The American Customer Satisfaction Index - The voice of the Nation's Consumer
First Quarter, 2004

First Quarter, 2004


Transportation/Communications/Utilities and Services: Industry and Company Results

June 3, 2004

Commentary by Professor Claes Fornell
The Donald C. Cook Professor of Business Administration
Director, National Quality Research Center, Stephen M. Ross Business School at the University of Michigan
Chairman, CFI Group


Increase in ACSI bodes well for the Economy
Big Gains for Newspapers and Hospitals - Customer Satisfaction with the Cable Industry Remains Dismal


The American Customer Satisfaction Index (ACSI) continues its upward trend. It is now at its highest level since measurement began in 1994. Even though there are many areas that could stand further improvements in quality and service, customer satisfaction has benefited from a confluence of factors. Among them is the fact that many companies have been forced to try harder to please customers in order to generate more revenue. Although there are now signs that prices are on the rise, consumers have been shielded from much of the inflation thus far. Interest rates remained low during the first quarter and employee turnover was low as well. Low turnover typically contributes to better service as well as productivity. Job insecurity is also a factor. When people are insecure about their employment situation, they are likely to try harder and demand less. Again, the consumer is the likely beneficiary.

Based on an update of the Transportation/Communications/Utilities and Services sectors for the first quarter of 2004, the overall ACSI now stands at 74.4, which is an improvement of one-half of a percentage point since last quarter.

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The overall ACSI reflects changes in the nation's quality of economic output, as experienced by the household users of that output. The economy's ability to create increasing consumer utility is central to economic health and real economic growth. After all, consumer utility, or satisfaction, is the ultimate standard for productive growth, not only because consumer spending makes up two-thirds of GDP but also because this is the fundamental premise of a market economy: companies compete for the satisfaction of their customers. If they succeed, they are rewarded with more repeat business and lower price elasticity. Economic growth at the expense of customer satisfaction, which occurred in 1995-1996, is not sustainable, as it has a negative effect on demand. Rather, the continued improvements in ACSI contribute to upward shifts in consumer demand, which translate into GDP growth.

Since the inception of ACSI in 1994, the relationship between quarterly changes in the Index and subsequent consumer spending growth has been strong. It has also been largely immune to changes in household income, debt, or consumer confidence and a better predictor of spending than these variables. Rather, the combination of low inflation and increasing household satisfaction with consumption has been a leading indicator of spending. The graph below shows the correspondence between quarterly CPI-adjusted changes in ACSI and the Consumer Price Index and subsequent changes in consumer spending.

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With the recent increase in the CPI, it is possible that consumer demand might be somewhat tempered despite increasing levels of customer satisfaction, but the overall outlook is for continued increased spending and healthy economic growth.

Even though aggregate customer satisfaction continues to improve, with the American Customer Satisfaction Index (ACSI) at its highest level in 10 years, first quarter 2004 results for individual industries and companies are mixed. In fact, customer satisfaction has deteriorated for half of the measured companies. The gains come from newspaper readers, moviegoers, shippers of small packages and hospital patients. Patient satisfaction has improved by 4% to a score of 76. This is an all-time high for hospitals and an improvement of 13% since 1997. Moviegoers are more pleased as well. The index for motion pictures is up by 3% to a score of 73 - somewhat below the satisfaction for hospitals. This does not mean that going to the hospital is generally more satisfying than going to the movies. The context within which services are delivered and products consumed is obviously of some significance. Newspapers have rebounded, following a dip in 2002 and 2003, with a gain of 6% to a score of 68. Parcel delivery continues perform well; its ACSI climbs by 3% to a score of 81.

It is the combined effect of these industries, some of which represent a large part of the economy, that results in a positive change in the overall ACSI. However, quite a few individual companies have moved in the opposite direction. After some improvement during the past two years (mainly because of decrease in passenger load), the airlines slip again. The drop is small (2% to a score of 66), but the growth over the past two years has been halted. Small declines are also evident among telephone companies (down 1% to 71), broadcast television news (down 3% to 66), utilities (down 1% to 72) and hotels (down 1% to 72). Cable/Satellite TV remains at a low of 61, dragged down by the dismal scores among cable companies. For the first time this quarter, ACSI also reports on cellular service providers and wireless phone manufacturers. Both score below the ACSI average. Providers come in at 65 and manufacturers at 69.

