Airline Industry - Case Study Example

and Section # of Marketing Industry Analysis – Airline Industry This assignment is based on Airline Industry Analysis in which three different airlines having distinct positioning will be analyzed. The assignment has two sections; the first section is about the positioning of the airline services, the differentiation of each airline and the offerings to their customers. The second part of the assignment is about the analysis of pricing strategy of each brand. Positioning Statements The positioning of Southwest Airlines in the airline industry is at the lower end of the market to cater for the customers looking for low cost. Those customers have a need for low cost and want to save money on travelling. Their positioning statement is to “provide the customer service of highest quality delivered with a sense of friendliness, warmth and company pride” (Southwest Airlines, 2009). Therefore the company has been able to position itself to the requirement of the particular market niche which wants to forgo the in-flight services and entertainment for a low price. The positioning statement of American Airline, which is a business class airline, is that “Something special in the Air” (Tuesday Productions, 2009). They target on the business customers that is why the focus of their positioning is on the specialty of the airline. For differentiating their service from other competitors, the airline has positioned itself only for the needs of business clients. The Korean Airlines are positioned for the needs of the higher end of the airline market. The customers who are targeted do not care for the heavy price of tickets. They want the quality of the service to be superb and exceptional for the premium price they are paying. They have the positioning statement “to exceed our customer’s expectations by delivering a full range of services” (Korean Airlines, 2009). They stay ahead of their competitors through innovating in new and better services with premium prices. Benefits Offered to the Customers Southwest Airlines offers lower prices to their flyers. They are able to offer lower prices by cutting on the expenses of luxury items and by offering in-flight entertainment and snacks on a price. The customers are able to save a lot on price of the flight. Special offers are made to the customer on a regular basis which helps them get special prices of flights combined with discounts on hotel booking. Through frequent flyer program, they customers are able to get rewards and the program is named as “Rapid Rewards.” American Airline provides routes to around 300 destinations worldwide (AMCHAM, 2009) to cater for every need of their corporate customers. The company also provides expanded and coordinated networks of routes through partnering with other major airlines (AMCHAM, 2009). The corporate customers are able to find flights for almost every destination in the world having corporate backgrounds. The customers get discounted hotel and car rental prices if they make a reservation online for the ticket. The customers are also able to take part in the AAdvantage Program in which they are able to get rewards and redeem their miles according to the American Airline website. Korean Airline flies from more cities of Asia to more cities in America than any other airline, according to the Korean Air website. The company uses only state of the art aircrafts (Korean Air, 2009) for the exciting customer experience and total in-flight entertainment. The customers get special treatment and benefits in Seoul if they have any connecting flight from Seoul (Korean Air, 2009). The airline has introduced two new classes for the premium customers, First Class with Kosmo Suites and Prestige Class with Prestige Sleeper Seat. Support to the Value Proposition The customers for the Southwest Airlines pay a small amount for their flight and therefore do not expect to get in-flight entertainment and free services like the regular airlines. Therefore reward programs and in-flight snack purchase service is of quite a value for the customers who do not expect such services in a low-cost carrier. American Airline customers pay a higher amount for travelling to other destinations therefore they expect a good service on board. Every corporate traveler needs an accommodation in the destination city; therefore the provision of discounted hotel reservation with the ticket reservation online is of great value to the corporate customers. Korean Air which is a luxury airline provides its First Class and Prestige Class customers with unique and relaxing sleeper seat and a Kosomo Suite in which the traveler gets comfort and total privacy. This is of great value to the customers who are paying a high premium on purchasing their ticket but does not completely satisfy some of the customers who think that the ticket is too expensive for the services offered. Point-of-Parity (POPs) The point-of-parity for Southwest Airline is the timely flights and comfort during the flight. Although