Airline Pricing Strategies - Research Paper Example

 Airline Pricing Strategies CONTENTS 1. Introduction………………………………………………………………………. 2. Literature review…………………………………………………………………. 3. Aim of the research……………………………………………………………….. 4. Research methodology……………………………………………………………. 5. Findings……………………………………………………………………………. 6. Discussion………………………………………………………………………….. 7. Conclusion…………………………………………………………………………. 8. References………………………………………………………………………….. ABSTRACT Heavy competition, procurement issues, and even consumer buying power are present in the airline industry. Buyers are considered to be price-sensitive and flexible, relying on advertising knowledge to gain a better brand image with their customers. It is an unpredictable environment with risks related to investment opportunities and ease of market entry for smaller companies offering lower fares. Revenue management systems represent a more rigid, data reliant system of streamlining operations and finance to maximize productivity. Evidence uncovered through research provides that revenue management systems are not sufficient strategies when determining pricing policies in the airline industry. Airline pricing strategies 1. Introduction The airline industry faces an unpredictable and often uncertain environment that is driven by trends in consumer behaviour, internal demands placed on specific organizations, and a competitive environment that often dictates forward momentum. Revenue management systems, on average, function as a tool with which to remove certain business activities that are calculated to be inefficient or budget-restrictive. In this system, “comparative trials of complex pricing policies are employed according to an application schedule that has a periodic character with respect to the arrival date of quoting circumstances” (patents.com, 2008, p.1). In many businesses, these systems become automated in order to link inventory with actual usage time that can be calculated on a variety of electronic systems. Marriott Hotels took advantage of combining two different revenue management systems to link customer needs with internal operational components to ensure that productivity measured with demand (Thibodeau, 2005). Airline companies must develop methods to measure productivity with inventory strategy, labour, and other industry-specific activities. All of these are related to the financial goals or current economic position of the specific airway carrier. Whilst being driven to satisfy customers with different demands placed on marketing efforts, airline companies also manage expenditures balanced with the organization considered much like a system. The research identifies information associated with revenue production, advertising as part of marketing, internal functions and organizational constraints with the design of the airline carrier, and general business activities in the airline industry. The research question is whether revenue management systems are a secure enough strategy to ensure that airlines are able to price successfully or whether other strategies are warranted. 2. Literature review An examination of the relevant literature associated with the current airline industry at the operational level, organizational level, and executive/general business function. Membership and loyalty A leading airline carrier, Qantas, has managed to create high customer loyalty through its membership programmes that provide award seat benefits. The loyalty programme is sophisticated and receives the added revenues associated with five million members (Smitton, 2008). Of this membership, it is typically a more affluent customers who earns between 70 and 140k per year, with a relatively equal split for gender demographics (Smitton). This would indicate increased revenues that come from higher-priced tickets and the ability to ensure rapid payment for instant membership perks. Qantas’ enticements for their loyalty programme is priority check-in, airline lounge usage, e-ticketing, and even the transferability perks of moving the reward points throughout the family unit (Whyte, 2003). Advertisers must identify a method to promote revenue-building systems such as the loyalty programme to make sure the benefits are in-line with customer demand and also worth the labour burden placed on internal staff members. There is evidence of high reliance on marketing efforts associated that would be measureable more with human intuition than electronic data systems designed to function as revenue management systems. Internal demands The carrier Qantas also has internal issues that would be dependent on significant budget allowance related to training purposes. The company developed an online programme that was interactive, with the assistance of outsourcing information technology specialists, to facilitate training exercises for flight attendants (Industrial and Commercial Training, 2006). Flight attendants make up only a small margin of the entire workforce at Qantas, including bag handlers, ticket agents, and operational systems support. Therefore the training needs on Qantas require specialized training programmes that would require maintenance, upgrades, and other system-related costs at the information technology support level. It is then very closely related to budget and revenues to ensure compliance to regulations and gain customer support-related knowledge. The customer view Tourism brochures produced by one large airline company illustrates people in their more social environment, such as sitting indoors at street restaurants or among the background in their travel-related hotel rooms (Edelheim, 2007). This type of literature is common in different travel agencies or associated ticket-generating partners. This would mean that the group of more affluent customers that make up the highest revenue units prefer imagery that is associated with social function as a product of their travel motivations. How