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Smaller Is Sometimes Better in the Airline Business

In the last few years, the annual Airline Quality Rating report has had one consistent finding -- smaller airlines tend to have better service quality. The 2014 report, released earlier this week, confirms this general picture. The three highest-ranked carriers were Virgin America, JetBlue Airways (NASDAQ: JBLU  ) , and Hawaiian Holdings (NASDAQ: HA  ) .

Virgin America took the top spot for the second straight year. Source: Virgin America.

These were some of the smallest airlines included in the survey. Meanwhile, the bottom of the list was populated primarily with the four largest U.S. airlines and their regional feeder partners. The explanation is simple: Smaller carriers have less complexity to manage, and in most cases this allows them to deliver superior service.

What the report measures
The authors describe the Airline Quality Rating report as the only objective study of quality that is comparable across all of the major U.S. airlines. The ratings are based on data that every major carrier must report to the Department of Transportation.

The study ranks the airlines based on a weighted average of four categories: on-time performance, denied boardings, mishandled baggage, and official customer complaints. While there's nothing that would prevent larger carriers from scoring well on these measures, smaller airlines with simpler operations have advantages across the board.

Where the smaller airlines shine
In this year's Airline Quality Rating study, Virgin America scored -0.32, JetBlue scored -0.42, and Hawaiian scored -0.59, compared to an average score of -1.07 for all airlines. (Smaller negative numbers indicate better scores.)

Digging into the numbers further, it's clear that no airline can offer perfect service. Top-ranked Virgin America had a higher-than-average number of consumer complaints. No. 2 JetBlue had one of the worst on-time-arrival percentages among the 15 carriers that were ranked. However, each one was able to offset these weaknesses with industry-leading performance in other areas.

Hawaiian Airlines was above average in all four categories. Source: Wikimedia Commons.

Denied boardings was one area where the smaller carriers truly excelled. JetBlue and Virgin America were by far the least likely to "bump" passengers from their flights. At JetBlue, it was literally a "one in a million" occurrence! For Virgin America, only four passengers out of every million were bumped. At Hawaiian Airlines, 17 passengers per million were involuntarily denied boarding, which was still less than half the rate of the next closest carrier.

JetBlue does not "oversell" its flights at all, and Virgin America rarely does so. In general, smaller carriers have a good incentive to keep overbooking to a minimum -- with fewer flight options, their customers would suffer more inconvenience than if they were bumped from a larger airline's flight. The upside for passengers is that they hardly get bumped at all.

One case when smaller is definitely worse
The Airline Quality Report highlights many areas where smaller carriers tend to outperform their larger brethren. (There are exceptions: Small budget carrier Frontier Airlines plummeted to No. 11 in the rankings this year.) That said, the AQR only measures a few statistics. These capture many of the main customer service issues in the airline industry but not everything.

For example, with fewer flights -- often concentrated in one or two hub cities -- smaller carriers are more at risk in the event of a disruption at one of their hubs. Larger carriers have a greater ability to reroute passengers around any problems.

JetBlue's heavy concentration of flights in the Northeast meant that its customers suffered the most when severe winter storms struck in early January. Many customers' travel plans were delayed by days (up to a week) as JetBlue canceled at least 25% of its schedule every day for six straight days.

JetBlue canceled more than a quarter of its flights in the first week of 2014. Source: JetBlue.

By contrast, Hawaiian Airlines benefits from the fact that all of its flights go through Hawaii, which generally has very good weather. However, a major volcano eruption in Hawaii could turn its geographical concentration into a huge liability.

Foolish final thoughts
Big airlines have their benefits, but the Airline Quality Rating report shows clearly that in many respects, smaller carriers deliver better service. All things being equal, smaller airlines tend to run on time more often, "bump" customers less frequently, lose fewer bags, and receive fewer official complaints.

Virgin America, JetBlue, and Hawaiian Airlines are far from perfect. However, in one of the most disliked industries in America, they are the best of the bunch in terms of delivering reliable, high-quality service.

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  • Report this Comment On April 14, 2014, at 12:03 PM, IAmAv8r2 wrote:

    You must be paid by the word. "However, a major volcano eruption in Hawaii could turn its geographical concentration into a huge liability." Really?

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Adam Levine-Weinberg

Adam Levine-Weinberg is a senior Industrials/Consumer Goods specialist with The Motley Fool. He is an avid stock-market watcher and a value investor at heart. He primarily covers airline, auto, retail, and tech stocks. Follow him on Twitter for the latest news and commentary on the airline industry!

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