W3 Classic Airlines Marketing Solution

Classic Airlines Marketing Solution 1

Classic Airlines Marketing Solution

Complete Scenario and Attached Documents

Betsy Vazquez Valentin

University of Phoenix

Marketing – MKT/571

Saturday, June 19, 2010

Dr. Deniss Arroyo Audiffred


SCENARIO: CLASSIC AIRLINES

Company Overview

The world’s fifth largest airline, Classic Airlines, commands a fleet of more than 375 jets that serve 240 cities with over 2,300 daily flights. In the 25 years since its inception, Classic has grown to an organization of 32,000 employees, and last year, it earned $10 million on $8.7 billion in sales.

Though profitable, Classic is no stranger to the challenges that plague today‘s airlines. Increased uncertainty about flying has affected industry stock prices, and Classic has seen a 10% decrease in share prices in the past year. With a concerned investment community on the watch, the airline industry operates under a microscope, subject to scrutiny from all sectors. Not surprisingly, the negativity from Wall Street, the media, and the public has affected employee morale, which is the lowest it has ever been.

Consumer confidence also appeared to be waning. By January 2005, Classic’s declining Classic Rewards program measured a 19 percent decrease in the number of Classic Rewards members, and a 21 percent decrease in flights per remaining member. Loyal customers were jumping ship and the ones still aboard seemed to be flying less frequently -- or at least less frequently with Classic Airlines.

Rising costs, particularly of fuel and labor, have limited Classic‘s ability to compete for the valued frequent flier. Although the travel downturn that followed September 11, 2001 has subsided, Classic and many of its rivals overestimated the reversal and expanded too quickly. Now, these companies face a restrictive cost structure that younger airlines do not.

To counter any further financial crisis, Classic’s Board of Directors recently mandated a 15 percent across-the-board cost reduction over the next 18 months. Within that mandate, Classic must still find a way to beef up its frequent flier program with methods that will demonstrate a measurable return on any investment (ROI). While the board is playing their cards close to the vest, the rumor mill is churning with word that if Classic cannot meet the reduction, the company faces bankruptcy.

Attachments:A: Financial statements (past two years)B: Chart of stock prices (past two years)C: Cost reduction plan by department


Classic Airlines 2004 Monthly Financial Results (in millions) Jan Feb Mar April May June July Aug Sept Oct Nov Dec Total

Operating Revenues:

Passenger $543 $501 $668 $459 $835 $960 $877 $710 $710 $626 $710 $752 $8,352

Cargo $40 $21 $30 $22 $35 $28 $28 $23 $37 $26 $28 $31 $348

Total Operating Revenues $583 $522 $698 $482 $870 $988 $905 $733 $746 $653 $738 $783 $8,700

Operating Expenses

Salaries and related costs $347 $347 $347 $347 $347 $348 $348 $348 $348 $348 $348 $348 $4,171

Aircraft fuel $81 $76 $99 $70 $123 $140 $128 $105 $105 $93 $105 $111 $1,236

Depreciation and amortization $61 $61 $61 $61 $61 $61 $61 $61 $61 $60 $60 $60 $729

Contracted services $35 $32 $43 $30 $54 $62 $56 $46 $46 $40 $46 $48 $537

Landing fees and other rents $34 $31 $42 $29 $52 $60 $55 $44 $44 $39 $44 $47 $520

Aircraft maintenance $25 $28 $36 $26 $43 $49 $45 $36 $36 $33 $36 $39 $432

Aircraft rent $37 $37 $37 $37 $37 $37 $37 $37 $37 $36 $36 $36 $441

Passenger commissions $8 $8 $10 $7 $13 $15 $13 $11 $11 $10 $11 $12 $128

Passenger service $13 $12 $16 $11 $20 $23 $21 $17 $17 $15 $17 $18 $197

Other selling expenses $19 $26 $32 $24 $36 $39 $36 $29 $29 $27 $30 $32 $359

Total Operating Expenses $660 $658 $723 $641 $785 $833 $800 $733 $733 $701 $732 $750 $8,750

Operating Income (loss) ($77) ($136) ($25) ($159) $85 $155 $105 ($1) $13 ($48) $6 $33 ($50)

Other income, net

Interest expense ($22) ($22) ($22) ($22) ($22) ($22) ($22) ($22) ($22) ($22) ($22) ($22) ($264)

Interest income $5 $5 $5 $5 $5 $5 $5 $5 $5 $5 $5 $5 $60

Total Other Income (expense) ($17) ($17) ($17) ($17) ($17) ($17) ($17) ($17) ($17) ($17) ($17) ($17) ($204)

Income (Loss) Before Taxes ($94) ($153) ($42) ($176) $68 $138 $88 ($18) ($4) ($65) ($11) $16 ($254)

Income Tax Provision (Benefit) $22 $22 $22 $22 $22 $22 $22 $22 $22 $22 $22 $22 $264

Net Income (Loss) ($72) ($131) ($20) ($154) $90 $160 $110 $4 $18 ($43) $11 $38 $10

Attachment A(1): Financial Statement 2004


Attachment A(2): Financial Statement 2003

Classic Airlines 2003 Monthly Financial Results (in millions) Jan Feb Mar April May June July Aug Sept Oct Nov Dec Total

Operating Revenues:

Passenger $537 $496 $661 $454 $826 $950 $868 $702 $702 $620 $702 $744 $8,262

Cargo $38 $20 $28 $21 $33 $26 $26 $21 $35 $25 $27 $30 $330

Total Operating Revenues $575 $516 $689 $476 $859 $977 $894 $724 $737 $644 $729 $773 $8,592

Operating Expenses

Salaries and related costs $337 $337 $337 $337 $337 $338 $338 $338 $338 $338 $338 $338 $4,051

Aircraft fuel $73 $67 $90 $62 $112 $129 $117 $95 $95 $84 $95 $101 $1,119

Depreciation and amortization $61 $61 $61 $61 $61 $61 $61 $61 $61 $60 $60 $60 $729

Contracted services $36 $33 $44 $31 $56 $64 $58 $47 $47 $42 $47 $50 $556

Landing fees and other rents $35 $32 $43 $30 $54 $62 $56 $46 $46 $40 $46 $48 $538

Aircraft maintenance $26 $24 $32 $22 $40 $46 $42 $34 $34 $30 $34 $36 $398

Aircraft rent $37 $37 $37 $37 $37 $37 $37 $37 $37 $36 $36 $36 $441

Passenger commissions $10 $10 $13 $9 $16 $18 $17 $14 $14 $12 $14 $14 $160

Passenger service $14 $12 $17 $11 $21 $24 $22 $18 $18 $16 $18 $19 $208

Other selling expenses $23 $21 $28 $20 $36 $41 $37 $30 $35 $40 $40 $42 $393

Total Operating Expenses $652 $635 $702 $618 $768 $819 $786 $719 $724 $697 $727 $744 $8,593

Operating Income (loss) ($77) ($120) ($13) ($143) $91 $157 $108 $5 $13 ($53) $2 $29 ($1)

Other income, net

Interest expense ($22) ($22) ($22) ($22) ($22) ($22) ($22) ($22) ($22) ($22) ($22) ($22) ($264)

Interest income $6 $6 $6 $6 $6 $6 $6 $6 $6 $6 $6 $6 $72

Total Other Income (expense) ($16) ($16) ($16) ($16) ($16) ($16) ($16) ($16) ($16) ($16) ($16) ($16) ($192)

Income (Loss) Before Taxes ($93) ($136) ($29) ($159) $75 $141 $92 ($11) ($3) ($69) ($14) $13 ($193)

Income Tax Provision (Benefit) $22 $22 $22 $22 $22 $22 $22 $22 $22 $22 $22 $22 $264

Net Income (Loss) ($71) ($114) ($7) ($137) $97 $163 $114 $11 $19 ($47) $8 $35 $71

Attachment B(1): Chart of Stock Prices 2004


Classic Airlines' Stock Price - 2004 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecStock Price $32.15 $35.36 $29.87 $26.50 $28.90 $30.08 $36.75 $31.11 $30.01 $32.22 $27.86 $28.93

Attachment B(2): Chart of Stock Price 2003

Classic Airlines' Stock Price - 2003 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Stock Price $36.25 $36.00 $35.80 $34.90 $35.35 $36.85 $36.20 $35.40 $34.77 $34.25 $33.68 $33.20

Attachment C: Cost Reduction Plan by Department


Classic Airlines Cost Reduction Goals By Department Quarterly Reduction Required To Meet 15% Goal

Department Q1 Q2 Q3 Q4 Q5 Q6 TotalAdministrative 3.00% 2.00% 3.00% 5.00% 5.00% 6.00% 18.50%IT 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 14.10%Operations 2.00% 1.50% 1.50% 2.00% 2.00% 2.00% 11.50%Marketing 3.50% 3.50% 3.50% 4.00% 4.00% 5.00% 21.50%Sales 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 11.50%

Key Players

Amanda Miller, Chief Executive Officer (CEO): Amanda was hired as Senior Vice President of Operations in 2000 and groomed to take over as CEO following the retirement of former CEO Jack Broadway in 2002. Prior to that, Amanda was CEO of Jackson Energy, the leading utility provider to the Southeastern United States. A graduate of a leading business school with an Ivy League JD, Amanda had a private law practice before going corporate. Her pragmatic approach to operational excellence often leaves her little patience for “soft” business disciplines such as marketing.