the company uses marketing literature to illustrate themselves to customers makes up the image the firm desires to create. Barnard (2009) promotes the situation with Air France where it was forced to make cost-cutting efforts noticeable in labour. The firm announced 1,500 job cuts, and a desire to remove 57,000 people through voluntary layoffs or buy-out packages. Situations like this are negative publicity that is in the eye of their currently loyal consumer target groups in a variety of televised, printed or online media. Price increases, as a result of revenue management systems, might be perceived by the consumer audience that there is a linkage between price and cost-cutting due to timing with different negative media releases. These are not situations that a typical revenue management system, by its definition, would be able to predict or compensate for, however it would involve many components such as labour and advertising budget linked with revenues. Finance and human talent Emirates has a considerable advantage over other airline companies with its sourcing capabilities related to fuel procurement. However, other costs associated with loans to purchase aircraft give the airline carriers new lease obligations (thetravelinsider.info, 2009). Even though these are predictable fixed costs to the company, at the same time Emirates was spending millions of dollars developing its customer-related lounging and upgrading aircraft (Kerr, 2009). Being able to handle multiple projects such as face-lifts for customer service systems, in a factor of millions of dollars, shows the dedication that some airline companies devote to their customers. Blending fixed costs associated with long-term strategy of expansion with customer demands requires budget allocation, labour and payroll, and operations function. None of these business units would be able to separate themselves from typical revenue management systems. However, the frequency at which such upgrades must occur due to knowledge gained from customer surveys or other research tools would be an important component into whether pricing would be effective to offset ongoing business face-lifts. At the same time, revenue demands from executives or simply through customer consent are driving changes for better fleet capability and services. In a typical revenue management system, by definition, it is the removal of unproductive activities in the organizational unit leading to further comparative pricing trials. There is literature available regarding the real-life, internal pressures that are linked with human resources. The Flight Safety Foundation offered that fatigue is “ubiquitous and unavoidable” in aviation. “No profession is immune; pilots, flight attendants, mechanics and controllers all suffer from it” (Fiorino, 2009, p.42). The situation in the airline industry must be substantial in order to devote entire organizational support to issues of fatigue and apply science to understanding it. All of the professions mentioned are linked to revenue support systems, however apparent concerns with fatigue will dramatically change the scope and dimension of relationships between peers or the management team that are short-term. Pricing policies developed in certain environments that have stable and predictable internal and external systems might be more suited to revenue management systems. There is ongoing negative publicity occurring in this industry and internal issues with fatigue and it reaches higher levels of government as well as the consumers in a variety of markets. Changes in employee attitude associated with fatigue or other human resources issues will impact strategy based on long-term customer sentiment, internal unit efficiency, or anything else affected by negative publicity or human error. In a competitive environment, where these airline companies typically operate, consumer sentiment clearly drives pricing sensitivity. Internal, routine business practice Airlines engage in market activities such as hedging through alternative investment strategies. Hedge positions vary by airline but can include call options, fixed price swap agreements, and the futures market related to commodities (Birkner, 2008). Pricing policies have historically been built around the demands that fuel and oil consumption put on the industry, with these pricing policies increasing to off-set externalities. “The more airlines are hedged, the more protected they are from price spikes” (Birkner, 2008, p.69). This shows the unpredictability that is surrounded by externalities related to executive job function and alternative investment strategies. Rigid and calculating revenue management systems that rely too dependently on data would seem to be irrelevant in this type of environment where hedging is common that is reliant on executive-level human thinking and strategy. Unpredictable Lost productivity has been measured at six billion USD annually associated with weather-related phenomenon and delays (Boland, Morrison & O’Neill, 2002). “The problem for carriers is that even the most sophisticated computer models can’t predict whether a snowstorm will cripple traffic in Chicago three months from now” (Boland, et al, 2002, p.3). As part of corporate strategy, some airline companies are hedging against major weather scenarios. Weather situations lead to considerable losses as pointed out by the data, and it is likely these are not scattered throughout all of the airline companies proportionately. (Data did not find market percentages on weather-related airline losses). The revenue management system, again, is over-burdened with unpredictable or ever-changing conditions that make predictable pricing policies difficult to accept as the most quality strategy. Fraud and other externalities Davis (2009) illustrates that the airline industry loses 1.4 billion USD each year related to online fraud. This is important in an industry