoyable. That is the motivation behind me wanting to share so you can also partake of the beautiful story filled with valuable insights.

From “Naivety” to “Authority”

My very first close encounter with a jetliner was with a Boeing 737-300 that was on ground for maintenance. Believe it or not, it under awed me! Its appearance on the surface did not meet my expectation of a sophisticated machine that flies at 35,000 feet above the ground. I guess it was a case of “naivety” and “exaggerated expectation” against “uncomplicated reality”. Perhaps I can blame this on the story of Theodore Honey and the Reindeer Jetliner that I so thoroughly enjoyed when I read Neville Shute‘s book “No Highway” as a teenager.

Fast forward some years and here we are today. Long gone is the naivety and exaggerated expectation that made me dismiss as a joke a respectable machine that remains one of the most iconic images and success stories of commercial aviation to date. Today I rate myself an authority on commercial aviation management. I hold a substantive and unique insider view of the industry that I can share with you. What a difference!

Invitation to Follow My Blog

This piece is therefore an invitation for you to jump on board and cruise with me as I share the story of commercial aviation management from the point of view of my experience. Register and follow my blog by clicking on the “Follow This Blog” link. By doing so, you will receive every post on your email so you will not miss any. I guarantee it will be insightful, thought provoking and interesting.