Catherine Simpson, Chief Financial Officer (CFO): More than 20 years ago, Catherine graduated business school and immediately began work as Classic‘s financial analyst, ultimately working her way up to CFO. Catherine is “driven by numbers,” and her practical philosophies about business are frequently in line with Amanda’s.

Kevin Boyle, Chief Marketing Officer (CMO): The new kid on the block, Kevin came aboard just six months ago as part of the restructuring of the global marketing organization. Kevin is an airline industry veteran who spent the early years of his career in operations, and the past 15 years marketing for one of Classic’s competitors. Recognized as possibly the leading mind in airline marketing, Kevin has spent his first six months observing, listening, and speaking with Classic’s employees, customers and shareholders. He believes that marketing is critical to the company’s ability to move forward profitably.

Renee Epson, Senior Vice President of Customer Service: Four years after joining the company in 1989, Renee implemented a customer relationship management (CRM) program. Renee’s background is in retail, where she spent 12 years in myriad management positions before coming to Classic. As the top management’s view of customer service becomes more operations-based, Renee has frequently found herself battling for the customer.

Ben Sutcliffe, Senior Vice President and General Counsel: Ben has been with Classic for more than twenty years, following a 10-year stint as senior counsel for UK petroleum giant KP. A well-educated and seasoned professional, Ben has a long history of conservative outcomes in Classic’s major legal decisions. Lately, he has been suggesting potential compromises with the union in order to pave the way for Classic’s continued success.

Doug Sheflin, Senior Vice President and Union Representative: Doug is a labor relations expert and has steered Classic’s relatively clear of major obstacles in an increasingly volatile union climate. A fair but firm negotiator, he has invested many years in building relationships with the union organization. Now, he is concerned that Classic will be unable to meet its current and future obligations to its employees, and advocates action over the status quo in the coming months.

John Hartman, Senior Vice President, Human Resources: A bright, young MBA graduate on the fast track to senior management, John has been with Classic for three years. John firmly believes that frontline employees represent the organization’s face to the customer, and are critical to customer service and marketing effectiveness. He has worked to educate and train all customer service employees on their


importance to the organization, and is recognized as a thought leader on the subject of melding the human resource and marketing functions.

JANUARY 7, 2005MEETING WITH CEO AMANDA MILLER AND LEADERSHIP TEAMExcerpt of meeting dialogue

Amanda: As the Customer Loyalty Report clearly shows, membership in Classic Rewards is down nearly 20% from this time last year. That translates to more than 160,000 allegedly loyal customers who are now flying airlines other than Classic. And that‘s not the worst of it. It seems we can’t even get the frequent flier customers we’ve retained to choose Classic over our competition. The average number of flights per member is down more than 20% as well.

Those of you who were here a year ago may remember that I was virtually assured by the former head of marketing that if I agreed to the price cuts he proposed, we’d be able to lure our customers back from the competition. I hate to admit it, but I got sucked into that strategy and where did it get me? Where did it get Classic, or our shareholders? Right in the middle of a battle over price - a battle that has every indication of becoming a full-blown war. I don’t know who will win but I know who won’t: Classic. We have absolutely no room to cut our margins any further. Period

Attachments:D: Customer Loyalty ReportE: Pricing structure report (average fare, past two years)F: Frequent Flier Program Overview

Attachment D: Customer Loyalty Report

Customer Loyalty ReportClassic Rewards Program Membership

Q1

2002Q2

2002Q3

2002Q4

2002Q1

2003Q2

2003Q3

2003Q4

2003Q1

2004Q2

2004Q3

2004Q4

2004

New Members 35,000 37,000 41,000 30,000 45,000 48,000 48,000 42,000 11,000 17,000 9,000 9,000

Current Members 750,000 770,000 789,000 809,000 819,000 839,000 852,000 865,000 857,000 823,000 791,000 746,000

Inactive Members(15,000

)(18,000

)(21,000

)(20,000

)(25,000

)(35,000

)(35,000

)(50,000

)(45,000

)(49,000

)(54,000

)(59,000

)

Total Members 770,000 789,000 809,000 819,000 839,000 852,000 865,000 857,000 823,000 791,000 746,000 696,000


Customer Loyalty ReportTotal Flights By Classic Rewards Members

Q1 2002 Q2 2002 Q3 2002 Q4 2002 Q1 2003 Q2 2003 Q3 2003 Q4 2003 Q1 2004 Q2 2004 Q3 2004 Q4 2004Total Flights

3,465,000 3,589,950 3,721,400 3,808,350 3,943,300 3,961,800 4,108,750 3,770,800 3,621,200 3,401,300 3,207,800 2,992,800

Attachment E: Pricing Structure Report

Average Roundtrip Fare 2002 2003 2004 2005Domestic $298 $305 $235 $238Worldwide $571 $582 $471 $475


Attachment F: Fequent Flyer Program Overview

Classic Rewards Frequent Flier Program Overview(Taken from Classic’s New Employee Training and Orientation Manual – Confidential Internal Information)

Classic Rewards members earn miles when they purchase eligible tickets on qualifying domestic or international Classic Airline’s flights. At present, over 95% of Classic’s routes are classified as qualifying. Members earn one point per flight-mile, with a minimum of 500 miles per roundtrip, and a maximum of 2500 miles per roundtrip. Members can earn miles for staying with one of Classic’s six hotel partners or renting cars from one of their three car rental partner companies. Members can also earn miles by using their Classic Rewards co-branded credit card.

Classic Rewards is a tiered program, with customer’s achieving Silver and Gold level status based on their annual mileage accumulation. Tier-status has a one-year expiration period. Gold members receive a monthly statement, monthly newsletter, and special promotions from Classic Rewards’ partners.

Current program membership by tiers is consistent with historic averages for the program:

Basic Rewards 60% Silver Rewards 25% Gold Rewards 15%

Membership tier overview:

Basic member up to 40,000 miles in one calendar year Silver member 40,001 to 100,000 miles in one calendar year Gold member over 100,000 miles in one calendar year

Current program membership is 80% business travelers, 20% leisure travelers. Members “move” between these segments (i.e., a business traveler may accumulate miles traveling on business and redeem miles for leisure travel), but historically follow the 80/20 split.

Miles earned in Classic Rewards will not expire as long as members travel once in a two-year period. Classic Rewards non-qualifying flights include ten direct flights from the US to Europe and ten direct flights from Europe to the US.

Classic Airlines allocates ten seats per flight for frequent flier redemption, and has blackout periods surrounding all major US and European holidays. Frequent flier redemption tickets are non-transferable, and members may only redeem one ticket per flight. Members are allowed to redeem for one companion ticket every two years.

Classic Rewards members may redeem miles for stays at one of Classic’s six partner hotel chains, or for car rentals at one of Classic’s three car rental partner companies. Members may also redeem miles for upgrades to first-class, and may redeem miles for an annual “pre-board” pass which allows them to board flights prior to normal boarding.

The following is a summary of Classic Rewards’ redemption options:

Round-trip domestic flight 40,000 miles Round-trip international flight 80,000 miles One night stay at partner hotels:

o Partner A: 40,000 mileso Partner B: 60,000 mileso Partner C: 80,000 miles

One-day car rental at partner companies 40,000 miles


JANUARY 7, 2005E-MAILTO: Kevin Boyle, Renee Epson, and John HartmanCC: Catherine SimpsonFROM: Amanda MillerRE: Today’s meeting

Kevin, Renee, and John:

I think we had a productive meeting this afternoon and I‘m happy that the three of you are eager for the opportunity to turn around our Classic Rewards program. Kevin, thank you for spearheading this project.

I don’t need to tell you how important it is that we lure back our frequent fliers. If we don’t, our chances of restoring stock prices to last year’s levels are slim. Your challenge is going to be rising above our competition without discounting airfare. That’s going to take some real creativity but the simple truth is that we are not in a position to cut our margins any further and still survive.

I have a meeting with our board on April 7. At that meeting, they’ll be expecting a progress report that demonstrates a measurable, positive trend. Because this deadline is just three months away, I expect frequent updates on your plans, so that I can be sure we’re headed in the right direction.

If anybody can do this, it’s the three of you. Good luck!

Sincerely,Amanda Miller, CEO

Attachment:G: Loyalty Program Expected Results Report

Attachment G: Loyalty Program Expected Results Report

These two graphs reflect the results CEO Amanda Miller expects from Kevin Boyle’s (and the leading team)

Expected ResultsClassic Rewards Program Membership

Q4

2004Q1

2005Q2

2005Q3

2005Q4

2005New Members 9,000 19,000 28,000 37,000 42,000 Current Members 746,000 696,000 695,000 708,000 733,000 Inactive Members (59,000) (20,000) (15,000) (12,000) (8,000)

Total Members 696,000 695,000 708,000 733,000 767,000


Expected ResultsTotal Flights By Classic Rewards Members

Q4 2004 Q1 2005 Q2 2005 Q3 2005 Q4 2005

Total Flights 3,200,895 3,575,000 3,790,000 3,920,000 4,100,000

JANUARY 8, 2005E-MAILTO: Kevin Boyle, Renee Epson, and John HartmanFROM: Catherine SimpsonRE: Today’s meeting

Kevin, Renee, and John:

Call me redundant, but as a follow-up to Amanda’s message yesterday, I must explicitly remind you of our corporate-wide cost reduction target of 15 percent over the next 18 months. That means that even as you


identify alternatives to retool Classic Rewards, you must engineer this turnaround with 15 percent less in marketing expenses.

