Middlesex University Business School, London, UK

Loyalty Management in the Airline Industry

Diplomarbeit / Diploma Thesis

by

Ben Beiske

April 2002

Abstract

This report will demonstrate the importance of Loyalty Management in the competitive environment of the airline industry and will show that a successful approach to Loyalty Management consists of three different, interlinked aspects. These three ′pillars′ are Customer Service, Frequent Flyer Programs, and Complaint Management; their interdependence will be analysed in depth, with special attention given to the perceived importance of Frequent Flyer Programs.

Findings from a detailed literature review and a survey show that customers do indeed perceive these issues as vital with regards to their loyalty towards a particular airline. It was found that Customer Service can be regarded as the foundation for Loyalty Management; it can help an airline to gain competitive advantage by setting it apart from its competitors. Frequent Flyer Programs, if implemented and run properly, can provide the customer with added value. As such, they compliment Customer Service and can help to increase overall loyalty. Additionally, Complaint Management was found to be gaining importance among airlines. The number of complaints was shown to be rising gradually, stressing the growing significance of efficient Complaint Management and its strong after-effect on customer loyalty.

Table Of Contents

1. Introduction 6
1.1. Aim and Objectives of the Report 7
1.2. Terminology 9
1.3. Background Information: Loyalty Management 9
1.3.1. Definitions 9
1.3.2. Traditional Marketing and Loyalty Management 10
1.3.3. Importance of Loyalty Management 12
1.4. Characteristics of the Airline Market 13
1.4.1. Airline Industry Analysis - STEEPLE 13
1.4.1.1. Social 13
1.4.1.2. Technological 14
1.4.1.3. Economical 14
1.4.1.4. Environmental 14
1.4.1.5. Political 15
1.4.1.6. Legal 15
1.4.1.7. Ethical 15
1.4.2. Consolidation in Practice: British Airways 16
1.4.2.1. British Airways and KLM 16
1.4.2.2. British Airways and American Airlines 18
1.4.3. The Current Airline Situation 19

2. Literature Review 22
2.1. Customer Service 22
2.1.1. Background Information 23
2.1.1.1. Singapore Airlines 23
2.1.2. Revelation of Dissatisfaction 24
2.1.3. Employees 25
2.1.4. Communication 25
2.1.5. The Customer 26
2.1.5.1. Customer Requirements 26
2.1.6. Service Quality 27
2.1.6.1. Quality and Retaining Customers 28
2.1.7. Orientation of Company 29
2.1.8. Conclusion Customer Service 29
2.2. Frequent Flyer Programs 31
2.2.1. Background Information 31
2.2.1.1. Statistics Frequent Flyer Programs 32
2.2.2. Critical Success Factors FFPs 34
2.2.2.1. General Considerations 34
2.2.2.2. Whom to Target: Share of Customer 35
2.2.2.3. Program Structure 37
2.2.3. Harmonisation between Frequent Flyer Programs 39
2.2.4. Conclusion Frequent Flyer Programs 39
2.3. Complaint Management 41
2.3.1. Background Information 41
2.3.2. Computer-Aided Complaint Management 42
2.3.3. Help from the Internet 43
2.3.4. Statistics Complaint Handling 43
2.3.5. Compensation 45
2.3.6. Conclusion Complaint Management 46
2.4. Chapter Conclusion 46

3. Methodology 47
3.1. Secondary Research 47
3.1.1. Libraries 47
3.1.1.1. Local Libraries 47
3.1.1.2. Interlibrary Loan 47
3.1.1.3. UK Libraries Plus 48
3.1.1.4. British Library 48
3.1.1.5. Online Catalogues 48
3.1.2. Electronic Databases 49
3.1.3. Newspapers and Periodicals 50
3.1.4. Internet 50
3.1.5. Search Terms Literature Review 51
3.2. Methodology - Primary Research 52
3.2.1. Diaries and Observations 52
3.2.2. Expert Interviews 53
3.3. Questionnaire 53
3.3.1. Purpose of Questionnaire 53
3.3.2. Questionnaire Design 54
3.4. Chapter Conclusion 57

4. Findings and Interpretation 58
4.1. Distribution and Response Rate 58
4.2. Demographics of Respondents 59
4.3. Question One - Number of Flights in Last Twelve Months 60
4.4. Question Two - Factors Influencing Purchase Decisions 61
4.5. Question Three - Loyalty to Favourite Airline 62
4.6. Question Four - Main Reason for Loyalty to Favourite Airline 63
4.7. Question Five - Frequent Flyer Program Participation 64
4.8. Question Six - Main Reason for Participation in FFP 66
4.9. Question Seven - Communication with FFP 67
4.10. Question Eight - Measure of Usefulness of FFP 68
4.11. Question Nine - Influence of FFP on Airline Choice 69
4.12. Question Ten - Perception of Customer Service 70
4.13. Question Eleven - Perception of Overall Quality 71
4.14. Question Twelve - Importance of Flight Times and Routings 72
4.15. Question Thirteen - Attitude towards Lodging Complaints 73
4.16. Question Fourteen - Satisfaction with Resolved Complaints 74
4.17. Question Fifteen - Complaint Resolution and Influence on Loyalty 75
4.18. Question Sixteen - Complaint Resolution and Future Behaviour 76
4.19. Chapter Conclusion 77

