Marketing in Hospitality Industry: Airline Industry - Assignment Example

Marketing in Hospitality Industry: Airline Industry Table of Contents Task 3 Marketing Concept: Service Industry Perspectives 4 Marketing Environment 5 Relevance of Consumer Markets 9 Market Segmentation in Airline Industry 10 Task 2 12 4Ps of Marketing 12 Pricing Strategies 14 Works Cited 15 Name of the Student: Name of the Professor: Name of the Course: Date: Task 1 Service industry is being characterized with several unique factors such as, intangibility (customers can only experience service delivery but cannot physically touch it), perishability (with time interval and intervention of physical lethargy of service deliverer, perishability of the service gets increased), inseparability (service is being produced and consumed simultaneously and due to close attachment between service and service providers, consumers find it difficult to separate them), heterogeneity (customers rate services in accordance to their perception regarding the service provider, therefore, quality of service cannot be standardized) and ownership (customers can only access to services rather than own the service) (Fernando, Saad and Haron 32). Such unique characteristics of service sectors force marketers to design marketing mixes in such a manner so that it can deliver desired value proposition to customers. Due to its own virtue; the travel, hospitality and leisure (THL) sector is being categorized as broad field which consist of sub sectors like restaurants, theme parks, airline industry, cruise line and others (Weissenberg, “2014 Outlook on Travel, Hospitality and Leisure”). In order to address the research problem in precise manner, the study has selected airline industry as sample sector for discussion. As airline industry is being considered as sub part of hospitality, travel and tourism industry, therefore, discussion on marketing environment of airline industry will also help the study to shed light on marketing dynamics of hospitality, travel and tourism industry (Weissenberg, “2014 Outlook on Travel, Hospitality and Leisure”). Marketing Concept: Service Industry Perspectives Fernando, Saad and Haron (31) defined marketing as, “an activity, set of institutions, and processes of creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.” It is evident from such definition that marketing is an activity or process through which marketers can deliver value to stakeholders. In product marketing concept, McCarthy’s (40-67) version of marketing mix (4Ps or product, price, place and promotion) is being used by marketers to shape the marketing strategies. On contrary, in case of service marketing, additional 3 P’s are introduced such as, People (trained staff who are able to deliver responsive services to customers), Process (systematic approaches and mechanism that ensure efficiency in service delivery) and Physical Evidence (aesthetics and physical condition of place, from where the service is being developed) (Vargo and Lusch 1-17). For Airline industry, all 7Ps are being adjusted in order to shape the value proposition to customers. Product: benefits being offered to customer through the airline services can be considered as product mixes. There can be two types of airline services such as, 1- on-the ground services and 2- in-flight services. On the ground services include passenger enquiry handling, serving foods and guiding passengers to airport lounge (Fernando, Saad and Haron 32-34). In case of in-flight services; Airlines offer cabin services, catering services and ramp services to customers. Price: based on the brand positioning and cost of service offering, different pricing strategies are being used by different airlines such as premium pricing, low cost pricing, APEX (advance purchase excursion) fares and others. Place: various distribution channels are used by airlines to provide access to customers to avail airline services such as, online 24 hours reservation system, travelling agents, tour operators, affiliated companies and co branding institutes (Shaw 47-71). Promotion: TV commercials, newspaper advertisements, co-branding with financial institutes, social media advertisements, word of mouth promotion, sales promotion, public relationship activities, partnership with travel agents to promote the patron company, frontline staff patronage and other promotional techniques are being used by airline companies to promote the service offerings to target segment. People: airhostesses, cabin crew, pilots are being trained to show caring attitude to need of passengers and take responsibility for ensuring comfort to travelling passengers. Process: in order to deliver responsive as well as efficient services to passengers, various process elements are used such as reservation of in-flight seats for customers, arranging facilities in airport, flight information processing, organizing meal services, scheduling flight logs, baggage handlings and arranging flight entertainments (Shaw 47-71). Physical evidences: in case of on the ground flight services, respective airlines can use sponsored ticket counters, tickets, brand logos and paper works to communicate the positioning of the company to customers. In case of in flight services; respective airlines can use physical evidences such as designed airlines, good inner exteriors, seating configuration, uniforms of staff, created ambience and baggage handlings. By using such physical evidences, airline companies can overcome the intangibility barrier