Thursday, May 22, 2008

How to make enemies and lose influence

As young adult, I read Dale Carnegie’s seminal book How to Win Friends & Influence People. It had a great influence on me, but every so often I need a refresher course when I’m suffering from a (particularly acute) humility deficiency. Since I can’t find my own copy (which is sitting in a box somewhere), this week I went to the library and borrowed a copy to read over the long weekend.

Carnegie’s book was brought to mind last night when I heard about the latest marketing disaster by american airlines — lead by American Airlines. The TV shows all led with the announcement that AA wants to charge a fee to check all bags, including the first at $15 (in addition to the $25 that United started charging earlier this year for the second bag).
I know the airlines are in trouble, I know they are losing money, and I know they are desperate to raise revenues to cover jet fuel made from $130 barrels of oil. I also know this also the strategy used by European discounters like EasyJet. Still, this sounds like the last gasp of the dying legacy carriers, for two reasons.

First, this will shift behavior — charge people more and they’ll do it less. It will generate less revenue than a straight fare increase. It is going to exacerbate the fights over carry on baggage that have been worsening this year as load factors go up.

[History of Air Cargo and Airmail]And what are they going to do with all the extra cargo hold space? Are they really going to be able to sell that capacity for airmail?

Second, this will continue the decline of the industry’s customer satisfaction measures and the market share lost to competitors who treat their customers like, well, customers, not revenue sources. The latest American Customer Satisfaction Index found that airlines have the worst satisfaction of 43 industries among American consumers. As USA Today reported on Tuesday:

Southwest Airlines is the only one of seven legacy airlines with a high customer-satisfaction score. Southwest, which has led in customer satisfaction for 15 years, received a score of 79 on a zero-to-100 scale. A score in the 70s indicates a high degree of customer satisfaction, Fornell says.…

Though Continental and American Airlines tied for second with a score of 62, it's a "very low" score, Fornell says.

US Airways had the lowest score, 54, which indicates a customer-service "disaster," he says.
The creator of the ACSI, Michigan Prof. Claes Fornell, reacted as I did to American’s bonehead plan. As the NYT quoted him this morning:
“I’m constantly surprised at the creativity in the wrong direction of airline management,” said Claes G. Fornell, a professor of business administration at the University of Michigan.

This week, the university’s American Customer Satisfaction Index rated the airline industry last among consumer businesses measured in the study. In this light, American’s move “seems really, dare I say it, stupid,” Professor Fornell said.
Fornell thinks the other carriers should not copy this trial balloon, but other (industry-specific) analysts predict that all the legacy carriers will do so. I would guess that Southwest will not, because they have been more reluctant to annoy their customers with annoying fees; for example, they still don’t charge for a second bag.

As a business flyer since 1980, I have been following the industry (and its business models) with interest during that time. Because I know the industry, I used to teach the airline industry in my undergraduate strategy class to illustrate Porter’s two generic strategies, low cost vs. differentiation. Before 2001, the legacy carriers provided better service and Southwest (with a few obscure copycats) were the discounters. First the Sept. 11 shock and then the jet fuel price increases have accelerated the commoditization of the industry. Other than frequent flyer benefits, today there is nothing about the legacy carrier service that’s really better than the discounters (even ignoring Jet Blue).

More seriously, the service is worse — the “TWA effect” I noticed 10-15 years ago. Flight crew assignments are based on seniority, so in a growing airline more junior people are hired and the veteran flight crews are able to bid for ever more desirable positions every year. In a shrinking airline (TWA 15 years ago, most of the major carriers today), junior employees are getting laid off, the plum routes are even harder to get, and facing another 10-15 years of declining working conditions the middle-aged cabin crew gets surly.

In a declining manufacturing firm, no one sees the surly workers, so as long as quality doesn’t decline the company might survive to grow another day. In a service business, the surliness is out front, and customers who can go elsewhere will.

The lowest ranked airlines is US Air, which changed its name from Allegheny because its poor service and reliability earned it the nickname “Agony” airlines. The next lowest rating was United Airlines — once a great airline that’s been recently cutting its way to greatness. On the proposed merger between United and US Air, Fornell dryly observed: “When it comes to mergers, combining two negatives doesn’t make a positive.”

Cartoon credit: Steve Breen, San Diego Union-Tribune, May 22, 2008.

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