Do you remember that fuel-hedging program I implemented last year? By locking in our fuel prices for the next year, we’ve been able to reduce our overall fuel costs by 12 percent. Every dollar that we spend on marketing (Classic Rewards included) is a dollar that won‘t go to fuel-hedging. We already know the program works, so continuing to contribute to it will enable us to reach our 15 percent cost reduction target.

Best of luck,Catherine

Attachment:H: Report reflecting results of fuel-hedging program

Attachment H: Report reflecting results of fuel-hedging program

Fuel Hedging Program Cost Savings

Q1

2004Q2

2004Q3

2004Q4

20042004 Total

Fuel Gallons Consumed (in millions) 294 388 394 359 1,435Market Price Per Gallon $0.82 $0.90 $0.97 $1.01 $0.93

Total Fuel Cost (in millions) $241 $349 $382 $363 $1,335Fuel Gallons Consumed (in millions) 294 388 394 359 1,435Hedged Price Per Gallon $0.82 $0.82 $0.82 $0.82 $0.82

Total Hedged Fuel Cost (in millions) $241 $318 $323 $294 $1,176

TOTAL SAVINGS (in millions) $0 $31 $59 $68 $158

JANUARY 9, 2005E-MAILTO: Kevin BoyleFROM: Ben SutcliffeCC: Amanda Miller, Catherine Simpson, Doug SheflinRE: Today’s meeting

Kevin:

As you lead the Classic Rewards project team, please remember the conversation we had a few months back regarding Classic’s union contract. Our commitment to the current contract is an investment in Classic’s future. At no time should your creative efforts on the reward program’s behalf include any revisions to the current union agreements in an attempt to reallocate funds to your marketing programs. I assure you that any ground you anticipate to gain by such an action would be immediately surrendered.Best regards, Benjamin Sutcliffe, Esq.

Attachment:I: Press release outlining Classic’s position with labor unions

Attachment I: Press release outlining Classic’s position with labor union

Press Release Outlining Classic’s Position with Labor Unions


Alexandria VA (UP)

Today, unions representing employees of Classic Airlines awarded Classic the Wright Stuff® Trophy for this year. Present from Classic Airlines for the ceremony were Amanda Miller, CEO and Ben Sutcliffe, General Counsel. Employees unions represented included the Aircraft Mechanics Fraternal Association (AMFA), the Air Line Pilots Association (ALPA), and the Association of Professional Flight Attendants (APFA).

Representatives from ALPA were most vocal in their praise for Classic, noting that Classic had withstood the challenges of a more competitive industry that is faced with rising fuel costs. ALPA cited several examples of Classic’s integrity, including the airline’s insistence on paying top salaries to pilots and other employees, even while competitors are cutting pay in those professions. The Flight Attendants (APFA) explained how Classic had expanded the choices of routes available to flight attendants by implementing new route-bidding practices advocated by APFA. “Classic has set a new standard for route bidding that will enable a flight attendant to balance the needs of home and work more easily, and it will become the gold standard of the industry” one unidentified APFA officer noted.

The aircraft mechanics union (AMFA) described Classic’s union-management relationship as “professional and mutually-supportive”, and shared some examples of fruit borne by that relationship. “With our ‘Thirty and Out’ retirement program, a mechanic can start at age 20 and be retired by age 50’”, noted one AMFA spokesperson. “Both the company and the union benefit when employees can know that thirty years of work pays off for everyone.”

The only somber note of the festive occasion was sounded by Ben Sutcliffe, Classic’s General Counsel. Noting that Classic has one of the highest labor costs per seat-mile, Sutcliffe observed that customers are price-sensitive, and that if Classic continues to carry the highest labor cost of any airline in the industry, it will jeopardize Classic’s future.

JANUARY 9, 2005FIRST PROJECT TEAM MEETING – KEVIN, CMO; RENEE, SVP Customer Service;JOHN, SVP of Human Resources.Excerpts from meeting dialogue

Renee: I can’t help being a little upset that it’s come to this. For the past two years, I’ve been saying we’ve lost touch with our customers, and I should know. Every day, I monitor the customer service calls. I hear customers tell us what they want, but we don’t have the service elements, operations procedures, or marketing programs in place to deliver. The higher-ups think they know what makes our customers tick, but they haven’t listened at all. If they had, they wouldn’t be surprised that we’ve suffered a 20 percent loss in Classic Rewards.

Kevin: I know, Renee. I heard your story over a handshake the first day we met. Just kidding! Trust me, I hear what you’re saying, and I’ve seen companies like ours get burned before. The question now is what do we do about it?

Renee: We’ve got to reconnect with our customers. We have to show them that we understand their needs and we understand what’s important to them. We’ve got the research, we’ve got the data, we just need to put it to work.

Kevin: But what about the CRM system?

Renee: Our CRM system is no more about customer relationships than the system we use to order office supplies! Don’t get me wrong, the platform itself is one of the best on the market, but it’s not a systems


issue. When we set it up, all we were concerned with was decreasing the amount of time our reps spent on the phone with customers or, better yet, driving these customers to the Internet so we didn’t have to talk to them at all. Because then we could reduce headcount and deliver cost savings by getting rid of the only people in the company who actually listened to our customers! And what’s worse is that we configured the system in a way that doesn’t integrate the phone channel with the Web channel. If our customers choose to interact with us over both channels, we don’t know they’re the same person. The system has the capability to integrate channels seamlessly, but it would have required more time thanwe were prepared to invest. So much for making the most of every customer interaction.

John: I agree, Renee; I’ve heard it in exit interviews, ever since I’ve been here. I’ve talked to Amanda about it as well, but I think she’s got too much political capital invested in the CRM implementation to take any corrective action. I also know that when it comes to marketing campaign execution, we don’t even use the information from the CRM system. Like you said, it’s not the system, but the philosophy, or really the lack of philosophy, that‘s the problem. But the system might be our answer in this case. It’s a strong platform, much stronger than that of our competitors, and with a little recalibration of our strategy, it could do everything we want it to, maybe more.

Kevin: John’s right; the CRM cloud could turn out to have a silver lining. When I first took the marketing VP job at the last airline I was at, we had no system. But we did have a strong loyalty program, one that was in tune to the wants and needs of our customers. When we began our CRM implementation, the CEO came to me and asked me what I thought it would take to make CRM work from marketing’s perspective. I was candid, and told him that if the system took the philosophies and practices of our current customer retention efforts, including the loyalty program, and integrated them with our reservations and customer service functions, and spoke to the customer in a unified voice as a result, we would succeed. We’ve got to champion the concept that CRM is far more than a system; it’s a top-down philosophy that puts the customer at the center of our business. We have the marketing know-how to make this work. In fact, I know a lot of my former colleagues who would love to have the experience and market knowledge that we have in this room.

Renee: I know one thing: Catherine sure loves the reports we get out of the CRM. She grins from ear-to-ear at the sheer fact that she can get data on our rep call time in real time. I’ve even seen her confront my reps on the floor if she sees their call times start to increase – my reps, my department, her report. She and Amanda both live and die by the numbers. If we can use the CRM system to deliver the same kind of metrics and reporting for the loyalty program that we do for our operations functions, we’ll at least have that part of the battled covered.

Kevin: Well, with all due humility, I can tell you this much – I’ve seen it done before. Marketing can deliver on this challenge, my friends, and the CRM system can play a starring role. I’ll also tell you this: I’ve spent the past 10 years talking to frequent fliers of all levels, and I’ve spent the past six months talking to Classic’s top-level frequent fliers. And you know what? They don’t always put price at the top of their decision-making criteria when choosing an airline. Both Amanda and Catherine seem to think we can’t win this game without playing the price cut card, but I think they’re wrong. I put together this “picture of the customer” that sheds a lot of light in this direction; check it out.

Renee: Wow, that’s slick. But I think we need even more research before we get started. Why don’t I head up a quick customer survey with the inbound group, and John, you could pull together any secondary reports that you can get your hands on.

Kevin: Sounds like a plan. It will keep us on course and defend the flanks, if you know what I mean.

John: Definitely; there will be plenty to steer clear of!

TO: John Hartman, SVP Human Resources; Renee, SVP Customer ServiceFROM: Kevin Boyle CMO.


Subject: Please Review

I have attached documents that outline our picture of the customer as well a few documents that present clues related to Classic’s current level of customer service, and employee satisfaction.

