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AIRLINES INDUSTRY: QUALITY OF SERVICE.
Term Paper ID:25675
Essay Subject:
Consumer issues, fares, on-time service, ticketing, deregulation, economics; focusing on Southwest Airlines.... More...
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Paper Abstract:
Consumer issues, fares, on-time service, ticketing, deregulation, economics; focusing on Southwest Airlines.
Paper Introduction:
Introduction
Companies which cannot operate at a profit eventually go out of business. Companies which cannot generate high levels of service quality eventually cannot operate profitably; either competition will arise to take away customers, or customers will be unwilling to pay for unacceptable levels of service. Deregulation, once touted as the solution to perceived poor levels of service in the airline industry, has not brought about improved levels of service across the board. As the European airline market prepares for deregulation, it is an opportune time to examine how airlines (and airline customers) define service quality, what makes quality unique in the airline industry, and how one airline in particular, Southwest, has triumphed when others are struggling. The future of service within the airline industry is also considere
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News and World Report, 8 May 1995, 63-64.Poling, Bill. This gives businesstravelers several hours to complete their journey, have a meeting, andreturn home without logging more than one day's travel time. Despite its no frills orientation, the company maintainsstrong customer satisfaction and high levels of customer service,encouraging repeat business. This strategy helped to fill planes during lowoccupancy periods and reap as much revenue as possible from the businesstraveler (who typically does not have much leeway in scheduling).[3] While some airlines have focused on low fares and encouraging weekendlayovers, others have focused on the desire of business travelers to returnhome quickly, and even to return to work the same day as they return froman overseas business trip. The mainfactors that affected whether an airline could serve a particular city waswhether or not that city had enough gates for the new carrier, and whetherthe carrier was able to afford to purchase them. In its targetmarkets, Southwest has positioned itself to compete favorably even withtraveling by car.[15] Southwest's success has not been without problems, and the company hasagain demonstrated an ability to find creative solutions to those problems. Travelocity When Sabre Interactive purchased Travelocity in 1997, Sabre gainedrights to the name and creative control over the Web site created byWorldview. These carriers donot have to be "all things" to "all consumers," but are instead able tomarket specifically to a niche where (in the case of Southwest), price isthe overriding consideration. Still other consumers are interested in having easy access to airlineticketing. "Prestige Counts for Little." Euromoney April 1997, 135- 139.McWhirter, Alex. However, the company has recentlyentered the highly competitive northeast, and is also now competing inCalifornia. Rate schedules were lifted,price fixing was eliminated and route management was removed. This resulted in shorter averageflights, but increased total travel time for consumers as they had to flythrough the hub regardless of their ultimate destination. First classpassengers paid higher fares, but received more comfortable seats, betterfood and free drinks. Ground transportation, hotel shuttles and the entire future of thetrip can depend on whether the aircraft is on time. [8]Ibid., 63. Even in the United States and in a "deregulated"environment, the government has a strong role in the regulations governingairlines, with the result that air carriers must abide by a large number ofrules that determine their structure and ability to compete.[1 ] Since deregulation in the late 197 s, the industry has foundered withnumerous companies going out of business and many others consolidationtheir operations. The two systems (Sabre andTravelocity) are being run separately, but with the goal that the serviceswill complement each other.[18] Microsoft's Expedia seeks to eliminate the travel agent completely, astrategy which Sabre and its parent company (AMR, owner of AmericanAirlines) has been careful not to pursue. By 1995, the sameflight was scheduled to take 1 5 minutes; this is the schedule which theairlines are now meeting.[7] There are several reasons which analysts give as to why the airlinesappear to be "padding" their schedules. [15]Stephanie Gruner, "Have Fun, Make Money," Inc., May 1998, 123. Parasuraman. In the future, quality is likely to be defined by the ease with whichconsumers can price various tickets; this is where services such asTravelocity and Expedia will become critical. Coach passengers offered a higher load factor, butpaid less (sometimes as much as 5 percent less) than their first-classcounterparts. [1 ]Douglas Nelms, "Better for Less," Air Transport World, April 1995,26. The rules of the airline industry changed in 1978, however;deregulation introduced an entirely new playing field on which the nationalcarriers and regional carriers were suddenly able to compete in anenvironment that resembled a free market. "Nosedive," Forbes, September 14, 1992, 2 .Marchant, Garry. Companies which cannot generate high levels of service qualityeventually cannot operate profitably; either competition will arise to takeaway customers, or customers will be unwilling to pay for unacceptablelevels of service. Newman, "This is 'On Time'?" U.S. Travelocity, which was launched in March 1996, enabled computerusers with access to the World Wide Web to seek out travel destinations inaddition to airline reservations systems. [18]Joseph Kornik, "Sabre Interactive Buys Travelocity," TravelWeekly, 6 February 1997, 1. In return for the higher productivity thatthe company receives from its employees, it has instituted a strong profitsharing program that can result in significant cash outlays. Defining Service Quality Before companies can address the level of quality that the provide toconsumers, they must first define what quality is within their industry.For manufacturing organizations, quality can be defined as number ofdefects per lot of widgets. These carriers mustprovide on-time service with several different classes and with routes thatmeet the needs of leisure and commercial customers. Southwest led the field with flights that were onschedule 86.6 percent of the time while Continental trailed at 78.6percent.