Recently, low cost airlines have become increasingly high profile. The value for money offered is capturing the public’s attention as European flights become more affordable and businesses of all sizes have begun to take advantage of the potential savings. European low cost airlines have learnt much from `no frills’ air travel in the US. Southwest Airlines has, in fact, unashamedly been used as a blueprint in the European Market. Later, higher yielding business was taken from the traditional airlines and competitor reactions became more aggressive. This does not appear to have either discouraged Southwest’s expansion or deterred other low-cost airlines entering the market. But how can low-cost airlines offer such low prices? The use of forecasting tools can assist airlines to predict likely load factors the percentage of seats occupied well in advance of flight dates. Armed with this knowledge airlines can benefit from selling this excess capacity at a low price, as long as the associated variable costs are covered. Ryanair has benefited over recent years from having bought aircraft when the prevailing market rate was low. This is reflected in their current profits. Bulk orders of new aircraft will also undoubtedly benefit buyers through reduced prices. However, there could well be a negative impact upon the profit and loss account as older, written-down fleets are replaced or enlarged.
The majority of cost centres now serve both brands to some extent. In the management accounts these are apportioned between brands using a variety of methodologies, depending on the cost driver of each department, be it sectors, passengers or flying hours, for example. Only three departments are wholly classified as buzz’s. Referred to internally as the “buzzgang” these cost centres consist of revenue management, marketing communications and sales and distribution. As seats are sold directly to customers, buzz’s sales team is far smaller than a traditional airline of similar size. The low-cost airlines are not competing against each other directly. Very few routes are served directly by more than one brand, and with Eastern Europe being within the reach of Boeing 737s there are still many other destinations to target before head-to-head competition becomes more evident. Size means yet further economies of scale and all-important brand awareness throughout Europe. Clearly this means that competition is rife, with low cost airlines striving to differentiate themselves from the opposition. Inevitably some form of shake up in the market will occur, but we could see more low-cost carriers entering the market; with hubs appearing across Europe, before this happens.
The response of traditional airlines cannot be underestimated. Established major airlines have huge scale economies and other advantages such as alliances, travel agency incentive schemes and frequent flyer loyalty schemes. Lufthansa is competing aggressively with buzz on German routes using marginal capacity to offer low prices. We could see problems if they use anti-competitive behaviour and increase capacity at low prices to maintain their market share. With a traditional cost base this yield dilution would be likely to cause losses. In an attempt to overcome this we are working with creditcard issuers and overseas banks to educate potential customers and convince them of the security of this method of payment. Systems now exist that allow the cost of purchases to be added to telephone bills, which could help overcome the concern over the circulation of credit-card numbers. Ensuring that departure and arrival times are suitable for businesses has been difficult because slots at many airports are scarce. Given that several of buzz’s routes are primarily focused on the business traveller, this can have a huge impact on the success of a route. The large increase in air travel has had a favorable impact on both the car rental companies and hotel chains, although earnings for the latter have been adversely affected by a tremendous expansion of facilities.
One problem the travel industry must face is the spread of frequent flyer programs and their car rental and hotel counterparts. The market is cluttered, and the programs are increasingly difficult to manage and confusing to consumers. They are now being re-evaluated by the industry, and some airlines are retrenching. Another problem is the growth of travel agent consortiums, which have become a powerful force in the market. Airlines must learn how to work with them, and the consortiums must try harder to understand the needs of travel suppliers. Foreign governments and travel companies abroad should take a close look at what has been accomplished here during the past years. There is a huge market ready to be tapped if the travel industry starts thinking in global terms. That is the challenge facing the industry today. Service quality and productivity in regional airlines were investigated to determine how these airlines compete in today’s market. The results show that regional airlines suffer from severe problems but air transportation is still expected to be the dominant form of intercity transportation. Passengers were inconsistent in rating regional airlines’ service quality but all gave a high score to the quality attributes offered by new aircraft. The results suggest that service quality image can be improved by communicating quality attributes to passengers.
