The Impacts of Recent Recession on Consumer Behaviour within Airline Industry - Literature review Example

The impacts of recent recession on consumer behaviour within Airline industry Table of Contents Table of Contents 2 Introduction 3 Consumer Behaviour 3 Factors affecting consumer decision making process 4 Consumer behaviour pattern in times of recession 6 Impact of Recession on the Aviation Industry 9 Impact of Recession on the Airline Industry 12 Conclusion 13 References 15 Introduction The management of the company faces diverse challenges due to frequent changing behaviour of the consumers. Consumer behaviour pattern can be analyzed but cannot be generalized. Every customer has a unique personality and distinctive behavioural pattern (Kappler, 2012). Successful marketing campaign of a product cannot increase the sales of the product. Although, the product itself has an importance but the consumer behaviour can be affected by various psychological and environmental factors (Hitt, Hoskisson and Ireland, 2008). The consumer development process can be ascertained by analyzing the past, present and future behaviour of the consumers. From a marketing perspective, the ability to influence consumer behaviour is to understand the intrinsic and extrinsic factors affecting the consumer behaviour (Vanhuele, Wright and East, 2013). Consumer Behaviour Consumer behaviour is the activities which people undertake when obtaining, consuming and disposing of products and services (Blythe, 2008, p. 56). The fundamental basis of marketing should be that the customers are at the centre of everything the firm does. In marketing management customers are the key concern. This means that understanding the behaviour pattern of the customers is essential for the managers. Traditional marketing management emphasized on product features and competitive positioning of the product (Abramovich, 2005). The conventional marketing management theory focuses on the customer relationship with the marketers of the company and the product value (Statt, 2011). The purchasing behaviour of the consumers relates strongly to the segmentation of the markets. There are three types of segmentation; geographic segmentation, psychographic segmentation and demographic segmentation. Geographic segmentation means to divide the market area according to the location of the potential customers. Psychographic segmentation means to segregate a consumer’s characteristics and behaviour. Demographic segmentation means the division of consumer groups according to variables such as wealth, gender, age and education level etc (Blythe, 2008). The managers of the company can strengthen their relationship with the consumers. The relational bonding between customers and employees will enable the managers to develop a product which will fulfil the consumer wants and needs. An established connection with the consumer provides the marketer information regarding the consumer behaviour. For example, the marketers would like to repurpose their products and services without hampering the core value of the product. This means that the marketers would meet the consumers’ needs without impacting the brand itself (Bjerre, Knudtzen and Heding, 2008). From basic necessities to luxury items consumer purchasing behaviour is dependent on psychological influences of the customer which includes brand loyalty, changing attitude of the consumers etc. Factors affecting consumer decision making process Consumers are an important element of the marketing mix. The original marketing mix was proposed by M. McCarthy in the year 1960. Later, many writers contributed to the theory and added several elements. Let us discuss the elements of marketing mix from the perspective of the consumers. Product The product must have a bundle of benefits attached to it. The consumer segregates the drawbacks and benefits of the product. The benefits might be essential and desirable to the consumers but the drawbacks of the product are the starting point of the consumer decision making process (Oracle, 2012). Price The price of the product must be decided carefully by the management of the company because consumers tend to compare price of the product with its substitute. Place Convenient locations for making purchases are essential. The location of the store can also affect the consumer buying decision in many ways. Certain shops may charge more cost for a product but since they are located near the house of consumers, they are more preferred by the consumers. These are also known as convenience stores (Statt, 2011). Promotion Promotional activity is done to gain attention of the consumers (Hayes and Dredge, 1998). Advertisements in radio, magazines, newspapers, posters on bus and billboard are easily noticeable by consumers (Ellonen, Tarkiainen and Kuivalainen, 2010). People One of the most important elements of marketing mix. People include the producers and consumers. The producers and consumers need to cooperate with each other in order to establish a successful connection between them (Stewart and Barlow, 2006). Process The process of