Introduction – how airlines define their markets and applicable strategies
At its most basic level and definition, the premise behind marketing is to match the product with the target market. This is largely achieved by the firm having a clear definition of the market that is being targeted. Given the large operational costs in the airline industry, both fixed and variable, knowing and defining markets takes on an even more critical perspective. Market definition by airlines forms the basis of maximising potential revenue. The implications for ‘getting it wrong’ in terms of not knowing how to cater to a market or failing to correctly interpret a particular market, may immediately impact the airline’s sustainability in a negative manner.
Airlines can define their markets by using specific strategies which are commensurate with the market(s) they are defining. The most common starting point for airlines is to understanding who the type of traveller is and also the destination or ‘market’ the airline will serve. From this the airline will create a product and service tailored to the requirements dictated.
* Traveller type
Carriers largely define travellers as either corporate, leisure and VFR (visit friends/relations). Corporate travellers generally provide the highest yields to carriers and as such will tailor their services accordingly. One of the most important factors for a business traveller is the frequency of service to allow maximum flexibility. QANTAS on their principal business routes between capital cities created a dedicated high frequency service which it brands as CityFlyer. In Europe, Alitalia has created a similar product called ‘Link’ for its high frequency services between Rome and Milan Linate Airport.
In Australia, Emirates has created its schedules around the requirements of the corporate/premium traveller and leisure traveller. From both Sydney and Melbourne, Emirates offers two daily flights to Dubai. One is a non-stop service whilst the other service transits via Bangkok or Singapore. The non-stop service offers a differentiated on board product, particularly in the premium cabins. This is attractive to the corporate/business traveller since the service is non-stop (an important factor for such travellers) and it also offers an enhanced on board product. Emirates charges a fare premium in all classes for these services. The leisure traveller, which is more focused on saving money and time is not a critical factor, will be more inclined to use the service via Asia which is offers a cheaper fare. A similar concept is used by Singapore Airlines with ultra long haul operations on SIN-EWR and SIN-LAX orginal using a Business and Economy Plus only cabin with the Airbus 340-500. The carrier moved to all Business Class but there are now planes to revert to two class service.
Traditionally the VFR market is low yielding even if with high load factors. In Australia, carriers which focused solely on VFR traffic such as Alitalia and Olypmic, have withdrawn from serving these markets. Most recently, Gulf Air will terminate services to Australia in June 2007 citing low yields from the VFR based clients – it will be the second time it has pulled out of serving Australia. When QANTAS terminated services to Rome in 2003, it citied low yields and unprofitability using its mainline operations model. This city has been touted as a possible destination for long haul operations.
In terms of destinations served, airlines tend to define these as either business or leisure routes. Since leisure routes may be lower yielding, airlines have looked to create low cost ‘spin-offs’ to better serve these markets. One of the reasons QANTAS created its Jetstar subsidiary was to effectively and profitably operate routes which were deemed unsuitable using the mainline model.
Market definition by type of carrier –Legacy, Low Cost and ‘New World Carrier’
Legacy carriers will normally offer a full suite of services and thus attract a large percentage of corporate/business traveller. However the service levels on such carriers is slowly decreasing particularly in the USA and in Europe. Given the pressure to match the LCC model, Legacy carriers have look at cutting costs and this has been at the expense of primarily on board services.
When Virgin Blue started operations in Australia in 2000, it based its operational and organisational model on the LCC. In 2012, it is quite clear that Virgin Blue now Virgin Australia has evolved considerably from the LCC and is now taking on the characteristics of a legacy carrier. In order to attract higher yielding corporate passengers, Virgin Australia offers ancillary products similar to the QANTAS Group, such as airport lounges and loyalty programs, which the corporate market and business traveller hold in high regard and of high importance.
The strategies adopted by Virgin Australia in relation to defining its markets is actually a redefinition of its potential markets given that it operates on a vastly different platform from where it started. The carrier’s orginal LCC model was aimed at attracting leisure clients which are traditionally low yielding. With the opportunity to attract the business market, particularly on the SYD / MEL / BNE markets, it was necessary for the carrier to evolve to have a product which would be comparable to its competition. Notwithstanding Virgin Blue’s move away from the LCC and to a full network carrier, it still retains characteristics of the LCC model, particular in its cost structure and product distribution, which still allow it to retain some of the cost efficiencies of the LCC. In trying to derive a definition for Virgin Blue, the term ‘New World Carrier’ (NWC) has been used. Meier (2006) defines the NWC as ‘a forward driven airline with a different approach and strict focus on a low cost base’.
