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Airlines’ Addiction to Mergers: Why Customer Experience is a Better Strategy for Acquiring Customers

moneyplaneIn case you missed it, US Airways is buying American Airlines out of bankruptcy. Assuming that the merger goes through, the top three domestic airlines—American, Delta, and United—will all represent mega-mergers of formerly bankrupt major airlines. It seems to me that airlines have perfected their dance moves: hit a bump, file for bankruptcy, merge, repeat …
The (now) Big 3—let’s call them “major”—airlines have unenviable reputations. In 2003, when we considered expanding our bustling business in hotels to adjacent industries, I talked to the customer experience leaders at the (then) five major airlines. A comment from one Director of Customer Experience stuck in my memory: “Whatever you do, if you’re me, you NEVER, EVER reveal your job title when you’re at a party.”
He went on to describe party guests queuing up to tell him their airline horror stories, each one worst than the last, and most of them from other airlines, not his own. Basically, he’d become the whipping boy for the entire industry—not a pretty sight.
I have never been able to shake that visual. In fact, not only can I imagine the hypothetical party, I can see myself at it, lining up to unload, creative license in hand: “We were on the tarmac for eight hours [actually, two], in oppressively hot conditions [75 degrees Fahrenheit], with my six kids [I have three],” and so on.
Let’s face it.  We LOVE to hate the major airlines. From the moment we head to the departure airport to the moment we leave the arrival one, we are like cattle being driven to slaughter. It sucks, and we like to dish about it. According to the American Customer Satisfaction Index (ACSI), which has been tracking the airline industry since the mid-90s, customer satisfaction with the Big 3 (then Big 4) carriers in 2012 was between 62 and 65 on a scale of 100. That’s not the performance of beloved companies.
And how do the Big 3 respond to this massive customer dissatisfaction? By merging and wielding more market power.  It seems the major airlines have forgotten that the purpose of business, as the late management guru Peter Drucker reminded us, is to create customers.  Oligopolies, like airlines, don’t create customers. They hold consumers hostage, often turning them into non-customers with infuriating policies (think baggage fees).
There’s a better way for the major carriers to bolster their survival prospects: Customer Experience. The major airlines could try to provide a product and service customers actually want to buy, not one they feel forced to buy (because of lack of appealing alternatives). It’s not as novel a concept as it sounds.
In fact, customer experience IS a term associated with some airlines—the ones nipping at the heels of the majors. Widen your lens from the top three to the top five domestic airlines and suddenly you see a different picture. The fourth-largest airline, Southwest, ranks 10th on FORTUNE magazine’s most admired companies list and achieved a customer satisfaction rating of 77 on the ACSI in 2012. Not only that, it’s profitable. Really profitable. Southwest generated the highest return to investors of all publicly traded S&P 500 companies held for 30 years from 1972 to 2002, according to Money magazine.
The fifth-largest airline—and it’s a distant fifth, at 29 million passengers in 2012—is JetBlue, an even stronger customer experience company. JetBlue scored 81 points on the ACSI in 2012 and topped J.D. Power’s 2012 North American Airline Satisfaction Study. It has been profitable most of its years of operation, including the period after 9/11.
Right behind Southwest and JetBlue in size is Alaska Airlines, which ranked highest of the traditional (that is, not “low-fare”) carriers in passenger satisfaction, according to J.D. Power. Alaska Airlines is profitable, too. The 2012 net income of Alaska Air Group, the airline’s parent company (which also owns Horizon Air), was $316 million, a 29% increase from a year earlier and its ninth consecutive year of adjusted profits.
The airline industry seems to be pursuing two disparate strategies. The strategy of the major carriers is to merge themselves into greater oligopolistic power, where they can continue to coerce disgruntled, captive consumers—their passengers. A Tonight show spoof of the most recent airline merger captures the scheme perfectly. The strategy of the “minors” (and, in the case of Southwest, not so minor) is to create customers.
I’m placing my bet on the customer creation strategy. Why? Because not only is Customer Experience the leading indicator of financial performance, but also, whenever I have a choice, I always fly Alaska, JetBlue, Southwest, or Virgin.

Photo credit: Christian Haugen

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