From an operational standpoint, productivity measures that were considered to be more useful for this study are seat miles generated per engine hour, seat miles produced per pound of fuel used during a fourteen-hour day (the industry average utilization rate), and total daily engine hours flown per aircraft, a measure of aircraft utilization. In addition, typical costs per seat mile data provided by aircraft manufacturers will be utilized as indicators of aircraft productivity. One strategy that regional airline management can employ to overcome this perception is to educate existing and potential passengers of the enhanced safety features of the new aircraft. Such an educational effort may be accomplished through direct advertising programs, sales calls with travel agents, and in-flight announcements and literature. However, increased expenditures for advertising programs featuring the new aircraft as a key selling point must be undertaken with caution since only 30 percent of the respondents recalled any marketing promotion which mentioned the introduction of new aircraft, despite extensive media publicity and advertising efforts by both carriers.
Furthermore, low cost airlines can improve their service quality image by communicating these attributes to passengers through a variety of means. A bright future awaits those carriers that recognize that providing excellent service quality can be done efficiently. As regional airlines continue to upgrade their fleets (including jets), it is clear that regional airlines will play an increasingly important role in Europe’s transportation system. In recent years, there have been a number of changes in global airlines industry which have had profound effects on the development of this very volatile sector of the economy in most countries of the world (Pustay 1992). The essence of the marketing concept incorporates three basic elements of customer-orientation, integrated marketing efforts and the resultant company profitability and customer satisfaction. In this process, continuous relationship between airlines and their customers has become the watchword and airline industry standard (Kaynak 1987). For instance, global marketing can work best for a service industry like airlines whose products and services have universal appeals (Agnew 1986). Internationally-oriented airlines would have a greater chance of securing consumer acceptance by developing and introducing products/services which are used and demanded on a universal scale and their products/service will have “universal selling appeals” (Pustay 1992, Kasper 1988, Tretheway 1990).
Airline industry is very much influenced by changes taking place in its varied environment. The development of the consumer-oriented marketing concept by airlines industry has been a response to changed environmental conditions from a sellers’ market to one of a buyers’ market (Folkes, Koletsky, and Graham 1987, Nelms 1991, Reamy 1989). Whether a marketing orientation is needed or not for organizational prosperity and well being will depend fundamentally on the prevailing relationship between the airline and its macro environment. On the impact of environmental changes on airlines industry, Elliot (1990, p. 28) examined Australian airlines industry. Traditionally, Australian domestic airlines operated within a strictly controlled legislative framework where The Two Airlines Agreement enabled two airlines to share the major inter-state and intra-state routes. The two airlines, namely, Ansett and the government-owned Australian Airlines, dominated the domestic market but competed with each other in international markets. Despite their domestic cooperation, they engaged in competition in international markets with each other. Fearing the consequences of price warfare, they competed with each other through product and service differentiation and through vertical integration as seen as attempting to treat the environment as if it was placid clustered and the dominant approach in such a market environment is one of market segmentation (Toh and Hu 1990).
Thus, customer satisfaction is very important in the repeat purchases. In terms of developing strategic marketing plans, airline executives should place more importance to those attributes which are deemed most important by passengers. In the development of new services and utilization of newer type of aircraft, consumer driven type of input should be utilized. In particular, most salient attributes used by airlines’ passengers need to be delineated. Airports around the world are becoming more aware of the importance of designing infrastructure and services to meet the requirements of their airline customers. Different airline market segments are considered and the passenger characteristics in terms of airport requirements identified. Possible future innovations are then discussed, including enhanced business and personal services and differentiation of the airport product by type of airline and passenger such as low-cost, high-value, transfers and surface mode integration. A successful airport must keep and attract air services. Different types of airline operation are identified along with target groups for airline marketing. The economic impact of air services provides a strong motivation for development of new routes. A marketing strategy is developed including SWOT analysis, market research and how to create an airport presentation to a potential airline customer. One of the most crucial decisions an airline must make is the composition of its fleet. To obtain the optimal fleet over a given time period requires an understanding of the demand for air travel, costs, revenues and market share.