[5] These are the type of statistics which are regularly touted inadvertising by airlines in order to capture those consumers interested inon-time performance. "AMR Corporation." Standard & Poor's Stock Reports, 6 June 1998, 12Q.Kornik, Joseph. By including a Saturday night in their trip, theprice of a ticket from Los Angeles to New York decreased at one time from$12 to $41 , a significant savings. Because Southwest's flights were generally an hour orless in length, the airline saved money by not having to serve meals;indeed, its peanuts became both a joke and a symbol of the airline'ssuccess within the industry; other low-cost carriers have since followedsuit by eliminating meal service on some flights.[14] It has a liberalwork rule arrangement with its unions, so productivity is high, and overallcosts are low; this enabled the company to realize profits during years inwhich the industry as a whole was suffering. [19]Mary Cronin, "The Travel Agents' Dilemma," Fortune, 11 May 1998,163. Because of this, domestic carriersare publicly held corporations who use their stockholder equity as aprimary source of funds. [3]Tina Farrell, "Choosing Whose Friendly Skies to Fly," The BusinessJournal, 21 August 1995, 24. "Sabre Interactive Buys Travelocity." Travel Weekly, 6 February 1997, 1, 14.Kripalani, Manjett. Carriers which do notrestrict themselves to a narrow definition of quality are able to meet thediverse needs of consumers, but do so at a high cost. American andUnited Airlines, for example, are undertaking expense reduction campaigns,beginning with seeking concessions on wages, benefits and work rules. [2]Garry Marchant, "Prestige Counts for Little," Euromoney April 1997,136. For these consumers,the ease of purchasing the ticket may be as important as the price of theticket itself. At the same time, the company can modify its remaining 737-2 sin order to make them compatible with noise and pollution regulations if itneeds the capacity. Suchactions are likely to result in diminished employee morale and possiblestrikes, negatively affecting customer satisfaction and inadvertentlyaiding competitors such as Southwest. From the standpoint that customersmay well spend as much as 3 percent longer getting from one point toanother than before deregulation, the level of quality must be said to havedeclined. "15 Years of Deregulation." Travel Weekly, October 28, 1993, 1, 1 -11.Slywotzky, Adrian. The on-line Sabre reservationsystem uses more than 5 million variables updated five times daily to keepcurrent with all airline ticket availability. "Have Fun, Make Money." Inc., May 1998, 123.Klein, Stephen. Often, the government would approve attractive newroutes only if carriers (either new or proposed) would also take on lessprofitable rural routes. In defining what customers consider quality service, and determiningwhether there are particular niche markets which can meet certain levels ofservice, airlines have begun to carve out for themselves markets in whichthey can profitably compete. [4]Alex McWhirter, "Working to Avoid a Night on the Town," TheEuropean, 21 November 1996, 33. Some analysts have defined the industry as "profitless,"which is an accurate statement for all but a few airlines during the late198 s and early 199 s.[11] Those airlines which did prosper during thisperiod, such as Southwest, did so by understanding the market better thanthe competition, and by defining service quality in a narrow way whichenabled them to effectively market to their particularly niche. Somecompanies find this an attractive alternative to long business trips and amore productive use of their employees' time.[4] Many travelers are interested in "on-time" service. Deregulation For nearly the entire history of the commercial airline industry, itwas one of the most heavily regulated industries in the country.Government regulations determined which carriers had access to whichmarkets, which routes were approved and not approved, and what ratestructures were permitted.[12] Airlines were controlled in much the sameway that utilities were, with companies having to petition for rateincreases. By1987, the time allocated for the flight was 85 minutes. The airline industry was characterized by giants (American,United, TWA) who offered nationwide and some international service, withnonstop routes for longer trips (such as New York to Los Angeles), and byregional carriers, such as Southwest, which offered short trips betweenairports not served by the nationals. Nuts! As the European airlinemarket prepares for deregulation, it is an opportune time to examine howairlines (and airline customers) define service quality, what makes qualityunique in the airline industry, and how one airline in particular,Southwest, has triumphed when others are struggling. But where Travelocity is marketing to travel agents,Microsoft is marketing to the consumer. Deregulation, once touted as the solution to perceivedpoor levels of service in the airline