Attachments:

J: Boyle’s customer profile and feedback from his discussions with customersK: Transcripts from call monitoringL: Excerpts from exit interviewsM: Customer service call reports

Attachment J: Boyle’s customer profile and feedback from his discussion with customers

Kevin Boyle - Notes From Customer Conversations

Key Customer Comments:

“I don’t need the perks, just get me there on time.” “I know you may need to automate customer service to control costs, but there should always be

the option to talk to a real person.” “I’ve heard you only allow two seats per flight for me to redeem my frequent flier miles. If that’s

true, you need to let me reserve them at least six months in advance.” “Stick to the schedules.” “Whatever you do, don’t lose my bags. And if you do, don’t treat me like a criminal – you lost

them, not me”. “My friend can use frequent flier miles to make her mortgage payment or save for retirement.” “One of your competitors just got rid of pillows on board to save almost a half-million dollars a

year. Please tell me you’re not going to do that.” “Treat me like a person, a paying customer, which is what I am.” “You should have your executives listen in on customer service calls sometime.” “I don’t care if it costs a couple of bucks more, if you can assure me I’ll arrive on time and be

treated like a human being, I’m with you.” “You know, your competition just put in leather seats with DirectTV in the back of every one.” “In the unlikely event that you overbook a flight (which has happened to me) please do not infer

that it is something I have done to cause (which has also happened to me).” “Let top-level frequent fliers board early.” “I remember the good old days, when I flew in and out of New York and you still had a Classic

Club at Newark Airport. Those ladies would call my cell phone and let me know if my flight was late, book hotel rooms for me when my flight was cancelled, and always gave me little trinkets to take home to my kids. I would never have dreamed of flying on anything but Classic.”

My Picture of the Customer:

Business Traveler –

Wants to get from point A to point B as quickly, easily and effectively as possible Doesn’t like connections, delays Wants frequent flights to a variety of destinations Wants quality service Will pay a premium for these benefits, within reason Considers his frequent flier points to be the airlines’ investment in him

Leisure Traveler –

Much more price sensitive – will schedule trips around discount fares


More tolerable of connections if it saves them money Doesn’t care as much about the frequency of flights or the variety of destinations Doesn’t care as much about the quality of service if they save money Doesn’t make as many trips as the business traveler, but outnumbers the business traveler in

sheer volume One trip decision involves multiple tickets (i.e, a family of four or more, etc.)

Attachment K: Transcripts from call monitoring Classic Rewards' Customer Service Call Monitoring Transcripts - Q3 2004

Call #1

Customer Service Rep:Thank you for calling Classic Rewards, this is Jolene, how can I help you?

Customer:Hi Jolene, my name is Joe Klinnger and I'd like to redeem some frequent flier miles for a flight to Paris.

Customer Service Rep: Can I have your Classic Rewards number?Customer: It's 876-999-00854

Customer Service Rep:Alright, let's see, you do have enough miles in your account for international travel.

Customer: I hope so, I've been saving them for six years!Customer Service Rep: Okay, Mr. Klinnger, from where will you be flying?Customer: Well, I live in St. Louis and I'd like to leave from there.

Customer Service Rep:That's good news, we do offer a flight with only one connection between St. Louis and Paris.

Customer:Hmm, nothing direct, it says here that you are "proud to offer non-stop flights daily from New York, Chicago, St. Louis and Atlanta"?

Customer Service Rep:

Well, we do, Mr. Klinnger, however, as far as frequent flier seats are concerned, those are only available to Paris on our connecting flights through New York. You'll have to fly to New York from St. Louis, and then after a short lay over, you'll be on your way to Paris.

Customer:Like I said, I've been saving these for six years, I guess I'll take what you've got.


Call #2Customer Service Rep: Classic Rewards, this is Jack, how may I help you?

Customer:Hi, I'd like to redeem some frequent flier miles for a flight home for Christmas.

Customer Service Rep:Okay, can I get your name and Classic Rewards number for starters.

Customer:Sure, my name is Dan Alabach, and my account number is 779-220-29837.

Customer Service Rep:Great, Mr. Alabach, now where will you be traveling to and from?

Customer: Tampa to Seattle, and back.

Customer Service Rep:Okay, and you mentioned Christmas. Now you are aware that there is a blackout period from December 15th through January 1st, correct?

Customer:What? Two weeks? I expected a couple of days right around the 25th, but two weeks, you've got to be kidding me!

Customer Service Rep:No, Mr. Alabach, I'm sorry, but I'm not kidding. Classic has a two-week blackout period around most major US holidays. Is there anyway you could extend your stay?

Customer:

Yeah, I could extend my stay….I wanted to stay for a week, but I could stay for ten days or even two week - but lets' see, if I have to leave on the 14th, we're talking more than two weeks right? This is ridiculous!

Customer Service Rep:Again, I'm sorry Mr. Alabach, but those are the rules, and they are stated clearly on our website.

Customer:Well, great - that sure is a comfort! Glad to know it's clear. Whatever!


Call #3

Customer Service Rep:Thank you for calling Classic Rewards, this is Lisa, how can I help you?

Customer:Hi Lisa, my name's Keith Gratz, and I'd like to redeem some frequent flier miles for a couple of roundtrip tickets.

Customer Service Rep:Okay, Mr. Gratz, I can certainly help you, but I'll need to get your Classic Rewards account number.

Customer: Sure, it's 537-000-53691.

Customer Service Rep:Alright, I've got your account information here in front of me. You mentioned a couple of roundtrip tickets, were these for two separate trips, or two tickets for the same trip?

Customer: That would be two tickets for the same trip.

Customer Service Rep:Now Mr. Gratz, it says here that you redeemed for a companion ticket last July, is that correct?

Customer:Well, I believe so, does that make a difference, it was over a year and a half ago?

Customer Service Rep:Actually, it does make a difference, as a member of our Silver Rewards program, you're only allowed to redeem for one companion ticket every two years.

Customer:I thought you were going to change that? They told me when I got my last one that this shouldn't be an issue going forward. What's the deal?

Customer Service Rep:

Well, we are hoping that change will come through soon, we've got some great new ideas in our marketing department. But unfortunately, for now, you'd have to wait four months to redeem for a companion ticket on one flight.

Customer:I've been a loyal customer for over ten years, I fly Classic every chance I get. Is there anyway you could make an exception since it is only four months out?

Customer Service Rep:I'm sorry Mr. Gratz, but we have to abide by the terms and conditions for all customers equally.

Customer:Equally, even when I've flown nearly twice a month with Classic for the past ten years? That doesn't really sound "equal" to me.

Customer Service Rep:Again, I'm sorry, Mr. Gratz, I wish there was something I could do. But for now, you can either redeem for the one ticket, or wait four months to redeem for the two.

Customer:

I can't wait, Lisa, this is for my father-in-law's 60th birthday party, it's a surprise and I have to be there when I have to be there. Go ahead and give me the one. But could you let someone know they really should look at what they're doing here?

Customer Service Rep: I sure will, Mr. Gratz, and thank you for understanding.

Customer:Oh, I don't understand, don't get me wrong, I just don't have a lot of options!


Attachment L: Excerpts from exit interviews Classic Airlines - Excerpts From Exit Interviews

Employee: Customer Service Rep #11. Were you treated with respect and dignity as an employee of Classic Airlines?: Yes2. Do you feel you were compensated fairly for your skills and talents?: Yes3. Would you recommend Classic Airlines as an employer?: Yes4. What was your reason for leaving Classic Airlines: Found better opportunity in another industry.5. If you could change one thing at Classic Airlines, what would that be?:

Fix the phone system. Not the phones themselves, but the computer program we had to use to log customer calls. People would call one day, maybe go to the website another, then call back to place a final reservation and we would have to make them go through everything all over again.6. If you could deliver a final message/comment to the CEO, what would that be?:

I never could understand why the CEO cared so much about how long our calls were. I thought I was supposed to be in "customer service", and it seemed like I was judged by how fast I could get rid of customers.

Employee: Customer Service Rep #21. Were you treated with respect and dignity as an employee of Classic Airlines?:

Yes2. Do you feel you were compensated fairly for your skills and talents?: Yes3. Would you recommend Classic Airlines as an employer?: Yes4. What was your reason for leaving Classic Airlines: Spouse relocated to a

different city.5. If you could change one thing at Classic Airlines, what would that be?:Don't focus so much on how long the customer is kept on the phone. Getting off

the phone fast doesn't always mean the best thing for the customer. I was afraid to "chat up" my callers, which is my personality, because I didn't want my call time to stand out.

6. If you could deliver a final message/comment to the CEO, what would that be?:Listen to your customers. People didn't seem to be as happy with us my last

couple of years as they were in the beginning. Everytime I said something like that to my supervisor, he always blamed me for not being "friendly" enough on the phone.


