The Secret to Airline Success?

The results are in, and the winners are lining up at the departure gate. The 2012 edition of the JD Power North America Airline Satisfaction Study, an influential poll of air-passenger preferences, has been released. As in surveys past, budget airlines scored the highest marks from their customers, while the big carriers continued to lose altitude. But it wasn't only price that made the difference.

A tough way to make a buck
The airline business is never going to be easy for any operator, no matter how well managed one may be. The capital costs are high, the labor relations always shaky, the regulatory constraints tight, and the inputs expensive -- particularly in this age of high oil prices. And now, if the European Union has its way, carriers that operate in that part of the world will have to pay levies for the carbon emissions their flights produce to and from that continent.

The introduction of fees over the past few years has clumsily addressed the cost problems. Most of the major carriers and even several of the budgeters impose these charges on their passengers. They're also universally reviled and -- no surprise here -- were the key factor driving down the ratings for the carriers that charge them.

And down they went. Most of the big airlines, which almost always impose such fees, dropped in terms of satisfaction levels when compared with the 2011 survey. The only one seeing a lift from the previous year was Delta (NYSE: DAL  ) , which gained 9 index points. Overall, traditional carriers had an average score of 647 out of a possible 1,000. That was 4 points down from 2011.

Budget airlines scored much higher. Not coincidentally, these companies are far less fee-crazy then their incumbent brethren. Averaged out, their score was a robust 754 and unlike that of the majors actually increased year on year, by 3 points. The champ in this category was also the overall winner -- JetBlue Airways (Nasdaq: JBLU  ) , with a tally of 776. Also scoring high was Southwest Airlines (NYSE: LUV  ) , the carrier that famously touts, in much of its advertising, its absence of baggage fees.

Low cost, low returns
But low cost and customer happiness come at a price. Fuel costs are stubbornly high these days and have been for quite some time, adding billions to expenditures and putting a heavy strain on margins. Carriers are stuck with an uncomfortable choice between pricing their tickets out of the market, slapping those hated fees on top of them, or doing neither in the hope that they can economize as much as possible and eke out a profit.

This is why, for all of the love they got in the survey, the budget guys don't make much money. Southwest, for example, barely manages to stay in the black; its fiscal 2011 net margin was as thin as the legroom in one of its planes, at 1.1%. Recent quarters have seen better results, but not by much: 2.5% in 1Q 2012 and 3.7% the previous quarter. JetBlue's numbers have been better, though still in the low single digits -- it had a 1.9% showing in its most recent fiscal year.

Service sells
It's an uncomfortable truth for the harried air travelers out there, but fees do add to a carrier's bottom line if other costs are kept in check. The survey's 2012 winner in the traditional (i.e., full-service) category, Alaska Airlines (NYSE: ALK  ) , has boasted annual margins ranging from 3.5% to 6.6% in the trailing half-decade, save for a loss-making 2008. Meanwhile, the company has managed to keep its year-on-year growth in costs more or less in line with revenue increases.

But in the end, one big driver of both high customer satisfaction and, by the way, profitability, is the level of service the carriers provide. Respondents seemed to be forgiving of those extra fees if other aspects of their experience were positive. JD Power cites the example of mobile boarding passes as an aspect of customer service that air travelers found beneficial. Which is hardly surprising: Anything that cuts down on the time and hassle involved in checking in and boarding a plane is bound to be popular.

In the survey, category winners JetBlue and Alaska scored the maximum rating in the "service experience" category of the rankings (there are seven categories all told). Despite Southwest's top scores in areas such as reservation, check-in, and yes, costs and fees, it had only an average score in service. As a result, it ranked slightly behind the winner in this year's standings.

And guess what? JetBlue and Alaska tend to be two of the more profitable carriers in their respective categories. There's a lesson to be learned there; let's see whether the airlines absorb it and start making more money.

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Fool contributor Eric Volkman owns no stocks mentioned in the story above. Motley Fool newsletter services have recommended buying shares of Southwest. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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