The real threat facing the airlinesFebruary 17, 2012: 10:34 AM ET
Over the past decade, the airline industry has desperately turned to mergers in hopes of achieving economies of scale. They're missing the bigger problem.
By Shelley DuBois, writer-reporter
FORTUNE -- The litany of woes plaguing airline executives is well-known: high labor costs, volatile fuel prices, thorny legislation, not to mention trying to sell a highly commoditized product to customers that love to hate them. Management has more or less tried to solve the problem by merging to achieve economies of scale. In the last ten years, US Airways (LCC) and America West, Delta (DAL) and Northwest, Southwest (LUV) and AirTran, Air France and KLM, and, now, Continental and United (UAL) have hooked up. (US Airways and Delta are reportedly eyeing a bankrupt American Airlines, as well.)
Here's what they may be missing: their brands. Branding consultants and aviation experts say the big airlines have lost focus on their brands as a result of their drive to make operational gains. Yes, successfully running an airline is bafflingly complex, but a strong identity, they argue, still sells tickets. "If three airlines are flying between New York and Chicago, the only reason to pick one over the other is because it's cheaper," a position no already-strained business wants to find itself in, says Allen Adamson, managing director at brand consultant firm Landor and Associates.
Smaller airlines have generally been more skilled at wielding their brands to differentiate and sustain their businesses. "Success in the airline business has not, in the past, been brand-driven," Adamson says, "-- with the exception of Virgin, Southwest, JetBlue (JBLU)." Consumers happen to really like those firms. According to a JD Power and Associates 2011 North American Airline Satisfaction Study, smaller carriers tended to score higher on average than larger firms. Top scores went to the likes of JetBlue and Southwest.
Of course, such airlines are much smaller than American, United or Delta, which each permanently employ about 80,000 people. Southwest, for example, has slightly over half that number of employees; JetBlue employs some 12,000 permanent workers. Southwest, JetBlue and Virgin have also made an effort to steep employees in their respective corporate cultures from the outset. Virgin has a leg up, argues Chris Rossi, senior vice president in North America for Virgin Atlantic Airways, because the airline came from Virgin Group, which is fundamentally an entertainment company. "Our approach was to prioritize the customer experience -- how do we make it something that they look forward to?"
That isn't the typical DNA at most large airlines. There, a lot of the management came out of the military, says Edward Lawler, the director of the Center for Effective Organizations at the University of Southern California. "Their model was a very traditional, top-down kind of approach that doesn't necessarily give flexibility to employees or listen to what they need." Trouble is, he argues, effective customer service begins with personnel. "That was never built into the other airlines," he adds. Instead, many larger airlines have a complicated relationship with their employees. Shifting around heavily unionized labor forces can be difficult, he adds. What's more, many employees at newly re-shuffled major airlines are the ones who have weathered the worst including seismic layoffs, says Adamson.
Of course, the major airlines know that branding is important. "American is in the middle of the restructuring process and plans to emerge a very different airline," an American Airlines spokeswoman said in a statement. "The airline looks forward to emerging from the restructuring process with something new and different for its customers." Creating a coherent corporate culture is also on United CEO Jeff Smisek's to-do list. Last year, he told Fortune, "My management team and I are spending a lot of time on developing the new culture. [We're] very focused on that because you do run the risk in any integration of ending up with mediocrity." Delta did not respond to a request to comment in time for publication.
For now, the success of small airlines with strong brands is likely to begin pushing against the branding approach of larger airlines. "I think the pressure is going to come from the regional guys that are getting pretty good at creating a unique experience and delivering around it," says Andrew Pierce, U.S. President of brand consultancy firm Prophet. "Those guys are going to become more formidable." They could chip away at the edges of a market that big carriers guard closely. Without a coherent brand strategy, those major carriers will continue to play the price game. And, in this market, with fuel costs and customer behavior difficult to predict, a broken brand is the last problem any airline wants on top of everything else.