Employee: Vice-President of Marketing1. Were you treated with respect and dignity as an employee of Classic Airlines?: By most colleagues.2. Do you feel you were compensated fairly for your skills and talents?: No3. Would you recommend Classic Airlines as an employer?: Marketing, no; other departments, yes.4. What was your reason for leaving Classic Airlines:

It was clear to me that my style and talents clashed with the CEO and CFO. The two of them played such a strong role in the direction of the company that I viewed it as an insurmountable hurdle. I actively pursued a position at a company where marketing played a more dominant role in driving the strategy of the company.5. If you could change one thing at Classic Airlines, what would that be?:

Either get rid of the supposed CRM system, or get it straightened out fast. We spent an unbelievable sum of money to implement one of the best platforms available, and we couldn't (or wouldn't) spend the extra little bit to fit the system around the needs of our customers. I was in the dark in the early stages of the implementation, and by the time my input could have changed the way things came out, the software was too far along to be changed. For starters, you've got to capture customer contact at all points of interaction with the company to provide the proverbial "360-degreee view of the customer". Until that is addressed, all you've really got is an expensive reservations system, and not even a good one at that.6. If you could deliver a final message/comment to the CEO, what would that be?:

I really don't think you want me to answer that question. My relationship, or rather the lack of one, with your CEO is the main reason I'm choosing to move on. I have nearly twenty years of marketing experience, and that is apparently of no value to the organization at all. If our top management does not recognize that the customer signs our paycheck, and that marketing and sales can help keep them (the customer) coming back, my successor will face the same challenges, and probably the same ultimate fate that I did.

Classic Airlines - Excerpts From Exit InterviewsEmployee: Director of Applications, Information Services1. Were you treated with respect and dignity as an employee of Classic Airlines?: Yes2. Do you feel you were compensated fairly for your skills and talents?: Yes3. Would you recommend Classic Airlines as an employer?: No4. What was your reason for leaving Classic Airlines:

Growth opportunities at my level were limited. With one senior level IT position, and no CIO, the career path did not look as promising at Classic as it did outside the company.5. If you could change one thing at Classic Airlines, what would that be?:

Re-define the role of the IT department as it relates to the software implementation function. Leverage the expertise of the IT veterans and let them provide directional guidance to the management/user group.6. If you could deliver a final message/comment to the CEO, what would that be?:

Listen to your lieutenants. Often decisions made at the top did not incorporate the direction and perspective of those closest to the day-to-day operations.


Employee: Supervisor, Customer Service1. Were you treated with respect and dignity as an employee of Classic Airlines?: Yes2. Do you feel you were compensated fairly for your skills and talents?: Yes3. Would you recommend Classic Airlines as an employer?: Yes4. What was your reason for leaving Classic Airlines:

I was recruited by a national retailer for a manager-level position with great opportunities for advancement. I did not necessarily want to leave Classic, but the opportunity that came along (I was not actively looking) was too promising to pass up.5. If you could change one thing at Classic Airlines, what would that be?:

Boy, that's a tough one, I really felt the company was moving in the right direction. I guess I'd have to say something related to the frequent-flier program. It seemed that my reps received pretty consistent negative feedback from customers, and with the rising cost issues we were dealing with company-wide, I don't think the company had the time or money to respond.6. If you could deliver a final message/comment to the CEO, what would that be?:

Keep up the good work, and take care of my boss' boss (Epson). The whole customer service group really turned around since she arrived, and she was the one who recognized my talents and pushed for my promotion.

Attachment M: Customer service call reports

Classic Airlines Customer Service Report Average Call Time By Rep - March

(Call times are in seconds)

Week

1Week

2Week

3Week

4 TotalEmployee 1 330 360 388 410 372Employee 2 334 554 279 368 384Employee 3 227 296 339 577 360Employee 4 188 195 210 295 222Employee 5 777 854 901 683 804Employee 6 320 340 328 507 374Employee 7 305 298 842 199 411Employee 8 757 685 673 886 750Employee 9 443 563 501 488 499Employee 10 278 299 224 300 275(in seconds) Total 396 444 469 471 445

Classic Airlines Customer Service Report


Number of Calls Per Week By Rep - March

Week

1Week

2Week

3Week

4 TotalEmployee 1 341 313 290 274 304Employee 2 337 203 403 306 312Employee 3 496 380 332 195 351Employee 4 598 577 536 381 523Employee 5 145 132 125 165 142Employee 6 352 331 343 222 312Employee 7 369 378 134 565 361Employee 8 149 164 167 127 152Employee 9 254 200 225 231 227Employee 10 405 376 502 375 415 Total 344 305 306 284 310

NOTE: The above reports are based on a full-time work week of 37.5 hours and actual phone time per hour of 50 minutes. These reports are taken from the main call center, which processes reservations, handles customer complaints, and processes frequent flier program inquiries/redemptions.

JANUARY 11, 2005TO: Kevin Boyle, CMO; Renee Epson, SVP Customer ServiceFrom: John Hartman SVP Human ResourcesSubject: Secondary research reports

Here's what I've come up with so far regarding secondary research reports. Please click the following to access the reports:

Attachments:N: Data monitor Report “Airlines in the United States”O: Plunkett report on the travel industry.P: John Hartman’s informal evaluation of the direction of Classic’s top three competitors


Attachment N: Data monitor Report “Airlines in the United States”/ Attachment P: John Hartman’s informal evaluation of the direction of Classic’s top three competitors

John Hartman’s Informal Summary of Classic’s Top Three Competitors

Competitor A – derived from Data-monitor assessment of British Airways

Strengths

Large company – economies of scale Existing global network Brand recognized worldwide Cost reduction has been effective Customers are loyal, frequent flier

programs are strong

Weaknesses

Reputation may have been slightly tarnished by recent strikes

Heavily leveraged Ineffective negotiations with unions Relies on narrow revenue streams for

much cash flow

Opportunities

Expansion at existing hubs Customer’s needs are changing Additional alliances Industry is on the rebound

Threats

Competition is fierce and strong Financial – interest rates, currency

exchange rates Fuel and equipment costs Concerns from environmental

organizations

Competitor B – derived from Data-monitor assessment of Northwest Airlines

Strengths

Dominant, long-time player in industry Multiple successful loyalty programs Established network, fed by regional

carriers Available cash balance

Weaknesses

Pension plans not adequately funded Workforce is over 90% union High-risk receivables Operating at a loss for three years in a

row

Opportunities

Industry recovery Re-structuring at major competitor Customer’s needs are changing Additional alliances

Threats

Competition is fierce and strong Fuel and equipment costs Government regulations and taxes Seasonality – Q2/3 outperform Q1/4


John Hartman’s Informal Summary of Classic’s Top Three Competitors (continued)

Competitor C – derived from Datamonitor assessment of United Airlines

Strengths

Global presence, strong existing network

Successful loyalty program Worldwide brand recognition

Weaknesses

Operating at a loss for two years in a row

Current and future lawsuits Heavily dependent on North American

revenue base Highest costs and lowest productivity in

the industry

Opportunities

Industry recovery Customer’s needs are changing Additional alliances

Threats

Competition is fierce and strong Fuel and equipment costs Government regulations and taxes Seasonality – Q2/3 outperform Q1/4

Attachment O: Plunkett report on the travel industry

Plunkett Research Ltd. Copyright (C) All Rights Reserved www.plunkettresearch.com

Discount Airlines Set the Standard But Face Economic Challenges

Thu, 03-25-2010

As discount airlines have set the standard for air travel for the past decade or so, their success has caused important changes in the industry. Southwest Airlines jumped to the number one spot of the top 10 U.S. carriers in 2004 based on domestic enplanements (more than 81 million), and regained the lead from American Airlines in 2007 with 101.9 passengers flown (both domestically and internationally), compared to American’s 98.1 million. For the period of January through November 2009, Southwest again topped the list with 92.9 million enplanements, followed by American with 78.6 million, according to the U.S. Bureau of Transportation Statistics.

For years, Southwest and its no-frills business model have enjoyed tremendous success, wooing customers based on price, not perks. Its single-plane platform (Boeing’s 737) keeps maintenance costs low, while its point-to-point flying system has helped to give it a solid reputation in on-time performance. Meanwhile, Southwest has led the industry in intricate hedging techniques that help to shield it from rising fuel costs. Hedging involves buying and selling commodity contracts on futures markets. There are no guarantees that hedges will work, and they can lead to large losses.

In mid-2008, Southwest announced a profit for the 71st straight quarter (excluding special items) while the other major airlines collectively lost money, largely due to fewer

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passengers. Up until mid-2008, fuel hedging had a major impact on Southwest’s market dominance. Its fuel hedges covered 80% of its fuel purchases (in 2008, more than 70% of its fuel was purchased at a price equivalent to $51 a barrel for crude oil, which was extremely advantageous). The airline was not immune to rising costs, as its fuel expenses rose by 35% in the second quarter of 2008 despite its hedges. However,Southwest was by far the best prepared airline when it comes to weathering high fuel costs.

By late 2008 when oil prices entered a freefall, hedging practices cost major airlines hundreds of millions. In October 2008, United Airlines reported losses of $779 million in the third quarter because of a noncash charge reflecting the losses of its hedging contracts for fuel. For fiscal 2008, United’s overall loss exceeded $5.3 billion (the carrier lost a further $651 million in 2009). Even Southwest took a hit, losing $120 million in the third quarter and $56 million in the fourth quarter, its first losses in 17 years. Full-year 2008 profits for Southwest fell to $178 million, down from $645 million in 2007. For 2009, Southwest managed to report a profit of $99 million, despite the fact that passenger traffic in the year declined from 2008.

