The Pricing Strategies of the Airline Industry in Hong Kong - Essay Example

? Table of Contents Page Introduction 2 Background 2 2 Theoretical Background 2.2 The Background Of The Case Study 3 Research Methodology 7 3.1Research Questions 3.2 Research Design 4 Data Collection and Analysis 10 4.1 Data Collection 4.2 Data Analysis and Interpretation 4.3 Critical Analysis of the Research Findings 5 Conclusion 15 5.1 Summary Of Research Findings 5.2 Recommendations References 17 1 Introduction The Hong Kong Civil Aviation Department’s approval for reducing the commission for travel agents by airlines (Legislative Council, 2010) demonstrating the fact that airlines reduce their dependence on travel agencies as a distribution channel. The influencing factor in this context was remarked to be the increasing impact of online distribution channels in the region (Legislative Council, 2010). The paper intends to analyse the various economic factors that have a strong influence on the pricing strategies adopted by the airline industry of Hong Kong to serve the regular air passengers between the UK and Hong Kong. The objective of the paper is to provide advice to a large travel agency of Hong Kong from an economic point of view in order to reassess the company’s business strategies. Relevant official data available in the government sites, the local airlines, and travel agencies will also be collected to facilitate the analysis in this study. Our prime focus will be to provide an in-depth analysis of the pricing strategies adopted by the local airline industry by using the concepts of market structure, cost and revenue structure and price discrimination. With this purpose, an in-depth analysis will be conducted through literature review describing the current business environment of Hong Kong airline industry. 2 Background 2.1 Theoretical Background Evidences have revealed that economic factors have a significant influence on the business environment of any and every region (The Times 100, 2008; Kitching & Et. Al., 2009; Floyd & Wooldridge, 1997). Based on this concept, experts have firmly stated that macro and micro economic factors, both play a crucial role in influencing the pricing strategies of an industry. Besides, the macroeconomic environment which may greatly affect the demand side of the market, the micro economic factors can be witnessed in terms of the market structure of the industry, the price discrimination taking place in the market scenario, its cost and revenue structure as well as the demand elasticity observed in the industry (Nadar & Vijayan, 2009). Musonera & Ndagijimana (2001) stated that the pricing strategies of an organisation depend largely on the political, economical, technological and social factors. For instance, when the economic factors tend to be highly fluctuating, the pricing strategies of organisations are developed to be flexible which can effectively deal with the economic variations. It is in this context that the aforementioned factors create a string impact on the market structure of firms in an industry which in turn influences its pricing structure (Mazzucato, 2000). Hong Kong airline industry is scrutiny by various regulatory bodies, such as Civil Aviation Department, International Air Transport Association (IATA), Airport Authority Hong Kong and others. These regulatory bodies deliver the industry with a strong and well-organised structure (Information Services Department, 2010). The initial factor that will be considered in this study is the influence of market structure on the pricing strategies of the airline industry. Market structure relates to various elements existing in the business environment such as product differentiation, market concentration, economies of scale, vertical integration of the competitors in the market and other similar aspects that in turn define the market structure of an industry. Therefore, market structure can be defined as “the organisational characteristics of a market that largely determine where it fails on competitive spectrum between monopoly and competition” (Duetsch, 2002 pp. 67). In terms of market structure the aviation industry possesses a few distinct features. To be illustrated, the inclusion of free trade can be apparently witnessed in the market structure of the aviation industry in Hong Kong. Along with the free trade trend, the market also faces barriers in terms of strict regulatory restrictions. Another major characteristic of the industry is that Hong Kong aviation industry lacks a domestic market. Most of the operations of the home-carriers are controlled by international air service agreements. However, in terms of product differentiation, the industry serves with heterogeneous products, e.g. the fighters and the passengers who are mostly engaged with rendering services to the cargos as well as regular travellers (Law & Yeung, 2000). Along with market structure, the cost and revenue structure of the industry also directs the pricing strategies adopted by the major players. According to the current facts and statistical information, the industry gained a $482 billion in 2009 which was a decline of almost 14% from the preceding year, i.e. 2008. However, the estimates revealed that the industry gained revenue of $552 billion in the year 2010 which was again forecasted to increase by 7.6% in the next year. In the international