New World Carrier – evolution of Virgin Blue to Virgin Australia
The evolution of this NWC continued with the introduction of the Embraer ‘e-jets’, ATR turbo-pros, and the establishment of long haul division with 777-300ERs “V Australia” now absorbed back into the mainline operation. In relation to the ‘e-jets’ the benefits are that it will allow Virgin to increase frequency on routes where it is not justified doing so with the larger 737 aircraft and also tap into regional/country markets. The ‘e-jets’ will also allow Virgin Blue to base such operations ‘feeder’ service onto its mainline services. The introduction of Business Class, replacing the former Premium Economy product also better places Virgin to effectively compete with QANTAS domestic.
In stark contrast Tiger Airways’ Australian operation is more closey aligned with Europe’s successful Ryanair, which uses its low cost base to deliver cut-price fares (Murphy, 2007). Tiger Australia which was grounded by CASA in July 2011 for not meeting safety standards is now back at almost full operations and looks set to expand further. Aviation analysts argue that given its true LCC model, it will be able to beat fares by its direct rival Jetstar and also Virgin and QANTAS. Tiger taps into the corporate SYD / MEL / BNE / ADL air routes trying to take advantage of a the ‘new’ corporate traveler looking at economizing. This type of traveler may not necessarily want or require a full suite of ancillary services such as a loyalty program and airport lounges. Given the failure of true LCCs operating and succeeding in Australia on these ‘trunk’ business city pairs (refer to Compass mk I and II and Impulse Airlines), Tiger faces strong challenges and competition on this frequently crowded east coast Australian market.
Strategies for maximising revenue
The principal form of revenue for carriers is through the fares sold. Traditionally, the large majority of fares created and distributed by legacy carriers are coupled with highly restricted conditions and terms of carriage (Office Aviation Internatioal Affairs, 2002). The carriers have in most instances achieved this by operating in fairly stable and regulated market environments. Another factor attributed to the airlines creating these restrictions is to maximise the revenue earned through the application of process called ‘yield management’. Yield Management is an economic technique to calculate the best pricing policy for optimizing profits (OPTIMS-Amadeus, 2006). American Airlines pioneered this concept in the 1980s and in a study conducted from 1989 to 1991 estimated a saving of US$1.4 billion dollars through its application (Malagras and Meissner, 2006).
Oster and Strong (2001) state that ‘airlines may charge different travellers different prices depending on their demand characteristics, charging higher fares for those with more inelastic demand and lower prices for those with more elastic demand’. This form of price discrimination is contingent of the airline having market power. In Australia, which has largely operated on a ‘duopoly’ of airlines was able to successful implement this price discrimination and thus maximise yields.
In stark contrast to legacy carriers, the LCCs have adopted a very simple pricing model. All fares are one-way, directional and ‘point to point’. Restrictions such as advance purchase and minimum stay requirements are eliminated. At the same time successful LCCs still apply the yield management strategy in order to maximise their revenue, however there are key differences to it application than that of the legacy. This strategy has been one of the key factors contingent on the viability and prosperity of the LCC.
The application of yield management by LCCs is different to that of the legacy carrier. For the LCC the main function is to correctly target and segment the point-to-point customer combined with having a flexible pricing structure that supports quick adjustments in yield strategy (Solomko, 2006). In terms of a legacy carrier adopting the same type of fare and yield strategy, Solomko further states that ‘the modification and simplification of the pricing structure would be a key condition for adopting a low fare distribution model.
Commensurate with these strategies the resulting fares for an LCC in most cases would be suitable and of benefit to most travellers, including the high yielding business traveller. In Australia, with the entrance of Impulse Airlines jet services in 2000 on the lucrative Sydney – Melbourne segment offering $39.00 one way discounted fares, QANTAS and Ansett Australia had to radically rethink their pricing strategies and started selectively abolishing the long established conditions and restrictions (Richardson, 2000).
LCCs also use the opportunity of on board sales as a way of maximising revenue. Cabin staff on many LCCs like RyanAir and easyJet are placed earn commission from any sales made on board. LCCs place great emphasis on board sales as a way of maximising revenue with flights attendants selling everything from food to jewellery and sun tan lotion Furthermore, these carrier its aircraft as flying ‘billboards’ and internal parts of the cabin such as the toilet walls and overhead bins will be used as advertising space in order to obtain more revenue.
Determinations and Conclusion
It is now evident that market definition plays a significant role in relation to an airline’s revenue. In order to maximise the potential revenue the airline will need to understand the requirements of the market it is targeting and provide the product(s) which will most closely match and satisfy that particular market’s needs. Airlines achieve this on both a strategic and operational level by assessing the type of traveller and also the destination being served. Through the use of differentiated products, branding, distribution and pricing and using the market definition function as a platform, airlines will be better placed to maintain sustainable and viable long term operations.
© 2012 – AIRLINE HUB BUZZ – ORIGINAL ARTICLE