Parcel Delivery and Express Mail
Small package shipping has always been a high scoring industry. Its score jumped 3% in 2004 and is now at 81 - one of the highest scoring service industries ACSI. FedEx, UPS and the Postal Service have all improved. FedEx maintains its lead with a score of 83 (compared with UPS at 80 and USPS at 77), but the gap with the Postal Service continues to shrink. Ten years ago, the gap was 16 points; it is now 6 - a reduction of more than 60%. As a result, consumer complaints for USPS are down. What is even more important is that its customer retention levels have actually surpassed both FedEx and UPS, even though customer satisfaction is not as high.

Airlines
In an environment of increasing fuel costs, intense competition from discount carriers, and continual labor challenges, it is not surprising that many of the airlines are having difficulty providing good passenger service. The ACSI score of 66 is a drop of 2% compared with last year. Partly as a result of reduced traffic, the airline industry managed to improve passenger satisfaction in the past two years. Now, however, it appears that the climb in satisfaction has come to a halt. Most carriers are looking for ways to cut costs. In fact, some have said that this is their top priority. Under these circumstances it is not easy to improve customer service, especially when cost-cutting is directed at labor. US Airways, which came out of bankruptcy last year, may be especially vulnerable. Its ACSI is not only the lowest in the industry at 62; it also had the largest decline from a year ago (3%).

Southwest maintains a significant lead at 73, even as it drops 3%. It is the only major carrier to turn a profit in each of the last three years, demonstrating that the airline industry is not an exception to the rule that customer satisfaction and financial performance tend to go hand-in-hand. But the challenge for all airlines remains: how to reduce costs and improve passenger service at the same time? Part of the answer is likely to be found in increased self-service and automation. Adopting technologies used by banks, supermarkets, and perhaps even gas stations, a good deal of the work that used to be performed by the seller - ticket agents in the airline context - can now be done by the buyer with self-service kiosks - and it can often be done better with less effort. Kiosks provide more information in less time and, provided that passengers learn to use them properly, can actually enhance service.

Telecommunications
ACSI includes telephone companies that provide land-line local and long distance service and, for the first time in 2004, wireless service providers and cell phone manufacturers. Most of the land-line providers have improved or held steady since last year. The sole exception is Sprint, which at 65 is near the bottom of the industry. Sprint is also at the bottom of the wireless category with an even lower score of 59. Obviously, these scores are not competitive and suggest a challenging future for the company. Part of the difficulty may have been caused by the reorganization of the company last year. In wireless, a good deal of the problems seems to stem from indifferent customer service and numerous dropped calls. Sprint has lost money each of the past four years. For 2003, net income was down by 14%. Although the increasing customer service problems seem daunting, investors have bid the stock price up; it has almost doubled in the past 12 months.

Verizon has a significant lead in customer satisfaction among large wireless carriers. Verizon satisfies customers better than Cingular, AT&T and Sprint, which all score in the low 60s or high 50s. With scores like these, it is difficult to retain customers and new customers are usually harder to come by. It is therefore not surprising that Verizon had more than three times the sales growth compared with its competitors last year.

Virtually all manufacturers have higher scores than wireless providers. Among the measured companies, Samsung scores the highest, at 73, with Nokia close behind and Motorola and Kyocera slightly off the pace at 70. This is happening at a time when the providers are supposedly gaining power over the manufacturers. What consumers might be implying is that one should not yet count out the branding power of Nokia, Samsung or Motorola. While Samsung has the highest ACSI score, it is Nokia that commands the greatest customer loyalty. Kyocera is another interesting case. Consumers consider it to be superior in value for money, but similar to Samsung its branding power in terms of consumer following is far behind Nokia.

Cable/Satellite TV
Cable television was added to ACSI in 2000. Since that time, customer satisfaction has gone from bad to worse, and there is no improvement in sight. Among cable providers, Time Warner has the highest score of 60. Both Comcast and Charter Communications register at 56. For the private as well as public sector, including the IRS, this is the lowest level of customer satisfaction of any organization in ACSI. Consumer complaints are also much more common relative to any other measured industry. Almost half of all cable customers have registered complaints about one thing or another. When buyers have meaningful choice alternatives, this level of customer (dis)satisfaction is neither competitive nor sustainable. Cable is the only industry to score below 60 in ACSI. With the satellite companies removed, the weighted average for the cable industry is 59. Under normal competitive conditions, there would be mass customer defections. The reason this is not the case for the cable industry is due to local monopoly power, which means that in most markets, the dissatisfied customer has nowhere to go.