manufacturing and providing service to the consumers differs from industry to industry. The process of a company should be easier and simpler for the consumers to follow. Physical Evidence The intangibility of the services makes it difficult for the consumers to evaluate the service. As a result, the consumer relies on the tangible characteristics of the service. For example: A restaurant may not be providing delicious meals but the ambience may appeal to the consumers. The management of the company should focus on the betterment of the tangibility of the services to attract consumers (Blythe, 2008). These elements help in understanding the consumer needs and wants, although the process cannot be generalized. According to some theorists, consumption behaviour among individuals with similar cultural ties is almost similar. Marketing campaigns may influence the consumers to a certain extent but cannot affect the consumer decision making process. Apart from influencing the consumers, product development can be used to generate data relevant to the development of products and services that have greater value and attachment to the consumers (Zaichkowsky, 1991). Thus, we can say that Consumer behaviour is a complex, dynamic and a multidimensional process. Marketing decisions taken by the management of the company are based on assumptions about consumer behaviour. Consumer behaviour pattern in times of recession As discussed before price of a product plays an important role in the consumer decision making process. The traditional theory of management emphasized that the general tendency of the customer is to buy products with lower price. However, the conventional marketing management theory emphasizes the fact that consumer decision making process is affected by factors like promotional activities conducted by the company, the location of the store, benefits attached to the product etc. A period of general economic decline or decline in Gross Domestic Product (GDP) for two or more quarters is defined as recession. The roots of recession are slowing growth in an economy. If the slowing growth continues for two or more quarters then it is termed as depression. In a mild recession, the quarter which has witnessed negative growth will be followed by quarter with positive growth. The causes of recession have been a debatable topic among various economists. According to theorists, the recession can be caused due to a single reason or various reasons. The factors which affect the slowdown of the economy are as follows: The value of local currency going down Rise in fuel prices Inflation Unemployment The central banks role in an economy, if the interest rates are set high by the central bank then the public borrowing reduces. The economic depression in the year 1930 had caused havoc among the consumers and producers across the nations. Countries like USA, Germany, Chile and Japan etc experienced a significant depression in the year 1930. To understand the consumer behaviour pattern during the economic depression in the 1930s, one has to understand the importance of consumers from the viewpoint of the economists. Economists in the 1930s viewed consumers as an unimportant source of income. Consumer expenditures were dependant on the income received from the government and business sectors. It was assumed that the responsibility for changes in the economy was due to the decisions made by the government and business enterprises. The conventional economists believe that the consumer decision making process relies on factors other than income like the purchasing power of the consumer, savings of the consumers, brand loyalty, etc. However, there are certain times when inflation favours the consumer. For instance when the stock price of a company goes down, the rationale of the consumer is to buy more stocks at lower prices (Cento, 2008). The ‘Lipstick effect’ in the year 1930 had created ripples in USA, UK and other countries. During the economic depression in the year 1930, consumers preferred buying luxury items which would make them feel good about themselves. There was increase in the sales of cosmetics during the economic depression of 1930s and the same spending pattern was observed during the recession period of 1980, 1990 and early part of 2000. L’Oreal had achieved a sales growth of 5.3% in the first half of 2008. This example shows that even if the income of the consumer has not increased, consumer spends more and saves less during inflation period. The consumer spending pattern towards basic necessities, luxury items, convenience goods, speciality goods and other items does change. The consumer plays the role of a buyer, user and payer. The decision making procedure will be subjected to various changing attitudes and social influence of the purchaser. Buyer will behave in a certain manner which includes attributes like brand loyalty, habits, post purchase behaviour etc. The cognitive theory states that the consumer starts the search process early so that he can limit the product choices and make a fast purchase decision. Time also plays an important