industry, has not brought aboutimproved levels of service across the board. This reduction was due to theairlines calculating that business travelers do not travel over weekendsand that a Saturday night stayover typically meant that the business wasbeing done for leisure. [17]David A. "Five Imperatives for Improving Service." Sloan Management Review, Summer 199 , 29-38.Brown, David A. Travel agents may well beforced to realign their own priorities, and the industry as a whole mayundergo additional changes as the European market is deregulated. They makearrangements, often including connecting flights, based on when theirprimary carrier indicates they will be arriving or leaving a particularcity. Microsoft is seeking to giveconsumers complete access to the Web and to reservations for resorts andother tourist destinations; this puts it in direct competition withTravelocity. One of the key components of an airline's cost structure is its laborcosts. Some companies proudly point to commitments in on-time performance which make exceptions for no one, including executiveswithin the airline industry.[6] What is not generally advertised is theway that airlines generally achieved these statistics. Another problem that might be ahead for the company is its routeselection. These defects can be quantified and analyzed.For service organizations, defining quality requires a different approach,and what defines quality to one type of consumer may not be what anotherconsumer looks for within the same industry.[1] In the airline industry, quality can be defined as having directroutes from and to the cities where people want to travel. As of the beginning of 1992, the companyhad done this with more than half of the Boeing 737-2 aircraft that itoperated.[17] This program enables the company to release aircraft that itno longer needs or that no longer meet the stringent new environmentalstandards. Value Migration. Some travelers are interested in the amenities at theterminal and on the aircraft themselves, such as access to telephones orfax machines, while some consumers are interested in the "creaturecomforts," such as quality of food and other in-flight services.[2] Business travelers are the most sought-after group of consumers bymany airlines; for many companies, low prices define the level of serviceof a particular airline. For example, the company has traditionally expanded its 737 fleet byadding older aircraft available at discounts (sometimes as much as 3 percent).[16] Since the company's ability to enter new markets isdetermined in part by the size of its fleet, and since the company iscommitted to staying with the homogenous fleet of 737s, it runs the risk ofending up with a large number of older aircraft that it no longer needed(depending on the market), or that do not meet new environmental standards. Thesepayments, added to the job security that Southwest offers in an industrynoted for its bankruptcies and acquisitions, makes employees at Southwestconsiderably better off than their peers at other companies. By building on corporaterelationships with resorts and hotels, Microsoft is attempting to provide aservice which offers greater service to the consumer by eliminating the"middleman;" in this case, the travel agent.[19] Conclusion Defining quality in a service industry is never an easy task. Southwest Airlines At the time of deregulation, Southwest offered point-to-point flightswithout the hub and spoke configuration, with the result that its planesspent less time on the ground than the aircraft of other carriers; since itused only Boeing 737 aircraft, its maintenance costs were also lower thanthe competition's. Any carrier could transport apassenger from point A to point B; it was up to the marketing effort tosingle out one airline's service, or baggage handling record or on-timeperformance. In 1994, the tenlargest American carriers had flights that were on-time an average of 81.5percent of the time. In some cases,this means that their employees might reschedule a trip so that instead ofleaving on Monday and returning on Thursday, they instead leave on Tuesdayand return on Sunday. New York: HarperCollins, 1989.Cronin, Mary. In anindustry with as many different types of customers as the airline industry,defining quality becomes even more difficult. "Working to Avoid a Night on the Town." The European, 21 November 1996, 33.Nelms, Douglas. In the international market, carriers are oftenrun by the government. These airlines have focused on defining qualityas offering the most flights to and from selected cities, or offeringflights at the beginning and end (often the very end) of the business day.The first departure in some cities is as early as 6:3 am with the lastflight returning at ten o'clock that same evening. Where the early 199 s were characterized bylow profits and worse stock performance, the mid-199 s have beencharacterized by more robust profits throughout the industry; this, inturn, has fueled consolidation within the industry.[9] The Airline Industry The airline industry is capital-intensive, with the result that entryand exit into the market is difficult. Brown, "Shrewd Capital Planning Allows Southwest toOutperform Competition," Aviation Week & Space Technology (May 25, 1992),57. New companies had difficulties competing underthese types of conditions, and the number of new carriers per year beforederegulation was significantly lower than the number of new carriers afterderegulation.