5. Conclusion 79
5.1. Conclusion of Chapter Findings 79
5.2. Conclusion Aim and Objectives 81
5.3. Overall Conclusion 83

Glossary of Terms 85
List of References 87

Appendices 92

Appendix I: Comparison of Airline Key Figures 2001 92
Appendix II: Frequent Flyer Development Timeline 93
Appendix III: Frequent Flyer Programs in Numbers 103
Appendix IV: Copy of Questionnaire 106

Table of Figures

Figure 1-1, Loyalty Management Visualised 8
Figure 1-2, Relationship Marketing Ladder of Customer Loyalty 12
Figure 1-3, Revenue Passenger Kilometres 2001 to 2002 20
Figure 2-1, Porter′s Generic Strategies 23
Figure 2-2, Development of KLM′s Flying Dutchmen Program 1996-2001 33
Figure 2-3, Share of Customer I 35
Figure 2-4, Share of Customer II 36
Figure 2-5, Number of Paid Flights Needed for Free Ticket 38
Figure 2-6, Rise in Flight Delays 1995 to 2000 44
Figure 2-7, Rise in Complaints 1995 to 2000 45
Figure 4-1, Respondents by Gender 59
Figure 4-2, Reasons for Travel 59
Figure 4-3, Number of Flights Taken in One Year 60
Figure 4-4, Factors Influencing Purchase Decisions 62
Figure 4-5, Overall Loyalty to Favourite Airline 63
Figure 4-6, Main Reason for Loyalty to Favourite Airline 64
Figure 4-7, Number of FFPs Taken Part in 65
Figure 4-8, Main Reason for Participating in FFP 66
Figure 4-9, FFP Communicates with Participant 67
Figure 4-10, Feeling of Benefit from Frequent Flyer Program 68
Figure 4-11, Would Choose an Airline Mainly Because of FFP 69
Figure 4-12, Satisfaction with Customer Service 70
Figure 4-13, Quality of Favourite Airline 71
Figure 4-14, Importance of Flight Times and Routings 73
Figure 4-15, Number of Complaints Made to Airlines 74
Figure 4-16, Satisfaction with Response to Complaint 75
Figure 4-17, Increase in Loyalty after Satisfactory Response to Complaint 76
Figure 4-18, Reason for Flying with Unsatisfactory Airline 77

Table of Tables

Table 2-1, Share of Customer 37
Table 3-1, Extract of Search Terms Used 52
Table A-1, 2001 Figures For Selected Airlines Worldwide 92
Table A-2, Timeline of FFPs 102
Table A-3, Value for Money in FFP 103
Table A-4, Selected Figures FFPs Worldwide 104
Table A-5, FFP Membership Numbers of Selected Programs 105

1. Introduction

The airline industry is a unique and thoroughly fascinating industry. Growing numbers of passengers, fuelled by increased mobility, reduced barriers to travel, and the entrance of new companies into the market, have increased the glamour, impact, and reach of this industry even further in recent years. British Airways′ Chief Executive Officer called the industry the ′flywheel for the engine of the world′s industry′ (Chan 2000). In terms of numbers, the whole industry was worth US$1,000 billion in 1998, employed over 22 million people, and transports over 1,25 billion passengers each year (Chan 2000), with passenger numbers steadily increasing.

In this light, Loyalty Management is becoming an ever more important issue for most major companies, including commercial airlines. Customers often have often a free choice where their custom will go to, making it harder and more expensive for companies to attract new customers and to retain existing ones. This is especially true for the highly competitive field of internationally operating airlines. Airlines around the world are studying, evaluating, implementing, or improving different loyalty strategies aimed at cultivating strong relationships with their customers.

Airline customers are very much like customers of other industries. They make an initial purchase - for whatever reason - with a particular airline. The customer tries to validate his or her choice by judging the airline through certain criteria, possibly overall Service Quality. For subsequent purchases, the customer becomes more critical and reacts stronger to service failures. If performance proves satisfactory however, he or she might eventually move to a point where they become advocates for the airline.

The aspect of advocacy is described in more detail in a later part of this chapter; the crucial point is to ensure that a customer moves from being an irregular customer to the point where he acts as an advocate for the company. This is the test for airline marketers, to manage this ′rocky period′ (Executive Summary and Implications for Managers and Executives 1998) between initial purchase and a solid relationship between the customer and the company. The management of the customer′s loyalty is a challenge to any commercial airline.

1.1. Aim and Objectives of the Report

The aim of this report is to demonstrate to the airline industry that a successful approach to Loyalty Management consists of variety of different aspects in regards to the customer. The basis for a prosperous airline is seen to be Service Quality. Service Quality itself consists of three pillars. These are seen as:

• Customer Service through optimum adjustment to customer needs;
• Frequent Flyer Programs; and
• Customer Dialogue through active Complaint Management.

The report′s objectives are to analyse these three issues in depths, to show the interdependence of these issues, and to illustrate that only a combination of all three can assist an airline in its pursuit to exercise true customer satisfaction and thus increased customer loyalty. Furthermore, the usefulness of Frequent Flyer Programs will be analysed with regards to loyalty; it will be argued that such programs are seen to be of value for customers in that they can help to increase loyalty. However, it will also be investigated if a Frequent Flyer Program (FFP) alone can be a reason for a customer to choose a particular carrier, or if it needs to be complemented by outstanding Customer Service and fast and efficient Complaint Management.

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