where one-third of revenues are dependent on electronic systems. Larger airline companies must use fraud screening technologies to identify checks that are automated, validation systems, device checking and manual checking (Davis). Fraud is not a predictable component within an operational system and the losses are considerable as pointed out by the industry financial statistics. Pricing is going to be adjusted based on corporate-level demands related to revenue creation versus generic financial obligations (liabilities). Unless the company streamlines its ability to predict fraud or set a stable budget to its function within the business, revenue management systems need alternate strategies that involve executive-level know-how. There is significant executive involvement in the airline industry and it is noticeable with how the company conducts its consumer travel services compared to competition. The hub concept streamlines capacity issues and assists in scheduling, along with other operational dimensions leading toward business improvement. When an airline develops hub operations, there are substantial transaction costs related to ground handling, flight scheduling, capacity planning and crew rostering (Knorr & Zigova, 2005). These systems are often reliant on the efficiency and motivational capacity of employees in the specific hub environment in order to ensure they are carried out effectively. In many ways, a partnership between airport and air carrier. A high-performing region of the company may not function well at one hub whilst another has a better organizational culture with a more motivational attitude. Compounded with budget requirements and the over-burdening of operations, pricing adjustments might need to be coordinated with geographic issues in order to prevent collapse of the unit. Trial and error pricing for individual units would be a more applicable strategy, based on transaction costs of hub operations, due to its inter-linkage with unpredictable human dimensions. Threat of new entrants EasyJet, a low-cost carrier, services over 100 routes to many European destinations and has grown considerably (Datta & Subham, 2006). Ryanair has also emerged to seize market share from other more established airline companies. There are low-cost carriers entering the market, therefore under Porter’s Five Forces Model, there are considerable concerns with the ease of market entry by smaller competitors. Competition, especially when operational costs are high and smaller, less established businesses can use competitive pricing that impacts pricing strategy by region depending on the size of the airline carrier. Low cost-carriers use what is known as dynamic pricing, that avoids the loyalty schemes, overbooking strategies, and discounting systems commonly found with larger carriers (Malighetti, Paleari & Renato, 2009). This allows consumers to get deeply-discounted tickets. Dynamic pricing represents another unpredictable measure, this time at the competitive level. At a whim, as a promotional strategy to an under-performing region of their service capacity, a competitor can change their pricing strategy as an incentive. In this type of scenario, a revenue management system could not systematically identify short-term pricing strategies when competitor movements and ease of market entry represents an ongoing business threat. 3. Aim of the research The aim is to establish whether revenue management systems are sufficient for pricing strategy in the airline industry. There is a focus on business operations as a determining factor as revenue creation is built on more than a product, it is built on reputation, media coverage, human resources issues, and competitive environments. 4. Research methodology The research required knowledge of what drives the current business environment in the airline industry. It asked: what are the real-life scenarios that carriers will experience on an annual or even monthly basis? This research study required a secondary research approach that consulted with reliable business publications and financial resources. The human component and its interaction with executive level decision-making needed to be included in the research as these are functions that drive routine business operations in this industry. Due to limitations of sample access for primary research, industry-specific sources were procured and compared to literature regarding customer relationship management; a qualitative report. A primary study had been considered that made use of surveys in order to gain pricing sensitivity knowledge from consumer groups or their generic attitudes toward airline companies. Since it was identified that consumers are quite relevant in pricing strategies for the airline industry and its competitive environment, it was first determined such data could be harnessed to encompass finance, marketing, and overall sentiment on the industry. However, because the factors of revenue management and revenue management systems involve multiple areas of operations, it was determined that such studies would be more quantitative with a large-sample study design and multiple research tools. A logical point of comparison for the secondary study was to glean knowledge from the field of economics to understand how the micro and macro environmental factors impacted the decision-making at airline companies. Concepts of price sensitivity, demand ratios, and statistical understandings of economics were compared as a trend template ranging between 1992 and 2008 in order to observe any noticeable trends such as new market entrants, sudden stock price losses, or anything internal or external that might drive changes to pricing structures. 