platform, the major markets of the industry can be identified as North America, Latin America, Europe and Asia-Pacific (IATA, 2011). Price discrimination in the airline industry also influences the pricing strategies of the firms to a large extent. The concept is defined to be a broad theory of market conditions related to the buying behaviour of the consumers and the firms’ market power to a large extent. McAfee (2008) stated that “Price discrimination can exist when three conditions are met: consumers differ in their demands for a given good or service, a firm has market power, and the firm can prevent or limit arbitrage”. Another precise definition provided by Stole (2003) states “a firm price discriminates when the ratio of prices is different from the ratio of marginal costs for two goods offered by a firm”. In the case of Hong Kong a significant discrimination in prices charged by the airline service providers can be observed, especially in the weekends (Mantin & Koo, 2010). Notably, similar kind of price discriminations is witnessed in the international airline industry as well. Reasons that have been identified in relation to the price discrimination witnessed in the international airline industry are capacity constraints and customer heterogeneity. These factors can also be identified to influence national airline industries to a large extent (Bilotkach, 2005). This can be well observed from the diagram represented below. Table 2.1: Pricing Strategies of Airlines to Various Destinations Cities from HK to Cathay Pacific Airline 1 Airline 2 Airline 3 Tokyo Peak 5100 JL 5000 UA 4800 NW 4700 Non-Peak 4900 4800 3300 3500 Taipei Peak 2658 CI 1800 BR 1930 EG 1400 Non-Peak Published Fare -9% 1680 1200 Bangkok Peak 3640 (Published Fare -9%) TG 2800 UA 2250 CI 2700 Non-Peak 2800 2200 1750 2000 Singapore Peak 4800 SQ 4800 QF 2200 GA 2185 Non-Peak 4000 4000 1984 Melbourne Peak 8550 QF 8550 SQ 7000 MH 7000 Non-Peak 7800 7800 6500 6500 London Peak 9740 BA 9740 VS 7600 SQ 7600 Non-Peak 7140 7140 5800 5800 Frankfurt Peak 9300 LH 9300 SQ 7600 MH 4700 Non-Peak 8800 8800 6850 Paris Peak 9300 AF 8700 SQ 7600 BA 8700 Non-Peak 8800 6850 Vancouver Peak 8500 CP 8500 AC 8200 UA 9900 Non-Peak 7700 7700 7400 7900 San Francisco Peak 9900 SQ 9000 UA 9900 NW 8700 Non-Peak 7900 7000 7900 6300 New York Peak 11000 UA 11000 NW 9800 SQ 10220 Non-Peak 9000 9000 7400 8200 Source: (Law & Yeung, 2000) According to the data available from the above presented table it can be stated that Cathay Pacific, which is identified as a market leader in the Hong Kong aviation industry concentrates on low fare prices, below 9% of the published price at peak seasons but only for the travellers to Bangkok and Taipei. For passengers from Hong Kong to London, the company does not consider similar kind of promotion. Thus, the price discrimination in the industry can be identified as quite high which in turn affects the pricing strategies of the airline companies. 2.2 The Background of the Case Study Table 2.2 Population Size and Airline Dominance Source: (Law & Yeung, 2000). It is quite apparent from the above represented diagram that the aviation industry of Hong Kong and the UK is largely dominated by two airline companies, i.e. Cathy Pacific in Hong Kong and British Airways in the UK. Therefore, it can be stated that pricing strategies shall strongly influence the sustainability of travel agencies. Fluctuations in the related industries of Hong Kong airline industry such as the fuel industry, the tourism industry and the technology industry will lead to the fluctuations in the pricing strategies adopted by the airline industry. For instance, in the recent trends the oil prices in the UK market has been recorded to increase at a historical rate which forced IATA to revaluate its budget (Brett, 2011). It is of no doubt that an increase in the spending of the industry will in turn raise the prices charged for the airline services from the travellers of the UK–Hong Kong route. Options available to the potential consumers of the industry are also likely to influence the pricing strategies of the industry. From the chart represented below it can be observed that direct services rendered by the industry play a major role in attracting consumers’ demand that in turn influence the prices. Table 3: Options for Passenger Services from Hong Kong to Other Destinations Flights per Week (No. Of Airlines) For Cathay Pacific From Hong Kong to Direct Services Connections Total Week Frequency Share Taipei 213 (7) 0 (-) 213 91 42.72% Bangkok 119 (9) 4 (2) 116 35 30.17% Singapore 89 (6) 24 (3) 113 28 24.78% Tokyo 84 (6) 14 (1) 98 28 28.57% London 35 (3) 19 (3) 54 14 25.93% Frankfurt 14 (2) 20 (5) 34 7 20.59% Sydney 27 (3) 16 (5) 43 14 32.56% San Francisco 21 (3) 60 (N/A) 81 7 8.64% Source: (Law & Yeung, 2000). The above table represents that travellers travelling from Hong Kong to Taipei enjoy a significant number of choices in terms of airline services. However, the travellers from Hong Kong to London only have 54 airline services with a frequency of 14 per week. Thus, the switching cost of the buyers in Hong Kong to London route can be identified as low in comparison to other destination travellers which tends to fuel up the competency in the market and also affect the pricing strategies of the company. Technological factors such as internet can also be considered as a