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Airlines, Are You Flying People, Or Planes?

Lia Winograd
By Lia Winograd on Nov 19, 2015 1:44:00 PM

Historically, airlines have struggled to break even. The economic atmosphere improved this year, resulting in an inverse relationship for customer service. How sustainable is this growth? Can airlines afford to forget about the customer even for a second?

Large Numbers, Small Margin.  

When we think about airlines, we think big stuff. A $787 billion dollar industry, flying 3.3 billion passengers for thousands of miles across the globe, with more than 1,400 new aircraft, creating 57 million jobs.

But when we get to the bottom line, the average profit an airline makes on each passenger is a mere $8.27 dollars, equivalent to roughly a 4% operating margin. That means that when you spend $200 dollars on a plane ticket to visit your family over holiday break, your airline retains profits big enough to afford two Double Whoppers at McDonald’s. And that profit is at an all-times high. 

Compare this to other industries, like telecommunications and banking, where companies make margins of 11% and up to 15%, respectively. 

Those were the days...

Profitability was guaranteed in the early years of commercial aviation. Washington regulated the airline industry as a public utility, which meant that the government was the one defining rates, fares and schedules. The price of a ticket was so expensive that only the rich could afford it. 80% of the American population had never flown on a plane.

But then the 1973 oil crisis hit, stagnation changed economic priorities, and technological innovation gained legitimacy and momentum. Also, the 1970 Penn Central Railroad collapse became one of the worst cases of public bankruptcy, resulting in a huge taxpayer bailout. Who wants to deal with that?  

The Deregulation Act in 1980 introduced new competitive forces in the form of low-cost-carriers (LCCs), causing prices to drop by about 40% and passenger loads to increase dramatically. Deregulation boosted those big industry numbers we think of today but drained what matters most in a “free economy”: profits.

Bullied By The Big Guys

Airlines are the face of the travel industry, the irony being that almost every other player in the value chain, from airports, manufacturers, travel agents to service companies, pockets far more sizable profits. Meanwhile, the companies pulling the actual weight struggle to break even.

Airlines have no negotiating power when it comes to Airbus and Boeing, the duopolies that control airplane manufacturing. Airports and air-traffic control are also monopolies. To top it off, fuel prices are controlled by global oil markets, leaving airlines no choice but to be price-takers.

Each year, airlines pay consulting giants millions of dollars just to make sense of their unwieldy cost structures. 

Fly People, Not Planes

Given the limited possibilities of reducing fixed costs, airlines must continue to focus on top-line growth to achieve profitability. 75% of revenues come from airfare (the rest from cargo). Sadly for an airline, selling a highly discounted seat is better than taking off with it still empty.

More so than any other industry, airlines have limited ways to achieve top-line growth. You see, when Ford, for example, wants to improve customer experience, it simply releases a new, souped-up line of vehicles. Because of the industry's higher restrictions and steeper costs, air travelers have, for the most part, been riding the same planes for years. So, if improving the hard stuff is not feasible, why don't airlines focus on the soft stuff, by providing stellar customer care and creating a seamless customer experience, from start to finish?

Welcomed Growth, Unwelcoming Response 

In an unexpected turn of events, IATA was forced to revise the airline industry’s projected revenues this year from $25 billion to $29 billion. Falling oil prices, improved efficiency, and stable ticket values have allowed airlines to generate record margins.

However, a recent article by Fortune shows that the same airlines benefiting from this heightened profitability (United and American Airlines) are the ones delivering the worst customer service. 

If airlines don't take care of their customers when the going is good, how can they expect fliers to stick around when times get bad?

Don’t Take the Social Customer for Granted

How sustainable is growth for the airline industry? Sure, oil prices have dropped this year, but there's no telling how long they'll stay low. Once the inevitable spike comes, will customer service take a leading priority in an airline’s agenda all over again? We already know that social customers are loud and impatient (over 42% of customers complaining in social media expect a 60-minute response), but are they resentful, too? Will they remember how they were treated?

Social media has evolved to represent a unique customer service channel. A recent 2015 customer service study revealed that 65% of customers are likely to speak badly about a brand on social media. Churn rate can increase by 15% if organizations fail to respond to customers on social media. For airlines, 73% of people feel more positively about a brand after receiving a customer service response.

The voice of the social customer is louder than ever, and everyone can hear it. Customers are listening and changing the way they perceive brands, and, by extension, their buying behaviors. This is also happening in public, making it harder for companies to cover up their messes. 

Companies can't take the social customer for granted. Airlines can't afford to take the social customer for granted. Pushing customer service to the periphery--only paying attention to it when economic performance dictates--is not a viable strategy in the long-term.

Because the social customer doesn't forget. And if he does, social media will be there to remind him. 

Topics: Airline, Customer Experience

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