Southwest Airline is a low-cost carrier, but an absence of customer service can certainly be a reason for the customer to choose some other airline for travelling. Another point-of-parity is the reward program which many frequent flyers look at, so that they can get free rewards and discounts. The American Airlines is basically an airline for the corporate customers who want to fly to other destinations of the world for their business needs. Point-of-parity for American Airlines is a good service on board and a comfortable flight ensured by the crew. Another POP is the availability of communication devices in-flight so that the corporate customers can keep in touch with their corporations whenever they want. This is an important POP because business customers today can select another airline which is providing better communication services to its flyers. The POP for Korean Airline is the basic comfort that the customers are expecting for the premium they pay. Outstanding customer service, free drinks on board and complimentary meals are the POPs. If these basic POPs are not available in Korean Air, the customers are more likely to choose another brand and drop Korean Air. Target Markets The target market for the Southwest Airlines is that segment of the market who wants to reach their destination on time with the minimum cost possible. This market segment is not luxury seeking and agrees to forgo complimentary meal on board, free drinks and in-flight entertainment. These flyers just want to reach their destination without any enjoyment or leisure on their flight (Abenes, 20). The primary target market for American Airlines is the corporate flyers who are seeking to fly for their business needs. This market segment wants savings in accommodation and car rental at their destination. Therefore American Airline provides hotel accommodation and other services at discount when flyers book their tickets with the company. High-spending people who are young and single are the target market for Korean Air who want true luxury filled flying experience. The Kosomo Suite is specially developed for single travelers who want privacy and comfort in their flight. Therefore the target market is the high end of the market that is willing to pay a high premium for exceptional luxury and entertainment in-flight. Point-of-Difference (POD) The POD for Southwest Airline is the low-fare it provides to its customers with frequent flights throughout the major destinations of the world. The coverage of routes, free peanuts on board, no assigned seats and no transfer of luggage (Abenes, 12) to other carriers have been identified as the points-of-difference which make the airline standout in the low-cost carriers industry. The American Airline provides more coverage than any of the other competitors through partnering with other carriers. They airline was also the first one to introduce AAdvatage Reward scheme in the 1980’s. The POD for the Korean Airline is that it provides relatively newer jets and aircrafts to its flyers in comparison to the other airlines in the industry. All the aircrafts are no more than eight years old. It provides personal suite which ensures privacy to the Prestige Class customers. Pricing Strategies The Southwest Airline focuses on low prices for flying and it entered the market with fares that were almost half the fares offered by other airlines (Abenes, 15). The airline’s pricing strategy is to charge the lowest air fare possible through cutting on the administration and on board entertainment costs. When the demand for certain route is higher in some season, instead of increasing the prices of the seats, the airline increases the number of flights (Abenes, 16). This way the company is able to get more sales and promise the lowest costs. The American Airline uses “Value Pricing” to price the seat tickets and uses dynamic pricing strategy (AcumenEnterprise, 2007). This strategy helps the airline make more profits as the airline charges different prices for different seats and different customers for the same flight. The higher the company thinks is the value for the customer to the flight, higher the price is charged to that customer. Therefore rather than charging a single price to all the customers, different prices are charged. Korean Airline is using Amadeus Fares and Pricing Engine solution to price the tickets for their customers as mentioned on the official Amadeus Benelux website. The prices are updated each second and flexible prices are provided to the customers. The airline charges a high premium from its customers in order to provide the innovative services in-flight and provide luxury. Break-Even Point The variable cost is the cost that increases as the sales increases. The variable cost of each company includes the fuel cost, selling expenses, administration expenses, maintenance, runway rent and the operating costs. The fixed cost consists of the property, offices, equipment, aircrafts and the fixed contracts for the maintenance of aircrafts. The