5. Findings Loyalty programmes are designed to secure consumer loyalty and are also upgraded and developed around their changing needs. In order to satisfy customer needs, complex systems are required for training that encompasses a generally-large workforce in this industry. The time and labour resources devoted to satisfying customer demands, along with financing liabilities for many of these activities, are driven by competitor growth and success in gaining market share through advertising or no-frills pricing offerings. Further, human resources issues related to worker fatigue that impacts multiple operational groups has gained the attention of management and the external regulatory and judicial environments. At the same time, this information is being publicly displayed through various media channels that can serve to erode the effectiveness of customer reward programmes or by changing attitudes of their key target market groups. In the airline industry, there is a value connection that is driven by customers, whilst executive level finance decision-making requires complicated strategies in hedging and other investments with a reliance on return on investment for these activities. There is a complicated system in the airline industry that is not driven solely by capacity and scope of the company’s operations. Revenue management systems are predictive by nature and this is something that is required of the airline industry when it is facing such a wide variety of different unpredictable scenarios. At first glance, revenue management systems would seem built ideally for airline carriers simply because of its definition of predicting system changes. However, the majority of decision-making requires human interface and interaction in order to gain any measurable market share, the activities of competing firms are taken into consideration for their pricing models to work effectively. Hub operations simplify efficiency, but lead to rising costs in labour expenditures and coordination that must have a well-developed management and/or leadership system. At the same time, these are fatigued systems that impact on-board staff and will likely change attitudes of interactions between flight attendants and the passenger manifest. The level of service provided by current onboard staff is subject to word-of-mouth examination, post-purchase evaluation, and a variety of consumer sentiment. The image of the organization is clearly important with the high budget allocated to physical face-lift improvements, devoting to loyalty schemes, and the method by which it advertisers to its target groups. The research did not uncover any significant benefit of reliance simply on a revenue management system in the airline industry, since the customer drives demand. Under Porter’s Five Forces, consumer buying power is a consideration in order to formulate any long-term strategic plan or objective. Here the consumer is the master over ticket pricing, as they have a substitute by which to defect if their perception or satisfaction is not superior. A movement to a low-cost carrier is a constant risk in the event of poor customer service, which would be supported by the high volume of resources put into the customer relationship management system and electronic training for multiple business divisions. Revenue management systems, alone, cannot predict the entire business strategy especially when strong investment attitudes are present in this industry. Decision-making regarding hedging, what percentages by which to hedge against, and the type of hedging most appropriate for the business/economic environments is common. Underperforming units might not be detrimental to the company’s revenue stream if these investments are stable and provide a considerable return on investment. An airline company with poor investment leadership might have more reliance on pricing for the under-performing unit if it jeopardizes the entire company’s profit margin. The high volume of risks to airline companies would seem to negate a singular strategy of the revenue management system. 6. Discussion When overburdened payroll obligations lead to considerable layoffs, most industries are not scrutinized by the media in the same fashion as the airline industry. Popular media, or simple financial press releases as well, portrays the airline companies and places these businesses into the eye of the consumer audiences. It becomes common knowledge to understand orders placed for new airplanes, oil pricing related to this industry, and upcoming mergers or acquisitions. Because their management is so heavily involved in market-related activities associated with investment and hedging, their portfolios are under constant view. Whether a publicly traded company or a private company (as with the low-cost carriers), business activity at the internal level is publicized in higher concentrations than other industries. This puts buying power into the hands of investors and consumers that impact pricing decisions. Revenue management systems rely heavily on data in order to make predictive policies. The airline industry relies heavily on customer sentiment, behaviour and attitude in their providing region. The complex system of publicity, both negative and public, make it difficult to establish pricing policies without alternative or contingency pricing measures. There is heavy reliance on loyalty programmes for revenue creation. These are one-time payments that ensure rapid resource availability in exchange for the provision of superior services over that of non-members. There is a multi-dimensional approach to marketing that is being undertaken here in this particular industry that must make advertising distinct for their largest buyer groups or be adjusted to gain new market interest. Where defection is a genuine reality for air carriers, due to high competition that is devoted to issues of pricing, risk is always present that would suggest a more flexible pricing model that can adapt to changing conditions or regional market trends. The literature review identified this industry as rather docile people with their photos taken