Nevertheless, the weak ACSI for the cable industry suggests that its customer base may well become vulnerable to new competition. Another factor is that technology is expensive and entry costs are high. Thus, it is difficult to create competitive markets with meaningful buyer choice.

Satellite television does better with customers, mainly because of lower price, in many instances half that of cable. Although the satellite companies don't offer the same array of services and are often limited in terms of local channel availability, the services they do offer are seen as having higher quality and a better value.

Utilities
The overall ACSI score for utilities does not change much from year to year. This is the case for 2004 as well. The industry score is 72, down 1%. However, the stability in the aggregate masks large changes among individual utilities. The range from high to low is also substantial.

The Southern Company, which has been a leader in customer satisfaction for many years, retains the top position with a score of 81. PG&E occupies the opposite end of the scale with a score of 66 - a 15 point difference in what generally considered a commodity business. While PG&E might still suffer from the aftermath of the power crisis in California, there are other utilities that are only slightly above it in customer satisfaction. Dominion, for example, has a score of 67.

The industry has faced several difficulties recently. The August 2003 blackout called into question the reliability of services and may have contributed to some degree of distrust about industry competence and dependability. Increases in oil prices have led to higher utility bills for consumers, which does not help their satisfaction. Yet, there are utilities that have improved customer satisfaction. KeySpan, FPL and Progress Energy have all done better this year, improving by 4% each. FPL may have been able to shield its customers from some of the price hikes by generating a significant portion of its energy through solar power and wind generators. Progress Energy has improved quality of service and consumers have not perceived that price has increased relative to service.

Quite a few of the utilities record drops in ACSI. Among the largest are First Energy and CMS Energy (down 9%). First Energy serves 4.4 million households in Ohio, Pennsylvania and New Jersey. It has falling scores for quality as well as value. The company was given a good deal of blame for the 2003 blackout. CMS serves 1.7 million customers in Michigan. As recently as last year, it was one of the leading utilities in ACSI, but seems to suffer from large price increases, as perceived by its customers.

Hotels
Hotel room rates, which have not increased in four years, have rebounded somewhat. Demand is picking up as well. Judging from the improvement in guest satisfaction for Hilton (up 4% to 77), the company seems poised to take advantage. With improved customer satisfaction, Hilton should get more pricing power. On the other hand, Ramada and Hyatt have dropped. Hyatt, which has been a customer satisfaction leader in the past, falls 4% but still has a respectable showing at 74. Ramada also falls 4% to a score of 67. The cause, according to guests, is higher prices with no improvement in service.

Hospitals
Patient satisfaction with the nation's hospitals is measured as a category in the ACSI. There are no scores available for individual hospitals. As a result, the ACSI analysis is restricted to the industry level. The growth in patient satisfaction is considerable, up 4% to 76. A reason for this is that hospitals are beginning to pay more attention to patient satisfaction. The Institute of Medicine and the National Quality Forum as well as the Agency for Healthcare Research and Quality are actively promoting initiatives to help consumers make more informed choices among hospitals and create incentives for hospitals to improve the experience of their patients. Patient satisfaction has improved at a much steeper rate than the overall ACSI since 2001.

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The ACSI statistics indicate that patient satisfaction is up, regardless of the nature of the hospital visit. Compared with 2003, inpatient satisfaction is up by 3% to 79. Outpatient satisfaction is even stronger, up 5% to 82. Emergency care remains a challenge, although it is improving rapidly. The 2004 score is 68, up by 8%.

Newspapers
Another category that shows a sizable improvement is the newspaper industry. It climbs as much as 6% to an overall score of 68. Traditional newspapers have faced increasing competition in the past several years from expanded cable television news as well as from new electronic media. News and information websites have taken away some of the special domain of newspapers. The desire for rapid and continuously updated information now provided online has coincided with deteriorating reader satisfaction with newspapers and it is not until now that satisfaction has increased. It is possible that the new type of competition is starting to have positive effects. Newspapers have attempted to focus more on commentary and news analysis, which may well have contributed to the rising ACSI scores.

 
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