factor; if the consumer wants to purchase a product for future consumption then he would give a lot of consideration to the product but if he wants the product for an immediate purpose then he would eventually overlook some of the flaws of the product. Consumers create the demand and supply of goods and services. Change in consumer spending pattern affects the investment rate. There is a chance that due to inflation pressures the consumers would do bulk shopping for storing the items for the future or they might hold unnecessary spending. It is possible that different consumers may respond differently in the same situation. Some theorists claim that consumers play an important role in the economy while some claim that they do not have an importance in the economy and products are not created solely for consumers. According to theorist Fusfeld, the paradigm of a smoothly adjusting system of largely competitive markets that produces what consumers want, provides rewards appropriate to effort, and is assured of stable economic growth through Keynesian macroeconomic policies lost its credibility and as per theorist Lekachman, an engine powered by uncovered inner motivated decisions of legions of ardently competing businessmen and hordes of their customers" and the contention that "success is ultimately related to individual merit and application. Industries which witnessed growth in sales during the recession periods were Insurance industries and fast food restaurants. Dominos Pizza witnessed an increase in sales by 25 % in the year 2009. Insurance industries witnesses an increase in sales because in times of recession consumers need the reassurance that if they are involved in an accident or have their vehicle stolen that they will be able to have it replaced or repaired. Consumer spending on non durable goods is very high, as non durable goods form the largest component of personal spending (Usman, 2010). Impact of Recession on the Aviation Industry The global financial crisis evolved in the year 2008 (Chon, Prideaux and Laws, 2006). It evolved in United States of America and later penetrated into the European countries. After a few days the crisis spread across the globe. The financial crisis was born due to the failure of major financial institutions of USA which include banks like Bear Stearns, Lehman Brothers etc. Aviation sector is one of the most important global pillars of the economy. This sector contributes to the global Gross Domestic Product (GDP) and provides billions of jobs worldwide (NewMyer, 1985). Aviation sector provides transportation services all over the world (Wensveen, 2012). The aviation sector was heavily impacted in the recession period (Bilyk, 2009). Prior to the recession, the aviation sector was fastest growing industry in the world but due to the recession it witnessed negative growth (Clark, 2005). The increase in the price of fuel led to an increase in airfare, the cost of fuel per gallon doubled. The airline industry spent 10 percent of their operating costs on fuel in the year 2001, by the year 2011 it had spent 40 percent of its operating cost on fuel. Most of the small airline and big airline companies went bankrupt. The price of fuel of international air routes increased up to three times than its normal fare (Gleich, Wald and Fay, 2008). There was a decrease in the number of passenger travelling abroad. The aviation industry had suffered major losses after the attacks on World Trade Centre, USA in the year 2001(Sharma, 2005). The recession in the year 2008 further added to the woes of the aviation sector. There was an increase in railway travel as, consumers looked for cheaper mode of transport (Azuolas, 2012). The airline companies devised strategies that would help in increasing the profits and decrease the operational costs. To generate revenue the airline companies introduced additional fees which was included in the base ticket fare. These additional fees were levied for checking the baggage, selecting food, seats and blankets (NewMyer, 1985). These additional services added to the woes of the customer. The number of domestic flights was reduced and the airline companies which used small aircraft were forced to eradicate them. Figure 1: Price of fuel over the years (Source: Azuolas, 2012) The aviation sector depends highly on the market trends of the economy. The aviation sector is a very unstable industry, the elasticity of demand depends upon the competition in the industry (Jones and Johan, 2009). The airline industry devised strategies in reducing the operational and administrative expenses but those turned out to be feeble attempts (Schoenecker and Arosio, 2008). There was a huge decline in the demand of business class air travel which resulted in cancellation of many scheduled flights. The airline industry suffered huge losses and the recovery speed of the airline industry was very slow (Jones and Johan, 2009). In USA, the number of passenger for air travel increased from 704 million in the year 2009 to 730 million in the year 2011. Amidst the financial crisis there was a positive outlook in