Over the past year or so, the management teams at American Airlines (NASDAQ:AAL) and United Continental (NASDAQ:UAL) have redoubled their efforts to boost their companies' profitability. Ultimately, they have the same goal: closing a long-standing margin gap relative to Delta Air Lines (NYSE:DAL).
Executives at American Airlines and United Airlines recognize the need to deliver top-notch operational performance and better customer service to remain competitive with Delta. Both carriers have improved across many objective metrics in the past couple of years. Unfortunately, a recently released J.D. Power survey shows that American and United remain far behind Delta in their customers' eyes.
An emphasis on delivering better service
During recent investor presentations and earnings calls, United Airlines' management has made a point of highlighting the carrier's operational improvements. For example, United has been better than American and Delta in terms of making sure flights depart on time since the beginning of 2017. United's management is also putting a lot of emphasis on customer service training for frontline employees.
American Airlines has similar priorities. Management often talks about maintaining a long-term focus. Improving the customer experience is a key part of that objective.
This talk about improving customer service isn't just bluster. Based on the metrics measured in the annual Airline Quality Rating report, United and American both improved significantly in 2017 relative to the prior year. By contrast, Delta Air Lines lost some ground last year. Nevertheless, Delta remained far ahead of both of its rivals -- and just shy of the No. 1 ranking for the entire U.S. airline industry.
The J.D. Power ratings are out
Last week, J.D. Power released its annual North America Airline Satisfaction Study. This study measures customer satisfaction using a sample of more than 10,000 business and leisure travelers who flew on a major North American airline during the 12-month measurement period. J.D. Power evaluates customer satisfaction in seven key areas: "cost & fees; in-flight services; aircraft; boarding/deplaning/baggage; flight crew; check-in; and reservation."
Delta Air Lines has routinely beaten both of its major rivals, and it extended its lead in this year's survey. Delta received a score of 767 on J.D. Power's 1,000-point scale, while American Airlines scored 729 and United Airlines brought up the rear with a score of 708. Delta's score improved by nine points relative to the 2017 survey, whereas American and United saw their scores decline.
Furthermore, Delta's lead is broad-based. In every one of the seven categories measured, Delta had a better score than both of its rivals.
United Airlines' performance was particularly noteworthy -- in a bad way. While management has pointed to various objective improvements in operational performance, customers haven't noticed. United ranked at the bottom of the industry across each of the factors included in the J.D. Power study.
Bad news for American Airlines and United Continental investors
Survey research has its pitfalls. Factors like question wording can distort a survey's results. Furthermore, respondents may (knowingly or unknowingly) give false or misleading answers. Nevertheless, the J.D. Power North America Airline Satisfaction Study offers important insights into what travelers think about the major airlines and can thus capture subjective differences in the customer experience that aren't measured in the Airline Quality Rating report.
This year's J.D. Power study indicates that American Airlines and United Airlines haven't come close to convincing customers that they are just as good as Delta. In fact, the scores that American and United received this year were more on par with those of ultra-low-cost carriers.
It's one thing to have subpar customer satisfaction scores when selling tickets for $49 one-way is your bread and butter. It's quite another when you are a high-cost airline trying to compete for deep-pocketed business travelers.
As long as travelers continue to see a wide gulf between the customer experience offered by Delta and that offered by American and United, it will be virtually impossible for the latter pair of carriers to match Delta in terms of unit revenue. Meanwhile, deep cost cuts would degrade the passenger experience and drive further unit revenue weakness in the long run. Thus, Delta's margin superiority appears to be safe for the foreseeable future.