If you don't have new customers, how can you have loyal customers?

OK, executives in the airline industry have officially lost their minds. On Friday, 05Sep08, Continental Airlines decided to start charging $15 for the first bag checked - much like American Airlines and the other airlines that followed. Interestingly, the NYT article about this stated a caveat regarding the fee: 

Continental, based in Houston, said the fee would not apply to elite members of its frequent-flier program, those in first- or business-class seats, customers traveling on full-fare economy tickets, or military personnel and their families traveling on official orders.

Now, two fascinating things about this development. First - as mentioned in an earlier post and updated regarding Southwest Airlines' response in a later post - is the extra fee really worth the aggravation? It certainly can't be good for the brand or customer satisfaction. 

In fact, I looked up the airline satisfaction ratings on the American Consumer Satisfaction Index (ACSI) website and - big surprise - Southwest is the highest rated airline and American, Continental, Delta, Northwest, United and US Airways all are rated below average in customer satisfaction. And those ratings were collected before American instituted their baggage fee!! (Note, ACSI is the satisfaction model I discussed in class.) 

Just to make sure it wasn't purely an ACSI data abnormality or something, I took a gander and J.D. Powers's website and found their most recent Airline satisfaction numbers. At first, I was surprised that Southwest wasn't even mentioned in the press release. Instead, it stated "Alaska Airlines, Continental Airlines and JetBlue Airways Rank Highest in Customer Satisfaction." What's going on here? 

Well, it turns out that JD Powers separates "Traditional Airlines" from "Low Cost Airlines." (I guess calling the "traditional airlines" "full service airlines" would be too much of an oxymoron.) Anyway, although they're separated, both categories use a 1,000 point scale. So, combining the charts from JD Powers, here's what they would look like:

1. JetBlue Airways - 776 points (JetBlue is not rated by ACSI)
2. Southwest Airlines - 728
3. Frontier Airlines - 715 (not rated by ACSI)
4. Airtran Airways - 708 (not rated by ACSI) 
5. Alaska Airlines - 684 (not rated by ACSI)
6. Continental - 684
7. Delta - 669
8. Air Canada - 654 (not rated by ACSI)
9. American Airlines - 644
10. US Airways - 640
11. Northwest - 628
12. United - 628

Also, note that beginning with #5, Alaska Airlines, all of the "traditional airlines" are rated at number 5 or lower in customer satisfaction!!

So, the way that the airline executives think they can increase customer satisfaction - and therefore long-term shareholder value - is to aggravate customers even more than they have already, while the "low cost" airlines eat their lunch. Hmmm...."How's that working out for you?" 

OK - time for the second point, and the title of this posting: If American Airlines, Continental and the others waive baggage fees for their loyal customers (e.g., elite frequent fliers), but charge new/infrequent customers to check bags - how in the world will they ever get any new customers to be loyal? This makes no sense!! The only non-elite people who would fly them regardless of the baggage fees would not have a choice (e.g., Continental has a near monopoly on Cleveland, OH). Of course, if people don't have a choice, why give them incentives to fly you anyway?  In fact, getting back to the example of Cleveland - once Southwest added Tampa-to-Cleveland connection, I stopped flying Continental and refuse to fly them again if I have a choice. 

Hence, by only charging the "non-loyal" customers for baggage fees, you'll never increase the loyal customer segment of customers. I'm not sure they'll be able to replace the loyal customers they're losing!! If I believed in conspiracy theories, I'd be inclined to think that it's Southwest and JetBlue - currently the highest rated airlines in terms of satisfaction - that somehow got American, Continental and the others to institute these fees!  (OK, I'm not a conspiracy theorist, but how someone could possibly think that by offering crappier service and charging more will attract more customers is beyond my comprehension.) 

The bottom line: before focusing on your "best customers" to the detriment of your other customers, it's always a good idea to make sure of two things. First, are you really making more money on those customers - or are you giving all the margins away by trying to keep them happy? Second, make sure you've got a way to get new "best customers." Otherwise, your "best customers" will keep declining until you have no more - and then it's too late! 

I can't wait to see the next batch of airline industry customer satisfaction numbers that include the baggage fees;-)