break-even analyses for the three companies show that Korean Airlines needs a less number of passengers. This is relative to the number of passengers that the other two require in order to neither make a profit nor a loss. Southwest Airline: (SEC Filing, 2009) Average Passenger Fare = US$ 112.76 (Sales Price) Variable Cost per passenger = US$ 10.67 Fixed Cost= US$ 10,698 million Break-even Point = Fixed Cost / (Avg. Passenger Fare – Variable Cost per Passenger) = 104 million passengers American Airline: Average Passenger Fare = US$ 196.55 (Sales Price) Variable Cost per passenger = US$ 63.4 Fixed Cost= US$ 15,455 million Break-even Point = Fixed Cost / (Avg. Passenger Fare – Variable Cost per Passenger) = 4985 million passengers Korean Air: Average Passenger Fare = US$ 505 (Sales Price) Variable Cost per passenger = US$ 150 Fixed Cost= US$ 24 million Break-even Point = Fixed Cost / (Avg. Passenger Fare – Variable Cost per Passenger) = 67,605 passengers Types of Channels Southwest Airlines is currently using direct sales channel and reservation agents to distribute the tickets to the customers. The direct sales channels include physical Southwest offices and e-commerce website to make online reservation. American Airline provides ticketing through mobile devices, online channels and B2B corporate sales force to sell the tickets. It provides its customers SMS and Email alerts to deepen its engagements. Korean Airline allows the customers to purchase tickets from service centers, Airports and City Offices. It also uses the Abacus channel and customers make 30% of the reservations through it. IT also allows the customers to make reservations through the website of the Korean Air. Price Elasticity The Southwest Airline is relatively price elastic because any changes in prices of the tickets will cause a great change in the demand of the tickets. Therefore the demand is more sensitive to the price. Southwest has many competitors and a very low price which is the main factor contributing to its price elasticity. The demand could be destroyed in the price is too much escalated. The American Airline has a lower price elasticity of demand because mostly it has business flyers. Minor price changes will not be the factor in changing the demand of the tickets at a large scale. The demand for America Airline is less price elastic because if the price is changed at a small scale, the demand will not change so much. When the price change is very high, then the demand for America Airlines is likely to fall. The Korean Airline has relatively price inelastic demand because the customers that are targeted are the ones who can pay higher prices for more leisure and entertainment. The demand for this brand is more inelastic as the demand if less sensitive to price. Whenever price is changed, the demand is not likely to change because the This is basically a luxury product which also is a factor for the price inelasticity of the demand. I got the Pricing Strategies of the three airlines from different sources. The pricing strategy for Southwest Airlines was mentioned in a research document published by Cal Poly Pomona University. The American Airline pricing strategy was identified in a website www.acumenenterprise.com. The information about the pricing strategy of the luxury Korean Airline was taken from its technology service provider’s official website of Amadeus Benelux. Works Cited Southwest Airlines. “Customer Service Commitment.” Southwest Airlines. December 8, 2009. http://www.southwest.com/about_swa/customer_service_commitment/csc.pdf Tuesday Productions. “Two kinds of positioning statements.” Tuesdaypro.com. December 8. 2009. http://www.tuesdaypro.com/html/res_articles_2kindsPosition.htm Korean Airlines. “Mission Statement.” Korean Air. December 8, 2009. http://cargo.koreanair.com/eng/InterNet/aboutus/aboutus_company02.jsp AMCHAM. “The Global Airline Industry: Threats and Opportunities in the 21st Century.” ANCHAM News. December 8, 2009. http://www.amcham-shanghai.org/AmChamPortal/MCMS/Presentation/Template/Content.aspx?Type=32&Guid={FB6A83B3-79B7-452A-B24E-73BB98658EBB} American Airlines. “AAdvantage Opportunities.” December 8, 2009. http://www.aa.com/AAdvantage/aadvantageHomeAccess.do?anchorLocation=DirectURL&title=aadvantage Korean Air. “Member Login.” December 8, 2009. http://www.koreanair.com/ Abenes, B. “Southwest Airlines; A symbol of freedom.” Cal Poly Pomona University. December 9, 2009. http://74.125.153.132/search?q=cache:Bg9_otor98oJ:www.csupomona.edu/~lbabenes/MBA/SouthwestMarketingStrategies.doc+"target+market"+southwest+airline&cd=2&hl=en&ct=clnk&gl=pk AcumenEnterprise. (2007). “American Airlines’ Value Pricing Business Background/Mission.” December 9, 2009. http://www.acumenenterprise.com/Tourism__Transport___Travel/American_Airlines__Value_Pricing_Busines_L758209.html Amadeus Benelux. (2007). “Alitalia to adopt Amadeus fares and pricing technology in all their direct sales channels.” December 9, 2009. http://www.amadeus.com/benelux/x70224.html Read More