service delivery process (Fernando, Saad and Haron 31-34). Marketing Environment Chang, Hsu, Williams and Pan (898-908) pointed out that marketing environment of airline industry has two segments such as macro environment and micro environment. For macro environment, country specific factors (political, economical, social, technological, environmental and legal) are being considered while for micro environment, equilibrium of industry forces is being considered (Scholes and Johnson 112-151). In this study, PESTLE analysis will be used for macro environment analysis and Porter 5 force analysis will be used micro environmental analysis. While doing research on marketing environment of airline industry, Zhang and Xie (442-447) and Chang, Hsu, Williams and Pan (898-908) concentrated on one particular country in order to conduct PESTLE and Porter analysis in rational manner. In the later part of this study, case study of Song Airlines (was headquartered at Atlanta, Georgia, USA) will be used. In such context, taking suggestion Chang, Hsu, Williams and Pan (898-908) in mind, marketing environment of USA will be used for conducting PESTLE and Porter analysis. Political & Legal Factor Government bodies like Federal Aviation Administration (FAA) control the airline operation in the country. In recent years, FAA decided to repeal the ‘Wright Amendment’ which prohibits airlines to run through-plane or non-stop flight services between specific cities in the country. Such supportive stances of government create opportunity to airline service providers to proliferate marketing activities. On the other hand, airline service providers need to follow numerous legal clauses mentioned by FAA and US courts regarding passenger safety, meeting prescribed quality standards, contract administration and others. In some cases, stringent legal clauses might restrict airline companies to execute legally questionable marketing strategy. Economic factors In recent years, profit margin for airline companies has reduced due to fluctuation in fuel prices while more than 35% of operational cost for airline companies is being accounted for fuels cost (Mouawad, “Pushing 40, Southwest Is Still Playing the Rebel”). On the other hand, customer demand for luxury air travel has reduced greatly due to decrease in disposable income caused by global economic downturn. In such context, demand for low-fares no-frills air travel has increased among customers who are not ready to spend huge amount of money for availing airline services (Mouawad, “Pushing 40, Southwest Is Still Playing the Rebel”). Social Factors Due to change in socio economic expectations, intervention of globalization and increase in professionalism; preference for faster transport like airline services has increased among travellers. On the other hand, emergence of utilitarian attitude among customer has indirectly triggered the emergence of the concept of low-fares no-frills air travel. Therefore, marketing environment is favourable for low cost carriers (LCC) to attract young and price sensitive customers. Technological factors Emergence of information communication technology (ICT) has improved the interactivity of communication between customers and airline service providers. For example, airline companies are using internet to promote 24*7 online booking, executing social media marketing, introducing ticketless travel and others (Chang, Hsu, Williams and Pan 898-908). By implementing state of art information technologies, airline companies can also shape its marketing strategy to increase its effectiveness. Environmental factors The aircraft’s emissions increases carbon footprint in the environment and significantly harm the atmosphere. On the other hand, high frequency air traffic noise can cause serious health damages (Zhang and Xie 442-447) In order to address such negative factor, government agencies and environmental groups have put some restriction on operations of airline industry. Due to presence of such environmental restrictions, scope of executing marketing activities has decreased for airline marketers. Porter 5 force analysis of the marketing environment for airline industry can be used as strategic tool to analyze micro environment (Scholes and Johnson 112-151; Porter 95-117). Bargaining Power of Buyers: High Due to price based preference and availability of alternate mode of transports (for short distances) as well as low cost carriers, switching cost for customers in airline industry is pretty low. On the other hand, airline companies have very little scope to differentiate service offering due to stringent cost requirements. As a result, bargaining power of customer has increased significantly. Bargaining Power of Suppliers: High Difference in technical as well as engineering requirements for different airlines need customized solution and contract partnership with specific suppliers. Establishing long term partnership with specific suppliers help airline companies to manage vendors, decrease cost of the contract and conduct training of staff. Low cost carriers also dependent on oil suppliers in order to facilitate oil price hedging against fluctuation of global oil prices (Mouawad, “Pushing 40, Southwest Is Still Playing the Rebel”). Therefore, supplier switching cost is pretty high for airlines. Threat of Substitutes: Low Although, there are substitutes available for low cost short distance travels such as trains, ferries, cars but customers still prefer airline services for convenience of time. In case