Why the services industry is in turmoil, and British Airways are screwed

I was sat on the sofa this morning, trying to think of a truly amazing customer experience that I have had in 2011. And if I’m being honest, I’m not sure I’ve had one. I’ve lots of OK experiences. A few good ones. And plenty of terrible ones. Maybe I’m wrong in thinking that me, the customer, should be the focus during an interaction, because I so very rarely feel that way.

And it was so that I ended up today at The Cheese And Wine Company in Hampton. It sits on the site that has housed no less than four cafés in four years. Organic this, children’s that. Each was a failed business because they had no idea what their customers wanted – usually bad home-cooked cakes and muddy coffee. Really?

Steve, on the other hand, has created a simple and oddly unique value proposition. He selles cheese, wine, and associated paraphernalia. In the store, online, you can sit and eat it or take it home. He does tastings and parties and events and has engaged his audience very nicely. And what’s more, he’s not competing with the supermarkets because he sells stuff you can’t buy there. Stuff like Epoisses soft cheese and Binfield Brut sparkling wine, that comes from a few miles from where I was born in Berkshire.

It’s a simple value proposition and his customers love it. He’s sold out on every event and I had to settle for a rather nice stilton today, because he’d sold every other cheese in the shop. Trust me, he has a truckload coming tomorrow, on the next working day of the year.

The shop next door to him shut down a few months back. As far as I can tell, Harry and Paul’s I Saw You Coming took this store to run a parody. As they say, “It’s basically a bunch of crap that I’ve tastefully displayed. And a bunch of candles”. And now it’s been replaced by a store called OhSo. Which as far as I can tell sells the same rubbish that the old store (which went bust) sold. It’s sad, but they won’t be open in Christmas 2012.

And this neatly brings me to British Airways. The airline industry is in trouble. Their consumers have less disposable income than ever before. Fuel prices and taxes are rising year-on-year. A bunch of low-cost airlines have cropped up, cutting margins further and increasing competition. And consumers are better informed than ever before, with better price comparison sites.

They have two potential differentiators to choose from: either price, or quality of service. With airlines like the US domestics (US Airways, Delta etc.) and European budget airlines like Easyjet and Ryanair, you know what you are getting. Very little, for the lowest price possible. A return trip from London to Madrid is £37 by Easyjet in January, and £114 with BA.

So BA try to compete on perceived quality of service. But they have a serious problem here too, because their staff hate them. They are used to being given a platinum pay package for the last 30 years, and the market can no longer support it for the reasons explained before. What’s more, the delays to Boeing’s Dreamliner planes mean that BA are operating a tired fleet of ageing planes.

And in reducing their salaries and making the shifts and perks more similar to other competing airlines, BA have made their staff hate their jobs – and they take it out on the customers in many cases. In 2011 I have experienced the following:

  1. Being charged for a ticket change after I was told I could have it for free because I was changing flights at their convenience.
  2. Being charged for a ticket change after an administrative fault
  3. A nice coat I left on a plane never made it to lost property – in a small airport
  4. My bags vandalised and my property stolen on a flight from London to Madrid
  5. Nearly missing a flight because of computer security check problems
  6. Having my complaint letter opened by the crew that I complained about – they then confronted me
  7. Flights with no water, broken heating systems, broken seats or rest rooms

And no one gives a crap. Their customer complaints department certainly don’t and from what I hear, the management team isn’t any different. When you talk to staff at the airport on a flight, they are invariably unhappy and disaffected.

And the share price shows it. They are down from 243p at the beginning of this year to 150p at the time of writing. To be fair, this is more or less in common with the rest of the industry – but what is not in common is they are barely breaking even. Lufthansa, for example, has an operating margin of 4% compared to the International Airlines Group (which owns BA and Iberia), which made 0.7% last year. I’ve not looked into it, but it wouldn’t surprise me if there were some creative accounting going on there.

Now last week, FedEx got in trouble on YouTube, when a disaffected customer uploaded a video titled “FedEx Guy Throwing My Computer Monitor”:

Now this video already has nearly 7,000,000 views and 22,000 comments. Fedex Senior Vice President Matthew Thornton III turned this into a fantastic opportunity and apologised to the customer, as a YouTube response, here:

And if BA want to survive, I believe they need to apply some customer-centricity. I’ve been told by some senior people in BA that they have a program in place to try to ensure retention of frequent flyers and offer them a good quality of service.

Now, I get a fantastic quality of service from Carl and his team at BA in Philadelphia International Airport and this is probably the main reason why I fly BA (along with the rewards points, and the convenience of London Heathrow Terminal 5). But I think this is a pocket of excellence caused by a good manager and it is not representative of my overall experience.

The risk to BA seems so obvious – there will be some major casualties of the recession. I’m already tempted to switch to US Airways, who have a very generous upgrade system (they always fill business class, upgrading passengers by order of seniority). The fact that US Airways don’t give you access to their lounge, even if you are a frequent flyer, is the reason I’ve not. It costs $375 a year.

During a visit to the NASA space center in 1962, President Kennedy noticed a janitor carrying a broom. He interrupted his tour, walked over to the man and said, “Hi, I’m Jack Kennedy. What are you doing?”. The janitor responded, “I’m helping put a man on the moon, Mr. President.”

It sounds corny, but having a company with a single vision may have something to be said for it. I work with a lot of large global organisations and it is often a problem that IT functions do not serve the wider needs of the business. One company that this is not true in is Howdens Joinery (previously the wholesale arm of MFI), which is a very interesting organisation.

For a start, everyone in the organisation is remunerated based on the same criteria. This shared sense of purpose is very visible in the CIO, David Hallett. We were talking about depot outages and he explained that they don’t operate on the basis of an acceptable failure rate: a depot which is not operating, is margin lost, and that is unacceptable.

What’s more interesting is that it appears that because everyone has a shared and common goal, they work as a team. The results are clear. Revenue in 2009 was 769m with 6.5% profit after tax. This was up to 808m and 8.2% profit in 2010. 2011 Interim results are available here but they aren’t very relevant because Howdens does much of their business in the run-up to Christmas. What is interesting is the first few pages which explains their business model.

If you do so, you will understand that Howdens is 100% customer-centric. They know who their customer is (the small builder) and know exactly what is important to them – and they deliver it, surrounded by a viable commercial model. Their massive market share is testimony to getting that right.

For my money, there will be airlines that figure out that being customer-centric first and foremost builds long-term sustainable success. And there will be those that will roll over and die. And from where I’m sitting, British Airways may be a Very British Institution, but I’m not convinced it can survive this recession.

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