significant facet of the airline industry in Hong Kong. It is worth mentioning that the airline industry in the global context is termed to be a highly competitive industry (Jiang & Et. Al., 2003). In this regard, the industry can be witnessed to focus on the internet distribution channels rather than travel agents in the market. Apart from these factors the pricing strategies of the airline industry also depend on the economic factors of the target market and the local market as well. For instance, the economic condition of the UK is currently observed to be fluctuating. This creates a constraint on the spending power of the consumer in the economy which in turn pressurises the pricing strategies of the industry in the route. The fact is also applicable in the case of other economies (Petersen, 2007). 3 Research Methodology This section will emphasise on the research method implemented in this study with the purpose of identifying the most significant factors which influence the pricing strategies of Hong Kong airline industry and in turn affect the business strategies of the travel agency. The paper will in this regard intend to focus on the implication of the quantitative research approach. Subsequently, the study will emphasise on the secondary data sources in order to collect sufficient amount of relevant data for the research. Furthermore, the study will tend to evaluate the causes existing in the business environment of Hong Kong airline industry that in turn affects the pricing strategies of the industry players (Ouyang, n.d.). 3.1 Research Questions The research questions considered in this context are as follows: a) What are the factors that influence the pricing decisions of the airline industry in Hong Kong? b) Which factors are most important in determining the pricing strategies of the industry which in turn can affect the travel agencies in the Hong Kong? c) How did the airlines adjust their ticket pricing strategy in response to the fact that the Internet has grown dramatically as an airline ticket distribution channel? It is worth mentioning that these research questions have been determined depending on the research objectives, i.e. to recognise the most significant factors influencing the pricing strategies of the airline industry with the purpose of suggesting beneficial strategies to the travel agent company in Hong Kong. For instance the objective of the research intends to identify the major causes present in the business environment of Hong Kong Aviation Industry that affects the pricing strategies adopted by the marketers with due consideration to the aspects of technology (internet), economy, and other macro-environmental factors. The research findings in this regard are likely to assist in the attainment of the research objective with efficiency. 3.2 Research Design In order to answer the research questions, data will be collected from the secondary data sources, such as the official websites of Hong Kong airline service providers and the regulatory organisations. Moreover, newspapers, magazines, journals and articles will also be considered in the data collection process. The collected data will further be analysed through the implication of cause-comparative analysis. In the data analysis process, the discussion will emphasise on the identification of the pricing strategies and relate the data with the causes recognised from the literature review, e.g. social, political, and technological and other various business environmental factors. Later, the analysed data will be interpreted with the support of theoretical concepts with an intention to critically evaluate the research findings and obtain the key findings of the research. The key findings of the research will intend to provide a comprehensive answer to the research questions and thus attain the objective of the research. 4 Data Collection and Analysis 4.1 Data Collection In this paper, three major airline companies were investigated regarding their prices charged for the regular passengers from Hong Kong to London. The price charged by Cathay Pacific for the regular passengers from London to Hong Kong ranges around ?500 in the economy class to ?2,979 in the business class. The prices charged for regular passengers from Hong Kong to London ranges from HK$5,000 to HK$6,000 for economy class (Cathay Pacific Airways Limited, n.d.). Other than Cathay Pacific, Singapore Airlines charge around ?800 for regular passengers from London to Hong Kong, which is apparently below the prices charged by Jet Airways, Singapore Airlines, and Thai Airways. On an average, the prices charged on the travel ranges between ?800 to around ?950 for the economy classes. However, the prices charged from Hong Kong to London as charged by Emirates ranges from $1,949 and above (Expedia, Inc., 2011; STA Travel, 2011). Table 4.1 Price Ranges of Major Three and Other Airlines of Hong Kong Airlines Price Ranges Air Travel Destination Cathay Pacific ?500 - ?2,979 From London to Hong Kong HK$5,000 - HK$6,000 From Hong Kong to London Singapore Airlines ?800 - ?3,500 From London to Hong Kong Emirates HK$1949 – above From Hong Kong to London Average pricing of other airline service providers ?800 - ?2,000 Between Hong Kong and London From the above represented table it can be apparently observed that Cathay pacific charges the highest price to the travellers from Hong Kong to London while the price charged to the travellers from London to Hong Kong are quite competitive. Thus, it can be stated that Cathay Pacific as a market leader in the Hong Kong aviation industry has a significant influence on the pricing strategies of the industry. 