In general terms, Southwest is facing tough competition in the form of newer discount airlines such as JetBlue. Although JetBlue has only a fraction of the fleet that Southwest boasts (at the end of 2009, it had 151 planes to Southwest’s 547), it was, up until recently, in rapid expansion mode, adding new planes and new markets. Meanwhile, the fact that JetBlue’s fleet is relatively new means that its maintenance costs are low.JetBlue offers soft leather seats and satellite TV. Southwest redecorated its fleet in response.

JetBlue also offers assigned seating, which has great appeal for those tired of rushing to line up at Southwest’s gates for its cattle-call seating (it must be noted that Southwest was considering switching to assigned seating in 2008, but implemented a numbered boarding system instead, letting passengers board by groups based on the order in which passengers check in).

According to founder David Neeleman, JetBlue aims to “bring humanity back to air travel.” However, JetBlue is learning a tough lesson when it comes to the challenges of rapid growth, and the cost of skimping on investment in logistics. Plagued by ice storms in early 2007, the airline’s lack of communication between its ground crews and flight crews resulted in delays of up to 11 hours with passengers trapped on board while planes sat on frozen tarmacs. Outraged passengers and some legislators called for regulatory changes that would guarantee certain passenger rights during times of severe service delays. JetBlue responded by announcing plans to upgrade its communications systems, adjust flight schedules ahead of bad weather reports and publish a “Customer Bill of Rights” outlining provisions for passenger compensation when flights are delayed or cancelled.Both JetBlue and Southwest are making attempts to attract more business travelers, which heretofore have not made up the bulk of their passengers. Both are offering fully refundable fares which can be changed without penalty when business travelers’


schedules shift. Also, both were testing inflight Internet access as of early 2010, which has powerful appeal to business travelers because they can work while flying. Southwest offers “business select” fares which afford business travelers to board Southwest aircraft first for priority seating for an additional charge. Additional perks included in Business Select are a complimentary beverage, additional frequent flyer credits and expedited security lines at participating airports. Southwest hopes to earn an additional $100 million per year through the added revenue from Business Select fares.

For full-service carriers, international travel affords them an added boost. Thus far, U.S. discount carriers have largely confined their operations to domestic travel, leaving international flights to the full-service airlines. However, JetBlue, Spirit and AirTran are offering tourist destinations like the Bahamas, Jamaica, Costa Rica, Aruba and the Dominican Republic, and may eventually fly even further afield.

Nonetheless, the fact that major “legacy” airlines offer extensive global flight schedules to Asia/Pacific, South America, Europe and beyond offers an opportunity for airlines like American and Continental to truly differentiate themselves, especially given the fact that their full-service domestic flights can connect smoothly with their international flights at major hubs. Legacy airlines are earning a significant portion of their net profits off international routes. Their ability to lure business travelers with first or business class seats, airline clubs and destination lounges that offer showers and changing rooms give them significant competitive advantage.

On the domestic side, some legacy airlines have been adding seats to new Boeing 737-800 aircraft by squeezing more rows of seats into coach sections where galleys used to be (galleys are superfluous on many domestic U.S. flights since meal service is no longer offered, especially on flights of under three hours). American, Delta and Continental are all increasing the total number of seats in coach cabins by 10 to 160 seats total.

Meanwhile, dozens of discount airlines, based on the Southwest and JetBlue model, have sprung up worldwide. RyanAir and EasyJet are setting the standard for discount operations in much of Europe. RyanAir is being especially aggressive in its cost-cutting efforts and increasing revenue by eliminating seat back pockets to lower weight and cleaning costs; eliminating airport check-in; banning checked baggage altogether; and selling 98% of its tickets via its web site.

Virgin America, partly owned by U.K.-based Virgin Group, began service from San Francisco and Los Angeles to New York in 2007. Virgin America offers low-cost seats, plus a first class section. Seating areas include mood lighting, seat-back entertainment screens, electric power plugs at each seat, and a clean, modern look. However, Virgin America had a rocky start, losing $227 million in its first year of operation. It has hung on, earning $3.5 billion in 2008 revenues and adding routes between Boston, Massachusetts and Orange County, California in 2009.


In India, Southeast Asia and elsewhere, new discount airlines have formed by the dozen. In fact, most of the fastest growing airlines in the world are discount airlines operating in places like China, Vietnam, India, Indonesia and Brazil. JetBlue’s American founder, David Neeleman, has launched a very successful discount airline in Brazil called Azul Airlines. Meanwhile, the Mexican Government has privatized its two national airlines, opening up the Mexican market to competition for the first time; competitive fares may be blossoming as a result.

By early 2008, the slowing global economy brought about severe reversals in many airlines’ growth plans. Faced with fluctuating fuel costs and dwindling passenger numbers, many U.S. carriers, including Southwest, cut back their schedules. At AirTran, capacity was reduced by 5% by the end of 2008 and another 2.2% in 2009, while delivery of 18 Boeing aircraft was deferred. JetBlue also deferred delivery of 21 Airbus planes and suspended existing and planned service to a number of cities including Columbus, Nashville and Tucson. Meanwhile, Southwest cut about 6% of its flight schedule in late 2008 and another 196 flights in early 2009. It also cut its fleet expansion in half, resulting in acquiring only 14 new 737s in 2009.

Poorly financed discount airlines were forced into bankruptcy in 2008, including ATA, Aloha, Frontier, Zoom and Skybus.

Plunkett Research Ltd. Copyright (C) All Rights Reserved www.plunkettresearch.com

Global Airlines Face Daunting Challenges/Partnerships Proliferate

Thu, 03-25-2010

The commercial airline industry has always been particularly vulnerable to economic and political changes. The deregulation of the U.S. airline industry in 1978 was a watershed event that led to intense price competition, and several factors conspired in recent years to make the goal of profitability ever more difficult for major airlines to achieve. The stock market crash of 2000, the tragedy of 9/11, rapidly rising fuel costs and intense competition, among other problems, bankrupted several airlines and threatened many more with similar fates. By late 2008 when the global economic crisis hit in earnest, global airlines were awash in losses.

The International Air Transport Association or IATA (which represents 230 airlines or 93% of scheduled air traffic) estimated losses among global airlines for 2008 of about $16.8 billion, and another $11 billion in losses for 2009. In 2008, a number of carriers ceased operations including ATA, Aloha Airlines and ExpressJet. In years past, airlines such as United, Delta and Northwest were awarded bankruptcy protection during which they were able to reorganize and cut costs. In the current market, lenders are less likely to finance ailing airlines, which sometimes leaves liquidation as the only alternative.

Capacity cuts taking effect in September 2009 dropped domestic seat capacity on U.S. flights to 66.5 million, down from the industry’s peak of 84 million in 2001. Delta scaled back its foreign capacity by 15% by the end of 2009 (compared to 2008), bringing its

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total network capacity down by 10% overall. At American Airlines, capacity was down by 7.5% by the end of 2009.

Total employment at American carriers, as of April 2009, was 583,030, down from 2007’s 624,372 and down 24% from the all time high in May 2001. Meanwhile, United, Delta and US Airways, among others, are charging passengers for many services that were previously provided free of charge. As of April 2008, five airlines began charging $25 to check a second piece of luggage and still more for a third. US Airways, American and United began to charge $15 to check one piece of luggage. On board, passengers are paying for drinks, meals and even pillows and blankets. United hopes to accrue as much as $1 billion per year from the so-called “ancillary” charges. In March 2010, Continental Airlines, a long time hold out in charging for extras, announced that it would begin charging for meals served to coach passengers.

Southwest has given traditional, full-service airlines an important model from which to learn when it comes to cutting costs: use fewer types of aircraft to keep maintenance and repair costs low, control labor costs while making the workforce as flexible as possible, design more efficient routing, purchase oil futures to hedge fuel costs and keep customers coming back with low prices, not perks. This model has allowed Southwest to boast some of the industry’s cheapest costs per passenger mile.

The low-fare model has given major airlines food for thought, and many have made big changes in order to improve efficiency and financial results. While the hub-and-spoke system that is the defining characteristic of full-service airlines is unlikely to go away anytime soon (it still may be the most efficient way to service some small- to medium-sized markets), more airlines are moving toward a “rolling-hub” concept. Rather than having clusters of planes wait around at airports for passengers, airlines are increasingly spacing flights at longer intervals, forcing passengers to wait for planes, rather than the other way around. The rolling-hub concept allows airlines to maximize passenger loads, while increasing the number of hours their aircraft fly per day and using staff more efficiently. Previously, airlines had many flights arriving and taking off within about 45 minutes of each other. In that manner, travelers had minimal waits when they changed aircraft at hubs to fly on to their final destinations. However, this system required large numbers of gate and baggage personnel who often were idle for long periods between groups of flights. With the rolling hub model, fewer gate personnel are kept on hand and passengers often wait up to two hours for their connecting flights.

More and more, airlines are forced to manage their fuel costs aggressively. For example, all new aircraft purchased by most airlines feature special upswept wing tips that are designed to reduce fuel consumption by 3% to 4%. Most airlines now taxi on only one engine, connect to gate power sources when parked and rely on expert market analysts for advice on when and how to purchase fuel. Results from fuel efficiency initiatives have been impressive. A 2010 World Economic forum report found that global air traffic rose 300% between 1980 and 2005, but jet fuel consumption rose only 150%. Airlines have made tremendous improvements in operating methods, while aircraft and


engine manufacturers have greatly enhanced their technologies. The result is a significant savings in fuel.