indoors in a variety of passive restaurant and hotel room scenarios. This is the image that the industry wants to present to itself and its largest client base or it would not be commonly found on the marketing literature with various travel agency partners or from within its own business ranks. Hotwire.com, a leader in airline ticket production and reservation packages for the hospitality industry, recognizes consumers in this industry as being “flexible, price sensitive travellers with suppliers to be more discreet and not affect the public perception of their brand” (Fiorino, 2009, p.42). The image of their brand is associated with the literature produced for advertising, and this again shows that there is a reliance on e-commerce revenues in this industry with partners representing ticket sales and authorizing them. There are many variables associated with how tickets are marketed, who is authorized to distribute them, and how these systems are inter-linked without causing problems with planning or on board plane efficiency at the organizational level. Add to this the price sensitive consumer that can defect for lower prices, a traditional revenue management system without reliance on marketing intuition just simply would not seem to be a quality method for pricing. There would likely be a sophisticated technology system that could be incorporated into revenue management systems in this industry that made predictive suggestions such as weather delay expectations or cyber threat models. However, these represent significant cost without an exacting science to determine how best to offset the costs of installation against the operational budget. With the level of risk associated with weather changes on this particular industry that can be put to a stand-still, revenue management systems as pricing systems cannot predict for regional losses or under-performing units due to these problems. These decisions need to have a promotional element, dictate service perceptions to customers, and also be responsive to competition that may or may not have been impacted by a similar weather scenario. The airline industry is characterized by close connections and a need for human talent in order to provide excellence in service. In literature about previous mergers, the concept of family was often displayed that showed a strategic target of improving organizational relationships. This was supported by the literature in this study regarding fatigue management, need for customer service training for flight attendants, and how to provide better client satisfaction. Revenue management systems would operate more efficiently in a manufacturing environment where production runs are highly predictable, inventory levels have firm capacity issues, and the software is present to help in executive pricing planning. There is less risk in this environment that is not necessarily dependent on customer attitudes, especially if there are limited suppliers (product manufacturer competition). In the airline industry, risks are present in a variety of areas that are more closely associated with management or leadership talent, however are strongly related to what type of price will be accepted by price-sensitive buyers in local and foreign markets. There is not as much concern over inventories in the airline industry as there is within a typical manufacturing environment. Manpower and talent are the primary needs to provide service efficiently and accurately. Revenue management systems tend to incorporate inventory-related factors and cost of manufacture when it is attempted to simplify the pricing planning process. However, over-simplification in this industry would likely lead to loss of competitive edge, thus contingency needs should be considered when determining what price will be most cost effective and return the highest advantage. 7. Conclusion Revenue management systems are not suitable as a single strategy for airlines when deciding their pricing policies. Control is given to suppliers, customers and even the investment public that steers sentiment toward what is considered an acceptable price. The high involvement and presence of competition in this industry is not fixed and changes with new advertising and promotions that can rapidly seize market share even from well-respected carriers. Contingent pricing is more effective than reliance on revenue management systems. 8. References Barnard, B. (2009). Air France to cut jobs, capacity, Journal of Commerce. September 8, 2009. Birkner, C. (2008). Hedges in flight, Futures, 37,10: 68-70. Boland, C., Morrison, D. & O’Neill, S. (2002). The future of CRM in the airline industry: A new paradigm for customer management. [online]. http://www-05.ibm.com/innovation/fi/pdf/highlights/integration/crm_airline.pdf (accessed October 1, 2010). Davis, C. (2009). Airlines lose $1.4 billion in online fraud, survey finds, Airfinance Journal, Coggeshall. March 2009. Edelheim, J. (2007). Hidden messages: A polysemic reading of tourist brochures, Journal of Vacation Marketing, 13, 1: 11. Fiorino, F. (2009). Fatigue, Aviation Week & Space Technology, 171, 11: 42. Industrial and Commercial Training. (2006). Qantas flight attendants meet compliance requirements, 38, 1. Kerr, S. (2009). Emirates airline profits plunge, FT.com, London. 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Thetravelinsider.info. (2009). Does Emirate enjoy an unfair advantage?. [online] http://www.thetravelinsider.info/airlinemismanagement/emirates.htm (accessed September 30, 2010). Thibodeau, P. (2005). Marriott links two data streams with revenue management system. [online] http://www.computerworld.com/action/article.do?command=viewArticleTOC&specialReportId=801&articleId=99963 (accessed October 2, 2010). Whyte, R. (2003). Loyalty marketing and frequent flyer programmes: Attitudes and attributes of corporate travellers, Journal of Vacation Marketing, 19,1: 18. Read More