The fleet planning process is built up using a PESTE analysis, basic assumptions laid down and critical variables identified. Data requirements and market research needs are identified. A Quality of Service Index for different aircraft types is discussed along with methods for estimating yields and traffic. International airline alliances enable airlines to dramatically extend their market coverage. The components of an alliance are examined including frequent flier programs (FFPs), airport facilities, code-sharing, schedule co-ordination and revenue/profit sharing with anti-trust immunity. The criteria that go into choosing a good partner are identified and the benefits of alliances to airlines and passengers and discussed. In a deregulated market-place, airlines and airports need to continually evaluate their competitive position and assess rival developments and strategies. Over the last five years there has been a surge in new entrant airlines starting services within Europe in the UK market. Criteria for successful new entry are then considered. It is demonstrated how low-cost airlines can stimulate demand, take advantage of under-utilized secondary airports and innovative methods of distribution to offer lower fares that benefit both the business and leisure traveler.
Business passengers are normally the most lucrative for airlines and a relatively small number of people can generate a large volume of business travel. They therefore merit special attention in terms of airline marketing and market research. Segmentation of the business market is demonstrated by issues such as length of haul, frequency of travel and attitude to a particular airline. Travel ‘mindsets’ are defined and research into passenger attitudes developed. The relative importance of different product features is quantified with particular regard to the value of customer service. Examples are given of the perception of different airlines in the UK market. New aircraft cost vast sums of money to develop and long lead times for production necessitate accurate forecasting of the demand for air travel and how this can best be served. Market research is an essential input in the process as the existing geographical distribution of demand will be modified by future growth rates and airport capacity constraints. For the world’s major airlines a key competitive advantage lies in the strength of their route network. In order to plan the network most effectively, market research provides a vital input. A wide variety of other information sources are also used including origin/destination demand, ticket coupon data, schedules and costs to evaluate changes in the destinations served, frequency and schedule. Competition is shown to be between itineraries, not individual flights. Network complexity grows very rapidly when flights serve hubs at both ends of a route.
A major challenge arises for an airline in entering a market segment for the first time. British Midland has developed from its roots as a domestic and charter airline into European scheduled services over the last 15 years and in 2001 plans to enter the long-haul scheduled market on the North Atlantic. The rationale leading to this decision is explained including consideration of the regulatory issues which are currently preventing services from Heathrow and the need to build a strong alliance partnership to provide marketing support in the US and globally. British Midland’s branding and positioning in the market place will be discussed. Hundreds of flights by subsidized airlines in Europe are endangering the global climate and the ozone layer. The European boom in “low-cost” airlines, fuelled by tax incentives, is increasing the level of toxic gases in the atmosphere and displacing less polluting and more efficient means of transportation for shorter distances, like trains. In business, Ryan Air got the low-cost religion in 1991 and started aggressively hitting the newly liberalizing European market soon after Stelios popularized the no-frills concept to the masses. Unlike easy Jet, however, Ryan Air refused to take on popular routes at congested and expensive airports, sticking to a strict diet of cheaper regional flights to keep its prices the lowest in Europe.
EASYJET and Ryanair pioneered low-cost airline travel in Europe but they are now up against plenty of local converts to the craze for cheap seats, particularly in Germany. Charter airlines in Germany are making moves into the budget sector to offset weakness in their core business. Last year, five charter companies set up low-cost operations including TUI (whose budget arm is Hapag-Lloyd Express) and Air Berlin (which runs the no-frills City Shuttle). Easy jet filled a lower proportion of its seats last month. The growing empty places reflected in part the 44% growth in the airline’s capacity year-on-year. But more capacity is on the way: the Luton-based airline recently ordered 120 aircraft from Airbus. The population of the European Union (EU) is 378m, significantly larger than the US’s 285m. Southwest, the US no-frills success story which pioneered peanuts instead of in-flight meals, says it might take 10 more years to cover the US fully – that comes on top of 30 years of double digit growth. Given the huge potential market, it could be another 50 years before the European low- cost sector reaches saturation point, experts predict. Southern Europe is also underexploited by low-cost carriers, according to Chris Avery, aviation analyst at JP Morgan. Low-fare carriers started life taking northern nationals to the south for short breaks in the sun. But Ryanair has disclosed that 45% of its traffic on its routes between the UK and Italy originates in Italy – much more of a two-way flow. Easy jet’s new Paris routes already have 30% French originating traffic.
