ACSI Commentary June 2010

The American Customer Satisfaction Index (ACSI) Report on Airlines, Hotels, Fast Food, Restaurants, and Express Delivery Services

Rise in Satisfaction for Airlines May Be Short-Lived; Big Gains for Many Hotels, Restaurants, and Fast Food Chains

Strong Improvements for Burger King, KFC, Papa John’s, Hyatt, and United Airlines; Drops for Delta Air Lines, McDonald’s, and the U.S. Postal Service

Airlines

Since 1997, airlines have rarely seen growth in passenger satisfaction. Even after two years of improvement, they remain near the bottom in ACSI—only newspapers and subscription TV have equal or lower scores. Nevertheless, airlines are creating more satisfied passengers, gaining 3% to an ACSI score of 66, the highest level since 2005. Lower passenger volume (down 6% in 2009) and relative stability in fuel prices after a spike in 2008 have helped, but travelers have also become more adept at shopping for deals. Fewer passengers check luggage, and those who pay to do so have been less satisfied than those who use carry-ons (an ACSI score of 60 compared to 69). In addition to saving on fees, a smaller volume of checked luggage reduces the risk of lost or damaged luggage, another major source of passenger frustration.

Still, the recent surge in satisfaction is unlikely to continue, as much of what is driving the upswing is on the way out. Airlines are beginning to charge higher fares, flights are becoming more crowded, and the increasing number of carry-ons will likely lead to cabin congestion and delays. Added to that mix are rumblings about fees even for carry-ons and another big merger looming on the horizon between United and Continental. Mergers and acquisitions, particularly of service companies, tend to take a toll on customer service, at least in the short term, and more consolidation means less consumer choice and usually greater dissatisfaction.

For seventeen straight years, Southwest Airlines has led the industry in passenger satisfaction. Even though Southwest dipped slightly, down 2% to an ACSI score of 79, it continues to outdistance everybody else. Continental comes next, up 4% to 71, and it too is well above the rest, followed by American Airlines at 63 after a 5% gain. Continental has added more nonstop flights over the past year and more in-flight services as well, including DIRECTV access. US Airways also improved, up 5% to an ACSI score of 62, and, although it made the largest jump of all airlines (+7%), United Airlines remains last in the category at 60. The addition of Continental to United’s Star Alliance in the run up to the proposed merger may have benefited both airlines by increasing the network of available flights that earn frequent flyer miles.

Passenger satisfaction with Delta Air Lines showed the largest drop. As Northwest becomes phased out, its passenger satisfaction has actually improved. Included for the final time in ACSI, Northwest jumped 7% to a score of 61. A year before Delta’s acquisition of Northwest, Delta stood at 64 and Northwest at 57. Now, Delta has fallen 3% to 62 and Northwest is at 61—the combination of both marking a slight increase.

Hotels

Guest satisfaction with hotels remained steady for a third straight year at an ACSI score of 75. Hotel operators continue to emphasize value for money as leverage in a weakened travel economy, competing on price promotions and perks. The largest hotels made strong gains: six improved, while only one declined. By contrast, the aggregate of all smaller chains, individual luxury hotels, and bed and breakfast establishments declined 3% to 74. Small companies find it more difficult to compete with their larger competitors on price and so tend to differentiate themselves with quality and customer service. In a strong economy, quality typically plays a stronger role in determining buyer preferences, while in a weak economy price takes on greater importance. As a result, the largest companies tend to benefit more in a down economy because they are better positioned to compete on price, while small companies often must reduce costs by cutting into the very aspects of quality and service that might otherwise give them an edge.

The more upscale hotel brands top the industry, with Hilton and Marriott sharing the lead. Hilton gained 1% to an ACSI score of 80, marking three straight years of improvement, while Marriott surged 4% to a tie. Hyatt follows closely at 79, after a 7% gain erased a slump from a year ago. InterContinental, led by the Holiday Inn brand, and Starwood Hotels also had sizeable gains, up 4% to ACSI scores of 78 and 77, respectively, followed by Best Western, up a more modest 1% to 76. Choice Hotels, which includes the Comfort and Quality Inn chains, dropped slightly, falling 3% to 74. Wyndham Worldwide rounds out the industry, unchanged at 70. Wyndham is dominated by budget brands such as Ramada, Super 8, and Days Inn. With the upscale chains offering lower rates and more perks, it has become more difficult for the budget hotels to compete for satisfaction.

Fast Food and Restaurants

The past year has been a difficult one for restaurants of all types. While business has picked up a bit through the first quarter of 2010, industry sales were down 2.9% in 2009 after falling 1.2% the year before. Throughout the recession, consumers scaled back on both the frequency of dining out and the amount of money spent at restaurants. Because of lower prices, fast food was harmed less than restaurants and the largest fast food companies generally weathered the economic downturn better. Despite the fact that most fast food operators improved, the ACSI declines for smaller chains and restaurants and for McDonald’s were large enough to cause a drop for the industry as a whole. Both the fast food and the restaurant categories slid 4% to 75 and 81, respectively.

Pizza maker Papa John’s moved to the top, gaining 7% to an ACSI score of 80, followed by Little Caesar (+4%) and Pizza Hut (+5%) at 78. Starbucks had a smaller increase of 3% to 78. Other gainers include KFC, which improved 9% to a score of 75, and Burger King, which moved up 7% to 74. Price was behind much of the improvement, but new products also contributed. Pizza Hut offered any pizza for $10, while Papa John’s combined similar pricing promotions with what customers perceive as high quality products. KFC added a healthier line of products while at the same time catering to those who don’t want to sacrifice taste for lower calorie products.

Domino's made major changes in its pizza at the beginning of the year, but customer satisfaction hasn’t moved—its ACSI score was unchanged at 77, behind all the other big pizza competitors. McDonald’s was the only major fast food company to post a decline, falling 4% to an industry low of 67. This may seem somewhat paradoxical in view of McDonald's sales growth over the past year, particularly compared to competition, but as increasingly frugal consumers have made price more salient, McDonald’s has acquired more customers. These newcomers seem less satisfied, and were it not for the economy some of them would rather eat somewhere else.

The largest restaurants improved, led by Darden-owned Olive Garden, up 4% to an ACSI score of 84, the fourth year in a row the chain has topped the category. Olive Garden is followed closely by another Darden property, Red Lobster, up 4% to 83. Outback and Chili’s are well behind, but both made similarly large gains. Outback improved 4% to 80, while Chili’s jumped 5% to 78. Restaurants have joined fast food with aggressive pricing via coupons and special deals. Olive Garden has long been a leader in value for money, going back to the earliest days with its all-you-can-eat soup, salad and breadsticks and now including offerings such as the “Never Ending Pasta Bowl.” Outback’s market share has declined. The company has responded by making value a key focus, most recently by offering a new menu with 15 meals for under $15 each.

Express Delivery and Mail Services

ACSI tracks customer satisfaction with the regular mail delivery of the U.S. Postal Service and the express delivery of the Postal Service, FedEx, and UPS. For express delivery, ACSI looks at shipping initiated by consumers to send packages to other consumers. The category improved 1% to 83, matching its highest level in more than a decade. FedEx has long been on top, leading UPS and the Postal Service for thirteen years now. This year FedEx edged up slightly, gaining 1% to 85. UPS trails a bit, unchanged at 82, while the Postal Service improved 1% to 77 but remains well behind. Customer satisfaction with the Postal Service’s regular mail delivery fell 4% to a score of 71, the lowest in five years. The combination of the recession and the rise of email have put the pinch on the Postal Service—mail volume has fallen by more than 15% in the past five years.