the behaviour of the consumers. This was mainly due to the improved airline service. British Airways provided wireless Local Area Network (WLAN) to the passengers waiting in the terminal (Marriott, 1998). In USA, the number of flights arriving on time during the tenure 2007 to 2011 improved considerably. The number of flights arriving on time was 71 percent in the year 2007 and 77 percent in the year 2011. Figure 2: Recovery of Airline Industry (Source: Forbes, 2011) In UK, the number of passengers increased from 70 million in the year 2000 to 86 million in the year 2003 (Forbes, 2011). The development of a fifth terminal at the Heathrow airport justifies this growth (Marriott, 1998). During recession, the airline industry became a concentrated industry from a fragmented one and this was mainly due to the mergers and acquisitions between airline companies (Yosef, 2005). In USA, Continental Airlines merged with United Airline; Southwest Airline acquired AirTran Airline in the year 2010 (Forbes, 2011). In Europe, British Airways and Iberia Airlines announced plans to merge (BBC News, 2003). Prior to the merger, British Airways had reported a loss of £531 million (Vedder, 2008). According to a survey conducted by Forbes, 81 percent of the management executives working in the aviation sector believed that consolidation would continue to take place in the future until the economy witnesses a positive growth (Forbes, 2011). Impact of Recession on the Airline Industry While the airline companies in USA and Europe were facing challenges, some of the airline companies in India, Latin America, China and the Middle East were expanding their routes. According to the survey conducted by Forbes, there was a change in the carrier size, routes and fleet size of the airline companies in USA, Europe, India, Latin America, China and the Middle East, Fleet size The fleet size increased from 40 percent in the year 2010 to 55 percent in the year 2011 in China and the Middle East (Forbes, 2011). Number of flights The number of carriers increased from 40 percent in the year 2010 to 55 percent in the year 2011 in India, Latin America and Middle east. Number of routes The number of routes expanded by 32 percent in India, Latin America, China and Middle east. Seat capacity There was an increase in the seat capacity of US carriers by 22 percent in the year 2010 compared to a 19 percent in the year 2009 (Forbes, 2011). Certain airline companies yielded profits during recession. This was due to the fact that tourism companies lowered their tariffs (Conrady, 2010). The government of Hawaii generates majority of its revenue from tourism (Sharpley and Pender, 2005). The cargo carrier Aloha Air Cargo has remained profitable even during the turbulent times of recession. The carrier delivers manufactured items or food items to the hotels of Hawaii (Forbes, 2011). Not all airline companies were blessed, since increasing fuel prices, economic pressures and increased competition has forced some of the companies into bankruptcy (Delfmann, 2005). Since 2000, 51 passenger aircrafts and cargo airlines have filed for bankruptcy. These airlines include American Airlines, Pinnacle Airlines, and regional carriers of American Airlines, Executive Airlines, American eagle, Colgan Air, Ryan International, and World Airways. There are two categories of airline companies; Legacy airlines and low cost airlines. Legacy airline includes Alaska airlines, American airlines, Continental airlines, Northwest airlines, Delta air Lines, United Airlines and US Airways. Low cost airline includes the novice airlines in the aviation sector whose operating costs are lower than the older airlines (Forbes, 2011). Figure 3: Net loss and gains of airline companies (Source: Azuolas, 2012) The figure shows that the low cost airlines had borne losses worth $2.1 billion in the year 2009. The same year witnessed legacy airlines witnessing loss of $62.8 billion. Conclusion Thus we can conclude by saying that airline industry is one of the most important and profitable sectors of the economy. It has wide reaching impact on the workforce and consumers. The data mentioned in the charts reveal that the airline industries are recovering (Transportation Research Board, 2011). The future of the aviation sector looks prosperous. The management of the airline industry needs to devise strategies with the changing market forces of the economy for the betterment of the economy. References Abramovich, D., 2005. Consumer behaviour [pdf] Available at: < http://www.marketingplannow.com/userfiles/marketing/Image/pdf/Consumer%20Behavior%20DA-5.pdf > [Accessed 06 March 2013]. Azuolas, A., 2012. Aviation industry performance [pdf] Available at: < http://www.oig.dot.gov/sites/dot/files/Aviation%20Industry%20Performance%5E9-24-12.pdf> [Accessed 06 March 2013]. BBC News, 2003. Aviation sector hits fresh turbulence, [online] 17 July. Available at: < http://news.bbc.co.uk/2/hi/business/3075553.stm> [Accessed 07 March 2013]. Bilyk, B., 2009. Effects of deregulation in the aviation industry. 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