Airlines have also been shaving salaries when possible, through extensive negotiations with labor unions. The median salary for commercial jet pilots as of March 2009 was $78,547 according to PayScale, Inc., down from approximately $250,000 in 2003. Pension benefits have been cut, and many employees are looking at monthly retirement pay that is one-half or less of what was expected in better times.

Like their U.S. counterparts, many global carriers have slashed costs and undertaken massive restructurings in the face of the losses at the end of 2001 and the SARS crisis in 2003. Their efforts paid off to some extent. For example, the merged Air France-KLM Group posted relatively steady profits of $1.2 billion in 2006 and $1.19 billion in 2007 (however, profits fell to $996 million in 2008, partly due to fuel costs). Sharp drops in passenger traffic resulted in a fiscal 2009 loss of $1.1 billion.

Japan Airlines (JAL) went into bankruptcy protection in January 2010. Global airlines are increasing their reliance on partnerships such as the Star Alliance and OneworldAlliance. The partnerships share flight codes, frequent flyer programs and airport lounge facilities, helping long distance travelers to cover thousands of miles as seamlessly as possible. The Star Alliance network offers 19,534 daily flights to 1,071 airports in 171 countries, while Oneworld has 8,387 daily departures to 727 destinations in 142 countries. In late 2009, Continental made news by leaving Oneworld and joining the Star Alliance. The move to the larger Star Alliance afforded Continental more partner airlines, flights and destinations.

Internet Research Tip:The U.S. Department of Transportation operates a web site with complete information regarding U.S. airlines, their on-time ratings, consumer satisfaction ratings and much more. Visit the Aviation Consumer Protection Division at airconsumer.ost.dot.gov ATWOnline offers extensive information regarding air operations, management, information technology, safety regulation and more: www.atwonline.com

Introduction to the Travel Industry

Fri, 09-18-2009

The 2009-2010 period finds the travel industry continuing to face challenging times. Consumers’ budgets are tight, and they are cutting down on unnecessary expenses. When the middle class does take a vacation, it is on a reduced budget. Meanwhile, corporate and business travel budgets are tight as well. The travel industry is acutely aware of this problem. Most airlines have cut routes and reduced the total number of seats available, partly by removing older, fuel-guzzling aircraft from service. Travelproviders of nearly all types are competing fiercely on price or are offering their customers special inducements and packages.

http://www.atwonline.com/


The U.S. Travel Association (USTA) estimated total U.S. travel expenditures at $772.9 billion for 2008, $739.4 billion in 2007 and $699.8 in 2006. According to the World Travel & Tourism Council (WTTC), the global travel and tourism industry supported 77.2 million jobs on a direct basis in 2009 (a 1.9% decline from 2008), generating $1.87 trillion in direct global revenues (a 3.5% decline from 2008, and an amount representing about 3.2% of total global GDP). The WTTC forecasts real annual revenue growth averaging 3.6% between 2009 and 2019, boosting the 2019 total to $3.39 trillion.

The WTTC also prepares an estimate of the total effect of travel and tourism on GDP (gross domestic product), including both direct and indirect revenues. On that basis, the group estimates the total impact of the industry on global GDP at $5.47 trillion or 9.4% of global GDP for 2009.

In the WTTC’s figures, the U.S. accounted for $1.64 trillion in direct plus indirect travel expenditures in 2009, followed by Japan at $551 billion and China at $526 billion. China is the market to watch, with 100 million Chinese expected to travel to foreign lands in 2018.

IATA, the international association that represents most of the world’s major airlines, projected a global airline industry net loss at $11 billion for 2009, after a net loss of $16.8 billion in 2008 and a net profit of $12.9 billion in 2007.

The 2008-2009 period was an ugly time for airlines. Many airlines took bankruptcy protection in 2008, including Frontier, and some, such as Aloha Airlines and ATA, once major airlines in Hawaii and elsewhere, were forced to discontinue operations altogether. Several specialty and business-classonly airlines ceased operations, including MAXjet, Eos and Skybus. Government-controlled Alitalia, in Italy, took bankruptcy in August 2008.

Hotels throughout the world enjoyed a major boom through mid 2007, with high occupancy levels, rising room rates and strong levels of both business and leisure travelers. However, the global financial crisis put a damper on hotel occupancy that continued into 2008 and 2009. Many major hotel construction projects have been cancelled or put on hold.

E-commerce continues to play an extremely important role in the travel sector, making booking convenient for consumers and more cost-effective for travel providers. However, online travel booking sites like Orbitz and Expedia face tough competition. Today, airlines and hotel chains are offering their own powerful online reservation systems, with rich features, multiple levels of photos and descriptions, and the ability to earn and manage frequent flyer awards. Consumers often find the lowest prices onsites operated directly by airlines and hotels.

The cruise line business has held up relatively well in the onset of the financial crisis, particularly at the largest cruise lines. However, these companies often offer deep


discounts today in order to fill cabins. Consumers see cruises as high-value package deals, and cruise ships are nearly full.

JANUARY 13, 2005Renee conducts phone interviews with current and former top-level frequent fliers

Attachment:Q: Summary of Renee’s customer interviews

Attachment Q: Summary of Renee’s Customer interviews

Summary of Renee Epson’s Customer Interviews

(Audience – 500 Gold and Platinum level Classic Rewards members)

1. How many flights do you take per year with Classic Airlines?a. 1 to 3 – 22%b. 3 to 7 – 33%c. 7 to 12 – 31%d. More than 12 – 14%

2. How many flights do you take per year with airlines other than Classic?a. 1 to 3 – 29%b. 3 to 7 – 42%c. 7 to 12 – 14%d. More than 12 – 15%

3. How well do you feel Classic’s advertising campaigns convey an accurate and meaningful picture of the airline?

a. Not accurate and meaningful – 14%b. Somewhat accurate and meaningful – 48%c. Very accurate and meaningful – 38%

4. How satisfied are you with the customer service you receive from Classic Airlines?a. Very dissatisfied – 4%b. Dissatisfied – 11%c. Satisfied – 62%d. Very satisfied – 23%

5. How long have you been a member of Classic Rewards?a. Less than one year – 23%b. 1 to 3 years – 42%c. 3 to 5 years – 27%d. More than 5 years – 8%

6. How satisfied are you with the umber of miles you earn for your Classic flights?a. Very dissatisfied – 18%b. Dissatisfied – 38%c. Satisfied – 27%d. Very satisfied – 17%

7. How satisfied are you with the service upgrades you receive as a Classic Rewards member?a. Very dissatisfied – 19%b. Dissatisfied – 51%


c. Satisfied – 22%d. Very satisfied – 8%

8. How satisfied are you with the reward redemption options available through Classic Rewards?a. Very dissatisfied – 14%b. Dissatisfied – 56%c. Satisfied – 22%d. Very satisfied – 8%

9. Would you recommend the Classic Rewards program to a friend or colleague?a. Yes – 32%b. No – 68%

JANUARY 16, 2005PHONE CONVERSATION BETWEEN KEVIN BOYLE AND JOSEF WYMANN, MARKETINGEXECUTIVE OF SKYWAY AIRLINES

Josef: Kevin Boyle, please.

Kevin: Speaking.

Josef: Kevin, Josef Wymann here.

Kevin: My goodness, Josef, it’s been a long time! How are things in Switzerland? The last I heard you were back at Skyway -- the top marketing man!

Josef: I’m still there; that’s actually part of the reason for my call. To cut to the point as we like to do in Zurich, I’ve been finalizing talks with a top Latin American airline to enter into a marketing alliance. The plan is to take it to a code-sharing level, integrate all customer-facing elements, and deliver a seamless program. We’ve already built one of the most extensive and strategic selection of rewards options in the industry, and we’ve got a couple of automated service features that could eventually change the baseline customer experience. We need the third leg to the stool, Kevin, and I think you and Classic may be it.

Kevin: Josef, you have impeccable timing as usual. I’m in the midst of a project with unbelievable expectations. I’m confident we’ll deliver, but this is as bad as it was in the early ‘90s when we worked at Transit Worldwide Air. Our customer loyalty is the pits, and we’ve got to reconnect with our customers. But, I’m working against a CEO who doesn’t believe in alliances. She thinks “no one can satisfy our customers better than we can.” There hasn’t been a marketing alliance here in the history of the company. And on top of that, the board has mandated a universal 15 percent cost reduction by next fall. Not to mention that if I can’t clean up our customer loyalty situation, I don’t have a lot to bring to the table.

Josef: Understood, understood. It does sound like you have your hands full; your boss has been pretty clear in the media that costs will be controlled.

Kevin: That’s nothing compared to what we hear. I love your idea, Josef, and I’m going to float it by my team and see if we can’t figure out a way to sell this upstairs. I know our CS person will love it, so who knows?

Josef: Very well, cheers, Kevin.

Kevin: Speak with you soon.

JANUARY 17, 2005


IMPROMPTU MEETING WITH KEVIN BOYLE, RENEE EPSON, JOHN HARTMANExcerpts from conversation:

Kevin: So that’s the deal in a nutshell.