4.2 Data Analysis and Interpretation During the study, most of the airline companies were observed to provide considerable attention towards online promotions. For instance, Emirates, Cathay Pacific, Singapore Airlines and many others offer special price discount offers to the online subscribers (Cathay Pacific Airways Limited, n.d.). This can also be identified as a major cause to influence the importance of travel agents in the airline industry of Hong Kong. From the list provided below it is quite apparent that most of the online promotions offered by the airline companies tend to render tourism services that in turn are likely to hamper the significant of travel agents in the industry. Table 4.2 Online Promotion by the Major Airlines of Hong Kong Emirates Discount on students’ air travel fares Special tour packages Cathay Pacific Flexible Travel Dates Discounted Tour packages Discount on international air travel through various saver packages Singapore Airlines Package tours at discounted rates Discounts and extra services to the members The three market leaders of the Hong Kong airline industry, i.e. Cathay Pacific, Emirates and Singapore airlines offer various promotional advantages to their target customers. As can be witnessed from the above represented chart, these airline companies commonly focuses on the tour package services to their customers in the current trend. This is mostly likely to hamper the role played by tour and travel agencies in the industry as a supplier. Therefore, competitive promotional strategies undertaken by the companies possess a significant influence the pricing of the airline industry and the sustainability of the travel agencies. Governmental policies also create an impact on the pricing strategies of the industry. As observed in the research findings, various airline companies in Hong Kong were recorded to have an ineffective pricing structure to promote low-cost carrier services in the local market during 2008. With this concern, the experts stated that the government should provide a certain amount of significance to the aspect in order to accelerate its growth. Thus, it affected the pricing strategies of the industry quite significantly (Central Policy Unit, 2010). The research findings also reveal the technological factors in terms of innovative strategies to render efficient customer service with the engagement of minimum cost, growing significance of e-marketing and others. It is worth mentioning in this context that the inclusion of internet has created a considerable impact on the pricing strategies of the industry. Presently, air tickets are available online which assists the customers to select a particular option from a wider range provided by the travel agents individually. It is also referred to be cost effective, as the process of buying air tickets online does not include commissions to the travel agents or any other intermediaries usually engaged in the face to face process. Moreover, the online buying process is observed to be time effective, following a well-structured and organised order for its completion. These attributes reveal that technology in the modern era has emerged to be more customer responsive than the travel agents. Therefore, it is quite likely that the importance of travel agents in the airline industry will decrease in the near future. With the role of travel agents played by the internet or online marketers of airline services, it is expected that the airline industry shall reduce the commission charges paid to the travel agents and thus affect its pricing strategies (IATA, 2005). Considering the facts revealed from the research findings it can be stated that the technological and the regulatory measures undertaken by the Hong Kong government as the most crucial factors determining the pricing strategies of the industry. It is due to the fact that technology has its implications in almost every sector of the industry and the governmental policies tend to regulate the entire function of the airline industry. However, the technological factors are termed to be controllable but the governmental policies are somewhat uncontrollable for the travel agents. It is in this context that the travel agents can determine their strategies with due consideration to the technological influences to a larger extent. 