[13] Because rates were approved by the government, price was not theprimary competitive factor in the regulated environment. The long-term success of Southwest depends in large part on howsuccessful other carriers are at mimicking the company's strategy, andwhether other carriers develop new strategies that prove more successful.What the company has proven to this point is that deregulation can work forsmall airlines that are willing to work closely with their employees andcustomers in order to keep costs low and service high. [9]Stephen Klein, "AMR Corporation," Standard & Poor's Stock Reports,6 June 1998, 12Q. "This is 'On Time'?" U.S. Southwest has one of the lowest direct labor costs in the industry,but this does not mean that its employees are necessarily worse off thanemployees of other airlines. [11]Adrian Slywotzky, Value Migration, Boston: Harvard BusinessSchool Press, 1996, 114. Since airlines could charge different prices for differenttypes of service, first-class and coach class were invented. These customers are interested in being able to seek out faresand ticket availability through the Internet and World Wide Web, and may beinterested in bypassing travel agencies altogether. BibliographyBerry, Leonard, Valarie Zeithaml and A. [6]Jan Carlzon, Moments of Truth, New York: HarperCollins, 1989, 84. Boston: Harvard Business School Press, 1996.----------------------- [1]Leonard Berry, Valarie Zeithaml and A. Notonly did prospective entrants have to be able to raise enough capital topurchase or lease aircraft, but the government had to approve the entranceinto specific markets. "Shrewd Capital Planning Allows Southwest to Outperform Competition." Aviation Week & Space Technology, 25 May 1992, 56-57.Carlzon, Jan. [7]Newman, 62. Or, it can bedefined as offering the lowest fares. [14]Kevin Freiberg and Jackie Freiberg, Nuts! [12]Perry Flint, "What's Wrong with the Airlines?" Air TransportWorld (May 1993), 59. These companies will seek out fares which canhelp the company reduce their overall travel budget, and will negotiatewith several different carriers (when possible) in order to ensure thatthey receive the highest "value" for their travel dollar. As a result, airlines themselves were run in a manner similarto utilities, with large airlines subsidizing money-losing routes withtheir money-making routes. Although airportsrelocate only occasionally, and while aircraft in general have not becomeslower moving in the past 2 years, there has been a noticeable increase inthe amount of time given to particular flights. Southwest solved this problem by beginning a lease-back program in1988. Over time,the airlines began adjusting those schedules to retain consumers and togive themselves better on-time performance records, particularly after 1987when new reporting rules went into effect. News and World Report,8 May 1995, 63. Moments of Truth. Parasuraman, "FiveImperatives for Improving Service," Sloan Management Review, Summer 199 ,3 . Introduction Companies which cannot operate at a profit eventually go out ofbusiness. New York: Bard Press, 1996.Gruner, Stephanie. "Better for Less." Air Transport World, April 1995, 26- 29.Newman, Richard J. Able to postprofits when other airlines were either losing money or vanishing from themarket altogether, Southwest is an illustration of how deregulation canwork when a company places customer service and quality above traditionalindustry thinking. Under the program, Southwest sells some of its older 737s, thenleases them back for its own use. "Choosing Whose Friendly Skies to Fly." The Business Journal, 21 August 1995, 24-25.Flint, Perry "What's Wrong with the Airlines?" Air Transport World, May 1993, 58-61.Freiberg, Kevin and Jackie Freiberg. For example, in 198 , ascheduled flight from Boston to Washington DC was allocated 7 minutes. Other consumers may be interested inon-time performance, while still others place luggage handling as theirhighest priority. One is that in the timeimmediately following deregulation, airlines were interested in gainingpassengers by promising the fastest routes possible; if the airlines failedto meet those schedules, they still had the passenger revenue. "The Travel Agents' Dilemma." Fortune, 11 May 1998, 163- 164.Farrell, Tina. Large airlines began experimenting with hub and spoke configurationswhich required customers to fly to a hub airport (often Chicago or Dallas)and then onward to their destination. When the airline enters a new market, such asBaltimore, its fares are as much as 85 percent less than those of itshigher-priced competitors, attracting passengers quickly and forcing thecompetition to either match the price or lose market share. Another reason for the increasein flight time is the increase in air traffic, the lack of expertise amongair traffic controllers since the strike in the early 198 s, and the use ofhub-and-spoke systems which result in additional delays due to poorweather.[8] From the standpoint that the airlines are meeting theirpublished schedules, they can be said to be meeting the level of servicethey have established for themselves. [13]Bill Poling, "15 Years of Deregulation," Travel Weekly (October28, 1993), 1. The company did well when it operated in the southwest wherethere was little regional competition. [16]Manjett Kripalani, "Nosedive," Forbes (September 14, 1992), 2 . The future of servicewithin the airline industry is also considered. Instead, airlineswould compete on service and image. [5]Richard J. Entry into the airline industry under regulation was difficult. New York: Bard Press,1996, 18. Companies such as Southwest which define quality in a more narrowmanner and which focus on meeting the needs of a particular market nichehave proved more successful in the deregulated market. Southwest's success has come about because it is providing a productthat the market wants, no-frills regional air travel, at a price that isattractive. Both of these markets are highly sought after, and competitorsare likely to raise additional competition that the company has notencountered in its previous market entries.
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