Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest.

On the basis that no experience, however bad, is wasted if you learn something from it, I thought I’d share my most recent interaction with our flagship airline. It was - let’s be charitable - disappointing.

Turning up at JFK last Thursday with two fellow travellers (one of whom was 14) and clutching three Premium Economy tickets back to London, we were told that only two of us could sit in the cabin we’d paid for. One of us (they selected me) was asked to keep on walking to the new seat I’d been allocated at the back of the plane in Economy.

This was the first time I’d experienced this kind of involuntary downgrade, but it didn’t take much Googling to realise that it is quite a common occurrence. Airlines routinely overbook flights to ensure they are full, kicking people further down the aisle until some poor sap is bumped onto a later flight.

This is wrong on so many levels. It is hard to disagree with the Civil Aviation Authority’s dry conclusion in a recent review of airline contract terms that ‘there is further work to be done’. More importantly, looking through an investment lens, treating customers in this way doesn’t even make any commercial sense.

Good companies see the world through the eyes of their customers. And so they should. There is a well-documented link between customer experience, profitability and, by extension, investment performance. As Walmart’s Sam Walton said: ‘there is only one boss. The customer.’

The impact of good and bad customer experiences is neither linear nor symmetrical. On the positive side, it is only beyond a certain threshold of satisfaction that behaviours such as loyalty, increased spending and brand advocacy are materially enhanced. Companies know that they have to delight their customers to shift the dial.

On the negative side, however, even small levels of dissatisfaction can have a significant impact on customer behaviour. And it’s quite easy to be disappointed when you have chosen to pay extra for an improved experience that is, unapologetically, not delivered.

The asymmetry arises because of a psychological phenomenon that’s familiar to investors - loss aversion. An objective amount of negative stimulus triggers a disproportionate reduction in perceived value compared to an equal amount of positive stimulus. We hate losing much more than we like winning.

And this really matters because when we have a good experience we tell, on average, just three people. Give us a bad experience, though, and we will bang on at length about it to a dozen of our friends and colleagues. Bad news is half-way round the world before good news has got his boots on.

Another distinction between good and bad companies is what they do when, inevitably, they screw up. In my case, the remediation process so far has involved me going online to fill in a refund form that concluded by telling me that I’d be contacted within 28 days. Oh well, that’s alright then.

Companies that are serious about turning bad customer experiences into positive, loyalty- and sales-enhancing ones put in place programmes that first ask customers about their recent interactions and then, crucially, do something with the information they gather. Most importantly, they pick up the phone within 48 hours, find out what went wrong, fix the issue and then work out how to prevent it happening again.

It is estimated that it takes 12 positive experiences to make up for one unresolved negative one. It’s a lot quicker and cheaper for an actual human being to just say sorry. And to find a way to make amends.

But getting there requires a focus not just on the customer but on your workforce too. Managing and learning from customer experience is becoming established. What companies have begun to understand better more recently is the role employees play in all of this. Again, my experience at JFK provides some insight.

It’s easy to feel for front-line staff fending off tired and emotional customers, but when they complain that they are powerless to fix problems at the coal face, agree with you that their employer’s booking system is unfair, but have nothing more to offer than a second measure of gin, you know the problem is more deep-seated than a poor customer experience.

It is hard not to conclude that airlines have simply judged that reputational damage is an acceptable price to pay for full flights. Maybe in the short term they are right. British Airways and Iberia owner International Airline Group’s revenues in 2023 were nearly 20% higher than in 2019, the last full year before the pandemic. EasyJet’s turnover was 42% higher last year. Ryanair is back to pre-pandemic levels of profitability. Announcing record profits two months ago, IAG did, however, acknowledge that it needed to ‘improve the customer experience’ across its airlines, that also include Aer Lingus and Vueling.

Perhaps this goes some way to explaining why its share price is lagging the improvement in profitability. IAG’s shares trade at 158p, which is where they stood more than 30 years ago. EasyJet’s has fallen by two thirds in ten years. Air France-KLM’s shares have fallen more than 90% since 2007. As Warren Buffett famously quipped: ‘if a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright.’

There’s more to investing than the numbers. To understand why there’s a mismatch between a company’s record profits and its languishing share price you have to ask around, gather other people’s experiences and learn from your own. There’s a risk in extrapolating from your own interactions with a company, but there’s danger too in ignoring what’s plain to see. Bill Gates put it well: ‘your most unhappy customers are your greatest source of learning.’

This article was originally published in The Telegraph.

Important information- investors should note that the views expressed may no longer be current and may have already been acted upon. Please be aware that past performance is not a reliable guide indicator of future returns. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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