Classic Airlines has fallen into the organizational and strategy trap many of its predecessors had, and that is seeing price as the most valuable strategy to overcoming dropping passenger rates and profits. In fact, that is exactly the wrong strategy to pursue, as this analysis will show. The airline is creating a culture of cost reduction over customer service, and this is lethal on the trust customers have in their ability to deliver a valued, unique customer experience. Their 56% rate of dissatisfaction with the Rewards program, 20% reduction in passenger traffic or 160,000 customers, and the continual spiral the internal departments are in regarding collaboration are all symptoms of a make larger problem. They have taken the customer out of the center of their business and put internal cost controls in their place. Ironically, this decision and its quick and significant reverberations throughout the company are just increasing the acceleration of this airline right into the ground. Blindly following cost reduction strategies in such a service-centric business will also alienate even the most loyal customers the company still has. Conversely having a marketing-driven business model would have assured the company greater agility and flexibility in meeting customer needs (Kotler, Keller, 2007).
Describe the Situation
Issue and Opportunity Identification
Customer churn, lack of internal integration across departments, a gradual focus only on cost metrics over customer-driven ones, pricing seen as the most powerful marketing strategy, and cost reductions being now the highest priority are all the symptoms of the more fundamental problem within Classic. In all of these symptoms however there is the systemic problem that will bring this company down if it is ignored too long. It has allowed its more core strategies, processes to become myopic, and inward-centric, losing sight of the customer in the process. The opportunity is not in dropping prices to increase volume of passengers, as this is an inherently inelastic market
(Kotler, Keller, 2007). Cost reductions will only slow or even cancel the direction the company needs to go in for growth to occur, and that is concentrating on customer satisfaction and loyalty.
Nearly all of the severe underlying symptions of this sysmetic lack of focus on customers can be mitigated if Classic begins using the custoemr data they do have more effectively. Ironicially one of the biggest probelms the company has is the lack of coordiantion and integration throughout its own organziations. The CRM system in many respects is a symbol of just how disconnected their entire organzation is. Integrating customer data back into each customer-facing process, from initial ticket sales, to evluating customers’ onboard experience, to providing more aggressive rewards for frequent fliers on their Classic Rewards program all can be done very cost-effectively using the CRM data they already have.
Classic’s reliance on price reductions when fuel costs have historically fluctation from 20% to 42% of total costs is short-sighted and potentially lethal for the company as well. This focus on price reduction is damaging the brand of the company and if contineud over a long period, will eventually lead to the compan going bankrupt. It is exactly the wrong strategy at the wrong time for Classic, as it is losing customers to airliens with better service and custoemr-based strategies. This is the trap hwoever so many airlines in the U.S. have fallen into, allured by the low prices of Southwest Airlines and others, they pursue a low-fare strategy. Southwest can compete on price based on their ability to continually improve customer-facing processes and make them as efficient and enjoyable for the customer as possible. Combining continual process improvement with custoemr service permeating their culture, Southwest has been able to attain what no other U.S.-based airline has, and that is continual profitability while growing their customer and route base.
Stakeholder Perspectives/Ethical Dilemmas
The stakeholders in this case are the shareholders of Classic Airlines stock, the management team, employees, suppliers, and customers, the responsibility is to stay in business and be a good investment, deliver a reasonable return on investment, be a stable supplier, and most of all, deliver a unique and highly valued customer experience. Classic has overbalanced itself on pricing and costs alone, attempting to reduce their complex customer-based problem into an equation they can quickly solve with relatively easy pricing strategies and quickly done, yet painful, cost cuts. Ironically none of these strategies will deliver the results they seek because the airline industry is inherently inelastic from a pricing standpoint and responds more effectively to customer satisfaction and loyalty-based strategies that are grounded in realistic financial assumptions than in purely financially-driven decisions.
Frame the “Right” Problem
With so many symptoms affecting Classic Airlines, it is easy to go off on a tangent and choose only a customer relationship or customer service solution. In fact the problem is so systemic to their business model that the business needs to reset its core business processes and strategies if it is going to survive over the long-term. This includes determining why their customers have a 56% dissatisfaction rating for the existing Rewards program, in addition to understanding why there is massive attrition of existing customers as well. The 21% to 19% reduction in customer usage of the Rewards Program is another indicator as is the dramatic drop-off of 160,000 passengers. All of these point to the “right” problem and that is the perception, or more precisely, the expectation of customers is becoming vastly different from their experiences on the airline. They have at the most fundamental level a disconnect from what they are promising customers and what they are delivering. Their old promise of service and satisfaction is no longer being kept; in its place is severe cost reduction strategies that are making that original promise extremely difficult to keep. Classic’s management team will continue to scramble and attempt easy, yet very painful solutions that include more price-cutting, headcount reductions and quickly implementation solutions, yet they are missing the most fundamental point of all. They are losing touch with and are ironically disconnecting themselves from their customers.
Describe the “End-State” Vision
Classic Airlines will be able to increase customer loyalty and profitability by concentrating on those customer-facing processes that matter the most to augmenting and strengthening the customer experience first. The company has also taken a very aggressive approach to streamlining operations-based processes, creating cost reductions, creating more financial flexibility in their business model to price flights to market conditions. Based on the aligning of customer processes to their information systems including the massive amounts of CRM data they have, Classic is also able to get the entire organizational structure galvanized on a commons et of customer-based metrics. Now the company acts as one entity, all focused on the customer, measuring customer satisfaction and performance of customer facing processes in real-time (Kotler, Keller, 2007).
Identify the Alternatives and Benchmarking Validation
Five different alternatives are based on analysis of the case included in Table 3 of this analysis. The continual cost reductions have different directions they could take, yet all of them would deliver less than an aggregated 2.0 ranking on the analysis of Alternative Solutions Matrix in Table 3. Instead, the focus on how to redefine the customer experience is what matters most, while also working to make internal processes as efficient and focused as possible on customer satisfaction. American Airlines, Delta and United all re-evaluated their Rewards program this year and Delta was the only one to make a major shift in strategy. Delta chose to make all miles non-expiring, a remarkable move given the costs of these over the lifetime of its core customer base. Another alternative has been the continual focus on increasing frequent flyer participation, which includes strategies by Southwest to lower the threshold for Friend Fly Free. They have taken it down from 12 segments to eight on occasion to increase the use of flight segments. Southwest continues to revamp this program to ensure it maintains the loyalty of its most critically important and profitable customer base (Smith, 2004).
Evaluate the Alternatives
For Classic to survive in the very competitive and economically turbulent industry it must define a strategy of business process improvement that encompasses both customer-facing strategies and internal cost reduction. Auditing customer expectations to experiences using tools including SERVQUAL (Kotler, Keller, 2007) and then re-vamping the customer-facing processes and strategies is an excellent approach. The company needs to change its rewards and analytics to better shift the culture away from being purely cost focused to being more customer-driven as well. It is as much a cultural issue as a process one at this point in the case study.
Identify and Assess Risks
The risks are that the company will not be able to change, or be agile enough to respond to market conditions quickly enough in order to survive. Competitors clearly understand what is happening and have most likely devised very aggressive plans to take their customer base by offering too honor all Classic Airlines miles too. The risk is that the strategy will not…