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Why do airlines find it so difficult to make a profit?

by Nigel Hollis | February 20, 2013

And then there were four…major U.S. airlines that is. Last week, it was announced that American Airlines will merge with US Airways. Neither airline can be considered a strong business or a strong brand, but perhaps consolidation will finally lead to an improvement in business results and customer satisfaction. The only question to my mind is which of those two things is the chicken and which is the egg?

The conventional wisdom is that airlines suffer from systemic problems that make it tough to run a successful business. This post from Investopedia suggests four basic reasons why airlines struggle financially.  

  1. Unprofitable airlines keep flying and so undermine demand for the other carriers
  2. Fixed and variable costs are high making it difficult to respond to changing market conditions
  3. Exogenous events can have a big impact on demand e.g. volcanic dust clouds
  4. Airlines have a reputation for hassle and bad service

Bankruptcy, which would often see normal businesses shuttered for good, seems to be a safe haven from which the airline uses to effect cost efficiency plans and upgrades they could not afford otherwise. They then emerge from bankruptcy with the expectation of improved financial performance, but the same dismal customer service. What is the definition of madness? Doing the same thing repeatedly but expecting different results.

Airlines in general have a low customer satisfaction score by comparison to other industries and it is notable that the two smaller, value airlines – JetBlue and Southwest – achieve satisfaction scores significantly higher than the traditional carriers: Delta, US Airways, American and United Airlines. We saw exactly the same picture last time when we measured U.S. airlines in BrandZ back in 2011. Southwest was far better known than JetBlue, but both brands were meaningfully different from the competition and poised for growth. None of the legacy airlines came even close to matching the equity scores achieved by the value airlines, which were seen to be setting the trends for the category.

I have recently updated the analysis I wrote about in the blog post “Does Your Brand Need Life Support,” with additional cases of deceased and bankrupt brands and the findings remain the same. 

Brands that fail lack a meaningful difference compared to their competition (for more on our new brand equity model see this Point of View by Josh Samuel). They tend to be equally well-known but they are unable to establish positive and differentiating perceptions of the brand, particularly among the people who use them.

Of course, you don’t have to offer great service to make money in the airline business. Ryanair in Europe makes more money than British Airways, has a lousy reputation for service but it is well-known for being the cheapest. The problem with the traditional U.S. carriers is that they need to command a premium to keep flying, but are not able to deliver the service necessary to justify that premium. Unfortunately, I am not sure the merger between American and US Airways is going to make any difference on that count.

So what do you think? Is customer service the chicken or the egg when it comes to airline profitability? Please share your thoughts. 

4 comments

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  1. Fisher, February 21, 2013
    Hi Nigel,

    In China, we have a china-sss airline which is really cheap. How do they profit? They sell things on plane.
  2. Drew, February 20, 2013
    Hi Nigel,
    I think what Southwest, JetBlue, and even RyanAir have done is stepped back and taken a more blue ocean style approach to their offerings.  Instead of competing on the same attributes as other airlines, they focus on a few key elements that are meaningful to consumers and also create a sense of difference.  RyanAir is essentially pure price, and by cutting out the frills can offer the lowest by a long shot.  When you fly JetBlue, however, it doesn't necessarily seem like a low cost airline because they were very selective in deciding which attributes were actually important to their target consumers.  So instead of cutting out the free snacks and drinks that in the big scheme of things aren't that expensive, they do things like charge more for extra legroom seats, eliminating business/first class, and having only two different aircraft they fly (greatly reducing maintenance).  The problem is, many of the big airlines try to be everything to everyone (as you mentioned) and drive consumers to decide on price while at the same time annoying them with fees for things consumers feel should be included (like baggage).  So to answer your question, customer service is just one component of a larger equation, and if consumers see what they are getting in place of service (i.e. much lower prices) they will tolerate lower levels or automated service (assuming you have the right mix and the overall experience isn't miserable).
  3. Nigel, February 20, 2013
    Hi Eduardo,
    I totally agree that it all depends on your target audience. Any brand will get into trouble when it starts trying to be all things to all people. Value brands have to focus on keeping prices low and Ryanair has not only got the business model right they have done a great job of publicizing how cheap they are. The practice of offering 5 euro tickets is just one example. Cheers from cold and snowy Vermont!
  4. EDUARDO CARVAJAL, February 20, 2013

    HI Nigel,

    I deeply think that it depends of which market or nich you are trying to reach, as you mentioned on your post, Ryanair is well known for its lousy service, however, I myself when used didn’t even noticed because I was so happy and trilled to have payed 5 euros for my france to spain ticket ( even if I payed extra for my luggage), I really think that service makes the difference, but when specific market segments such as the on the budget,backpackers,students kind of market demand for just a single trip, those things ( although well received) are not that important ( all seen in a costumer point of view).

     

    Cheers all the way from México

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