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AIRLINES SENSE A CHANGE IN FORTUNES

The first quarter of 2001 went badly for the airlines. American Airlines announced a loss of $43 million for the first three months, Delta Air Lines reported losses of $122 million and United Airlines $305 million. High fuel prices, reduced turnover due to striking pilots and the general slowdown in the American economy were stated as to blame.

Yet Continental Airlines managed to make a $9 million profit in the same period. What did the Houston-based airline do that was different from the others?

Shareholder value has been the magic word touted about in industry over the last ten years, and not just in the world of aviation. Again and again chief executive officers would get up at annual general meetings and make a point of stressing all the effort that was being put into increasing shareholder value. The higher the shareholder value, the better the return a company is expected to make. In the past the only way to keep up in the race for shareholder value was by subjecting costs to careful scrutiny. It was believed that the key to good shareholder value was services produced with low unit costs.

All the benefits of this kind of business administration went to the shareholders. The share price rose and the company gained in value, so the shareholders were happy.

But when corporate policy is dictated solely by share price considerations there is a serious danger that the needs of the customer will recede into the background against all the cost saving programmes. There are plenty of examples of this phenomenon among the airlines. Years ago they discussed at Lufthansa how much money might be saved from reducing the proportion of wool in the socks offered to First Class passengers on longhaul flights, while Bob Crandall of American Airlines announced proudly some years ago the savings he had achieved by no longer offering olives to Business Class customers with their aperitifs. Such savings were good from a shareholder value perspective. But for the customer they were bad, even if the absence of the olives escaped unnoticed. The critical factor here is the thought behind the deed.

Continental Airlines on the other hand is driven by a different catchword, customer value. This concept is the key element in a way of thinking and acting that is customer-centred. For example, at Continental passengers on flights that are not sold out are allowed to take their baggage on board with them. Punctuality of flying operations is promoted by a company bonus scheme: if Continental finishes in one of the first three places in the punctuality stakes in the USA, every employee receives a bonus of $65 per month. The result: Continental is more punctual than other airlines in the USA, and last year it was actually the most punctual airline. This has enabled the company to save millions of dollars in costs because it spends so much less on delayed passengers, their accommodation and onward transport.

The financial results for the first quarter of 2001 suggest that airlines which focus too heavily on their shareholders and too little on their customers come unstuck more easily than customer-oriented airlines. Customer satisfaction is not actually at odds with shareholder value. A satisfied customer who always flies with the same airline contributes more in the way of shareholder value than a full fare-paying passenger who changes airlines after enduring a few nerve-racking experiences of unpunctuality or inadequate on-board service.

From page 6 of FLUG REVUE 7/2001