This study suggests that low cost airlines need to focus on those core competencies that allow them to design the operation of their networks of air services from a value-based perspective. Airlines clearly need to be customer-focused. However, further liberalization and overcapacity in some markets, coupled with the impact of low-cost carriers and the commoditization of air travel, will lead to a long-term decline in yields (Doganis 2001). Perhaps airlines should outsource as many non-core functions as possible. This may mean abandoning peripheral services such as catering or ground handling services. Should they not want to do this, they may be required to perform these activities as external specialist companies defined to be independent profit centers. In any case, it is not clear that the traditional paradigm of the self-sufficient airline, which provides all of its ancillary support services in-house, can survive. The new European low-cost airlines are quite different. Even if they are keen to keep their customers happy, they give far more weight to cost-cutting. It is certainly the right strategy on a continent that offers efficient, relatively low-cost, surface transportation systems. In Europe the market differentiation tends to be far clearer. If during the crisis quite a number of business travelers have flown on the low-cost airlines–especially easy Jet–the vast majority of the European low-cost customers are new air travelers–people who in the past had not considered flying because of the high costs.
European low-cost airlines take pride in not passing oil price increases on to their passengers contrary to the legacy carriers. However, they omit to mention that they simply cannot do so without losing their customers. In the same vein, if Ryanair, is constantly struggling against what it calls the “bureaucratic” attitude of the European Commission in Brussels, it is because it knows that each cost increase due to new regulations will translate into the loss of thousands of its customers. However successful the low-cost carriers may be in convincing Brussels to let them operate in a totally deregulated environment, they have no way to influence oil prices. If, as a growing number of experts think, oil prices are going to increase because the world supply is close to its historical maximum, it may be the end of the story for many–if not all–low-cost operators. Every company needs to co-operate with rivals at some point during its business lifetime. Increased levels of local and international competition, coupled with smarter and more discerning customers, require more sophisticated and efficient ways of doing business. In addition, many regulated or protected industries have restrictions on cross-border activities or mergers.
Formulating effective strategies for achieving business goals has been, still is, and will continue to be one of the most important concerns of business leaders. In this context, perhaps no other organizational practice has captured more of the attention of academics and practitioners in recent times than offshore outsourcing. As more and more companies transfer their functions beyond the confines of national boundaries, new insights are needed to deal with the associated complexities. Offshore outsourcing refers to the practice of migrating routine business processes to overseas locations with the aim of achieving lower costs while maintaining quality. Competitive advantage derived from cost leadership results “when the company sets out to be the low-cost producer in the industry” (Porter 1985, p. 12). Even if a company manages to be the lowest-cost producer, some other company may dethrone it by pursuing low-cost strategy on a more aggressive scale. This has been the phenomenon in most industries and is not new. To regain lost cost leadership, the company would have to search for a new vendor that could provide at an even lower price than can the nearest competitor’s provider. The search for low-cost providers becomes a continuous process. The low-cost position that companies achieve through off sourcing enables them to serve target customers more effectively by providing lower costs of products and/or services, and by extending newer, differentiated products and services.
Thus, off sourcing development activities to outside providers may allow companies to bring products to market or enter a new geographical area much faster than it could while maintaining in house activities as the primary activity of marketing and sales can be disaggregated into activities such as marketing management, advertising, sales force promotion, sales force operations, technical literature and promotion (Porter 1985: 46). Similarly, outbound logistics may be segregated into information systems, order processing, fleet maintenance and delivery. Marketing is as old as business, but the discipline of marketing only emerged in the last century. Today, marketing differs less than the perspectives academics take on it. It is also context dependent: the product, be it goods, services or service, may have only a small impact on the fundamental logic of marketing. Choice and complexity are influencing practice, as is the pressure for accountability, and pressures for cash flow are also changing the way we understand marketing. This article seeks to draw out the fundamental logic of marketing and separate it from contextual and relativist perceptions. “Marketing management seeks to determine the settings of the company’s marketing decision variables that will maximize the company’s objectives in the light of the expected behavior of non-controllable demand variables” (Kotler, 1972 p. 42). The low cost airlines must have the advantage over the premium airlines because they will never get their costs to a point where they can make a profit at low fares in bigger markets.
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