4.3 Critical Analysis of the Research Findings Kitching & Et. Al. (2009) stated that economic factors have a significant contribution to the pricing strategies adopted by companies. These economic factors were further recognised to be the market structure of the industry, governmental influence and various other macro-economic factors. In relation to the airline industry of Hong Kong the influence of market structure can be observed as the most crucial in determining the pricing strategies of the airline companies (Nadar & Vijayan, 2009). Notably, Cathay Pacific is termed to be the largest airline company in Hong Kong that dominates the price to a large extent. Moreover, the price discrimination has also been observed to be quite high in the industry which in turn also affects the pricing strategies. It is in this context that the rivalry within the industry players motivates them to adopt product differentiation strategies and provide heterogeneous products to the targeted customers (Law & Yeung, 2000). For instance, the promotional strategies adopted by the companies tend to influence the market structure by diversifying its operations to the tourism industry and thus hampering the role of travel agencies within the industry structure. Market dominance also plays a significant role in this context. In a nutshell, the market structure of the airline industry in Hong Kong plays the most significant role in influencing the pricing strategies of the industry players. The factors included in the market structure with regard to their influence on the pricing structure of the industry can be recognised as price discrimination, market dominance and dependence on macro-economic factors (Law & Yeung, 2000). However, in relation to the travel agencies’ role and scope in the airline industry, the promotional strategies in terms of product diversification creates the most significant and apparent impact on the existence of tour operators as suppliers to the industry. Technology also plays a crucial role in this context by providing beneficial assistance to the airline companies in offering online discounts and various promotional offers to their target customers. 5 Conclusion 5.1 Summary Of Research Findings The key findings obtained from the research revealed that the fluctuations arising in the supporting industries, such as energy industry, logistics industry and others creates an impact on the pricing strategies of the airline industry. For instance, the increase in the price of fuel shall in turn lead to the rise in the cost of air travel. Similarly, increase in the taxes charged to the outbound logistics of the industry also shall influence the pricing strategies of the airline industry to a large extent pressurising it to reduce the travelling cost for the benefit of the logistics industry. This shall in turn affect the prices charged to the regular passengers in the industry with the purpose of maintaining the overall profit of the industry. Concurrently, the airline industry in Hong Kong is controlled by regulatory bodies such as IATA, CAD and others. For example, if the policy measures imposed by these bodies define an increase in the tax rates or a reduction in the total number of airships used in the industry, it is quite likely that the pricing strategies of the industry shall be tailored which signifies the impact of policy measures on the pricing strategies of the industry. However, in the modern day context the impacts created by technological factors tend to be the strongest. The rapid growth of the distribution of air tickets through online distribution centres. Availability of online air tickets and effective consumer friendly services through internet certainly has an impact on the pricing strategies of the industry which in turn is most likely to affect the future prospect of travel industry. Therefore, it can be stated that travel agents should consider precautionary strategies, such as continuous monitoring of the business environment of the airline industry which shall assist the travel agency to predict the future price changes in the industry and thus plan the strategic alliance accordingly. This strategy can be imposed with considerable significance to the industry trends in order to minimise the risk of exclusion from the Hong Kong airline industry or a cut in the percentage of commission. 5.2 Recommendations It is worthy to be mentioned that the importance of travel agencies as a distribution channel is reducing in the airline industry due to the popularity of online booking. Hence, the travel agents should intend to increase their supply to the airline industry. This objective can be achieved by the travel agents with due consideration to the virtues of online marketing, rather than excluding the presence of internet in the marketing strategies (Kuuchi, 2011). To be precise, the travel agents should provide considerable significance to the customer services rendered by e-marketing. For instance, the wide range of options in terms of places, prices and other facets of the travel services shall be rendered by the online agents. They can also reduce their charges and focus on serving the valuable customers with various value added offers, such as discounts, extra facilities and others. This will not only assist in retaining the valuable customers, but shall also provide with a competitive advantage to the travel agents. In this regard, it is quite essential for the travel agents to analyse the marketing opportunities available in the region providing greater emphasis on the aspect of online customer service. Moreover, the pricing strategies determined by the airline industry also depends on other factors which include governmental interventions, regulatory measures, structural interdependency of the industry with other related industries and others. The travel agency in this regard should emphasise on the fluctuations occurring in the industry’s business environment as an ongoing process. This shall assist the agency to monitor the pricing trends of the industry and adopt strategic alliances accordingly. 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