Renee: And how well do you know this Wymann guy?

Kevin: Josef and I go back quite a way. We worked side by side to turn around Transit Worldwide Air’s marketing in the early ‘90s. He’s one of the sharpest marketers in the industry, probably number one or two in Europe. I know there are a couple of our competitors who would be thrilled to just listen to Josef’s presentation.

John: Sometimes I don‘t think Amanda and Catherine see the forest for the trees. I’ve never understood why all of our competitors have formed alliances and we haven’t.

Renee: Because that would be too customer-focused!

Kevin: Okay, okay, enough with the daggers….are you two on board with this or what?

John: On board that we should move in the alliance direction?

Kevin: One step at a time. Right now, all I want to know is if you think the idea deserves consideration.

Renee: Oh, it definitely warrants attention.

John: Call it unanimous.

JANUARY 19, 2005OFFICE CONVERSATION WITH AMANDA MILLER AND CATHERINE SIMPSON

Amanda: Have you heard anything from Boyle and friends?

Catherine: Not a word, you?

Amanda: Nothing. Nothing against Kevin, but in all my years I’ve yet to see the marketing department drive anything but budgets through the roof. He’d better not come in here talking about dropping the prices even one more dime. If I could take back any decision I’ve made in the past ten years, it would be letting them talk me into that last time.

Catherine: Well, that’s an understatement. Since the day that guy walked in this place, there’s been something about him that irked me. I don’t think he’s all he thinks he is; put it that way. At least I can’t see the point in gambling on another spin of the marketing wheel, when we can put the money to good use hedging against fuel prices. But, that’s your call…

JANUARY 23, 2005


OFFICE CONVERSATION WITH KEVIN BOYLE AND RENEE EPSONExcerpts from conversation:

Kevin: Renee, can you drill down a bit into what you feel needs to be done differently in the CRM area?

Renee: Where do I start? I actually think you made a good point at our first meeting about our having a fundamentally solid and robust system that’s globally accessible. That’s more than most companies can hope for. The problem is our segmentation strategy. It’s outdated; customers don’t think the way we think they do anymore. We need to listen to them, and recalibrate the buckets we put them in, and the way we talk to them. It’s really nothing more than a little perceptual mapping, experience mapping. But those are foreign concepts around here; not only would you never get anybody to agree with me, you’d never get the kind of budget you need to do it right.

Kevin: Don’t be so sure; it’s all a matter of how the story gets told or, better yet, tells itself. If you step back, you start to see that what customers value may, in fact, be value. Value and price are not the same thing. If we can make people feel good about the money they spend to fly with Classic, they’ll be less concerned about every penny. When you have a good experience, you are far less likely to question the price.

Renee: Kevin, you’re preaching to the choir. But can you get Amanda and Catherine to start singing? That’s not going to be easy.

To: Kevin BoyleFrom: Renee EpsonSubject: Segmentation Strategy

Kevin, Here’s the segmentation strategy.

Thanks,Renee.

Attachment:R: Segmentation Strategy

Attachment R: Segmentation Strategy

Classic Airlines Segmentation StrategySegment Name Business Traveler Leisure TravelerPrimary Benefit Sought

Low price fares to many destinations.

Low price fares to select destinations.

Demographics Professional, predominantly male, 23-60 years old; income above $50,000.

Male/female, 18-70 years old; all levels of income; families with children of all ages.

Behaviors Heavy to medium user of air travel; medium loyalty to a single brand/carrier.

Light user of air travel; little or no loyalty to a single brand/carrier.

Personality Confident, successful, egotistical, demanding.

Carefree, passive, usually agreeable, demanding.

Lifestyle Upwardly mobile or established achievers.

New-age families and mature, active seniors.


JANUARY 24, 2005MEETING WITH KEVIN BOYLE AND JOSEF WYMANNExcerpts from tail end of meeting:

Kevin: Josef, we can’t thank you enough for making the trip over to discuss this opportunity. I think the team and I have a lot to think about over the next few days.

Josef: I did give you a lot to consider. Frankly, Kevin, I think you could just as easily go it alone and succeed. My alliance presents some advantages, but the idea makes the most sense from a European perspective; the United States is a different market. Well, you know the pros and cons; it’s up to you and your team to weigh them and make the best decision for Classic.

Attachment:S: Wymann’s presentation slides

Attachment S: Wymann’s presentation slides

Wymann’s Presentation Slides

Tri-Star Alliance Overview

Three initial members – Europe, Latin America and United StatesPhase I growth plan to include Asia, Middle East (1 – 3 years)Phase II growth plan to add partners in established markets (3 – 5 years)


Tri-Star Alliance Marketing

Single brand presence – Tri-Star AllianceShared promotions as appropriateSeamlessly integrated frequent flier program:

Code sharing for all points and rewardsExtensive network of reward options established

Tri-Star Alliance Rewards

Most extensive network of partners in the industryBased on years of customer researchCurrent agreements with

1 major credit card5 major hotel chains3 major car rental companies2 major office equipment and supplies firmsShopping services, financial services, tax services, vacation getaways, etc.


Tri-Star Alliance Operations

Once the marketing alliance is established, the opportunity exists to expand the alliance into operationsPossibilities include:

Shared routes and pricingShared customer serviceConsortium fuel purchasing

Tri-Star Alliance Benefits

Single brand, global presenceShared marketing expensesExpanded frequent flier program - more miles, more reward optionsStrengthens position against existing competitive alliancesHistoric relationship of key alliance leadersOpportunity for expansion into operations


JANUARY 25, 2005E-MAILTO: Kevin BoyleFROM: Amanda MillerRE: Magazine article

Kevin:

Please take a look at the article I’ve linked below. You’ll see that our friends at GlobalAir have made some significant changes to their frequent flier program recently. It seems the changes they made two years ago resulted in quite a few angry customers. In fact, the customers were so unhappy that they created their own Web site as part of a formal protest.

That’s not to say that our customers, at least the ones we have left, would ever do anything like that to you!

Regards,Amanda

T: GlobalAir Article

Attachment T: GlobalAir Article

GlobalAir Finally Implements Changes To Frequent Flier Program

[December 4, 2004]

The Springfield Business News Journal (Springfield, Missouri)

Byline: Eric Rodgers

Last Friday, Springfield-based GlobalAir announced long-awaited changes to its frequent-flier customer loyalty program. These changes include the addition of value-added features, such as pre-boarding and concierge baggage handling for top-level frequent fliers, and simplifications to the program for members at all levels. GlobalAir hopes these changes will help them win back frequent flier customers who have been frustrated with the prior program for some time. The level of frustration and disappointment reached epic proportions over the past eighteen months, as a group of customers formally organized a movement against GlobalAir. The movement received significant media attention nationwide.

In the tough and uncertain times following the terrorist attacks of September 11, 2001, GlobalAir made several changes to their frequent flier program in early 2002, in an ill-fated attempt to control skyrocketing costs. These changes included reducing the number of miles awarded for domestic and global flights, raising the number of miles required for redemption tickets, reducing the number of frequent-flier seats available per flight, and eliminating a variety of perks, such as low-threshold upgrades, pre-boarding and more.

In response to these changes, a grassroots group of angry top-level frequent fliers organized a partnership, formalized as a limited-liability corporation (LLC) in the state of Missouri. The group developed a website, placed ads in local and national newspapers, and received airtime on at least ten local and regional consumer advocacy news features. The group solicited GlobalAir’s executives with an onslaught of email and postal mail communications, and promised not to let up until their “voice of the customer” was heard.


In commenting on the matter, a local University professor of marketing stated, “this is an unforeseen and commendable example of customers demanding that their position be acknowledged. GlobalAir made a critical misstep, and their customers called them on it. The only thing that is unfortunate is that it took the company over two years to respond.”

JANUARY 25, 2005E-MAILTO: Kevin BoyleFROM: Benjamin Sutcliffe, Esq.RE: GlobalAir

Dear Kevin:

I’m sure you’ve seen this article by now, and I do hope you are reminded about the significance of the decisions you are about to make.

What took place at GlobalAir was not customer-focused, and the company may never recover from the damage they created for themselves. I know we can count on you to avoid a similar misstep, and keep the union contract unaltered.

Best regards,Benjamin Sutcliffe, Esq.

JANUARY 25, 2005E-MAILTO: Renee Epson, John HartmanFROM: Kevin BoyleRE: FYI on potential cost-saving recommendations

Renee and John:

It is always important to anticipate the other side’s next move and, in that interest, I’ve put together some thoughts on cost-savings recommendations, in case we need them.

I expect that Amanda and Catherine will be evaluating any potential solution our team proposes against the concept of taking the same amount of money and applying it to the fuel hedging program. I’ve spoken with some old contacts, and have several alternative cost savings suggestions that could a) be offered as alternatives to fund fuel-hedging or b) subsidize a portion of our marketing budget.

The ideas include:Reduce the number of reservations operations centersEliminate travel agent commissionsDevelop an employee buyout or attrition programWe may or may not need to bring them into the conversation, but if we do, it’s best that we all are aware of the specifics.

Thanks,Kevin

W3 Classic Airlines Marketing Solution

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Transcript of W3 Classic Airlines Marketing Solution