of long distance travel, there is hardly any alternative that can match the convenience of airline services. Therefore, threat of substitute is pretty low. Entry Barriers: High Entering in airline business requires large initial capital investment and due to low profit margins, it becomes difficult for small level players with limited access to financial resources to survive in the industry. Due to limited availability of landing slots in airports of different countries, new entrants face difficulties to compete with established airlines that have already reserved landing slots by investing huge amount of financial resources. Therefore, entry barrier is pretty high for new entrants in airline industry. Competitive Rivalry: High Competitive rivalry in airline industry has been increased due to capability gaining by existing airlines through merger and acquisition (Kwoka and Shumilkina 767-793). Competitors are increaser passenger fleet capability of the flights through technological innovation and strategic acquisition of resources. On the other hand, emergence of no-frill and low-price based low cost airlines have further increased the competitiveness of the industry (Kwoka and Shumilkina 767-793). Therefore, competitive rivalry for the industry has been assessed as high. Relevance of Consumer Markets Airline industry is a customer focused industry and within the industry, there can be different customer segments such as, 1- normal passengers who travel for working purpose, 2- travellers who are using airline services for vacationing, 3- sporting teams who are using flights for transporting players, 4- company sponsored flights for business delegates (Luo 27-48). According to Kwoka and Shumilkina (767-793) and McGovern, Quelch, and Crawford (70-80), importance of consumer market in airline industry depends on 3 factors. Factor 1: consumer market is primary revenue driver for airline industry. By increasing customer base, airline companies can earn more revenues by selling more tickets. Low cost carriers (LCCs) can compensate low profit margin by selling more tickets to customers (Gilbert and Wong 519-532). Factor 2: incorporating customer loyalty program, airline companies can encourage repeat purchase for customers and subsequently, decrease cost of retaining customers. Satisfied customers may refer the name of the airline to others; as a result, airline companies can acquire new customers without incurring much acquisition costs. Factor 3: through target market and segmentation strategies, airline companies can streamline value proposition to target market. Targeting the right customer segment can help companies to eradicate wasteful marketing activities and unnecessary resources that are being wasted in targeting wrong customer segments (McGovern, Quelch, and Crawford 70-80). Based on above arguments, it can be said that consumer market is pretty important for airline industry in terms of revenue generation, increasing profitability and achieving competitive advantage (Kwoka and Shumilkina 767-793; Luo 27-48). Market Segmentation in Airline Industry Market segmentation is being defined as process of creating homogenous clusters of customers who share somewhat similar characteristics and purchasing behaviours. Segmenting customers provides 3 major types of benefits such as, 1-selecting right target market can help airlines to streamline its marketing activities to position the brand in effective manner, 2- understanding requirements of particular target market helps companies to adjust value proposition in profitable manner and 3- competitive advantage as well as core competency can also be achieved by airline companies investing most of the resources in developing strategy for particular target market (for example, Southwest has achieved competency as LCC by targeting price sensitive customer groups) (Mouawad, “Pushing 40, Southwest Is Still Playing the Rebel”; Liou and Tzeng 131-138). Consideration of research works of Vargo and Lusch (1-17) reveals the fact that segmentation can be done on the basis of four parameters such as, geographic (clustering consumers in accordance to city, state and country of origin), demographic (clustering consumers in accordance to age, gender, educational level and income level), behavioural (clustering consumers in accordance to occasions of using the offered product and degree of loyalty) and psychographic (clustering consumers in accordance to similarity in lifestyle, value system and attitudes). Traditionally, air-line customers are mainly segmented on the basis of demographic parameters (income level) such as business passengers (ready to pay high price of the airline tickets) and economy passengers (ready to forsake luxury services in the airline in order to avail low cost flying experience) (Gilbert and Wong 519-532). In order to compete with LCCs, luxury airline services are also using geographic (network to large numbers of cities, broad range of tour destinations and frequency of flight scheduling in distant countries) as well as psychographic (customers who look for premium class flying experience that can match their aristocratic lifestyle or courteous behaviour of in-flight cabin crew that can mach value expectations of customers) customers segmentation techniques. Both LCCs and luxury airline services use behavioural segmentation technique to offer special discounts to loyal customers. For example, Frequent-Flyer Program (FFP) can be considered as derivative of behavioural segmentation of customers (Liou and Tzeng 131-138). Task 2 4Ps of Marketing Song, LLC was positioned as low cost carrier (LCC) and the airline was Delta Air subsidiary (Knorr and Zigova 1-23). Unfortunately, Delta Air Lines completely acquired Song, LLC and as a result of the acquisition, Song, LLC ceased its operation. According to the case study, Song, LLC tried to reach profitability by reducing its breakeven point and reducing the turnaround time of each plane. From marketing perspective, marketing strategy as well as marketing mixes of Song, LLC needs to be analyzed. Segmentation and Target Marketing Song Airlines used demographic variables like gender and income level to select target customer group. By conducting market research, Song Airlines found that 75% of women make leisure travel decisions and these customers look for low cost airline services (Maynard, “Delta to Discontinue Its Low-Fare Song Airline”). Identified customer segments were not ready to forsake amenities in order to avail low cost airline services. At that period of time (during early 2000’s), there were very LCCs or leisure travelling airline companies that was able to satisfy mentioned unique needs of female customers in the country. Therefore, market gap was created and Song Airlines tried to shape its value proposition to fill the existing market gaps. Positioning of the Brand Ticket price of Song airlines was low in comparison to competitors but such low pricing did not prevent the company from offering luxury travel experience to targeted customers. For example, flyers enjoyed healthy organic meals (sold at competitive price), at-seat digital TVs and internets despite paying low prices to avail the airline services of Song airlines. The brand was positioned in terms of ‘lifestyle culture’ that was carefully designed through adjustment of marketing mix by Song airlines (Maynard, “Delta to Discontinue Its Low-Fare Song Airline”). Marketing Mix Product: Songs aircraft were fitted with at-seat digital TVs, leather seats, audio MP3 programmable selections, trivia games, satellite television, a flight tracker and others. Song, LLC also offered free beverages but customers were charged for meals and liquor (Maynard, “Delta to Discontinue Its Low-Fare Song Airline”). Within the flight, cabin crew artistically interpreted the safety instructions to customers and customers were also offered healthy organic meals. In-flight exercise program for customers was introduced by the company. Price: service offerings of Song, LLC were priced at competitive level in line with key competitor Southwest Airlines. Due to low price points, profit margin for Song, LLC low and in order to compensate it, the company started flying bigger planes to highly popular destinations. By decreasing, turnaround time of each plane, Song, LLC succeeded in keeping fixed costs low. Place: distribution channels like Song branded stores, travelling agents, tour operators, online 24 hours reservation system and company reservation were used by the company. Promotion: in order to position the ‘Song culture’ of the company, Kate Spade designed the crew uniforms while customized nightlife cocktails for customers were designed by Rande Gerber. Fitness guru David Barton designed the in-flight exercise programme for travellers. Twelve million dollar were allocated for marketing promotional activities and promotional techniques included newspaper advertisements, TV commercials, public relationship activities, launching FFPS, establishing “Song Stores” to sell lifestyle products (Maynard, “Delta to Discontinue Its Low-Fare Song Airline”). Pricing Strategies In Airline industry, companies need to get approval from government bodies to set ticket prices. Pricing of airline services are being differentiated on the basis of different strategies. Strategy 1: price discrimination is being done on the basis of product differentiation. In order to compensate high operating cost of offering superior ground and on-board services (such as lounge access, limousine service, FFP bonuses, free meal-beverages and others), high price points for tickets are selected. Strategy 2: in order to prevent customers from substituting higher fares for discounted ticket prices; penalties are added in the ticket price. On the basis of different booking classes, different price points are derived (Knorr and Zigova 1-23). Strategy 3: LCCs use cross subsidization among itineraries and passenger classes to develop excessively low price points for tickets. Song airline also used the low cost carrier (LCC) pricing model to attract price sensitive customers. In order to decrease operational cost and support low cost pricing model, Song airline and other LCCs eradicate the concept of using hub airports rather they provide non-stop point-to-point services (Knorr and Zigova 1-23). Deploying standardized fleet and decreasing turnaround time also helps Song airline and other LCCs to increase higher gross revenue despite small profit margin/customer. In order to reduce cost of operations to further extent, LCCs (except Song airline) tend to offer basic transportation in a single class cabin to customers (Knorr and Zigova 1-23). Works Cited Chang, Yu-Chun, Chia-Jui Hsu, George Williams, and Mei-Ling Pan. "Low cost carriers’ destination selection using a Delphi method. Tourism management 29.5 (2008): 898-908. Print. Fernando, Yudi, Norizan Mat Saad, and Mahmod Sabri Haron. New marketing definition: a future agenda for low cost carrier airlines in Indonesia. Business Strategy Series 13.1 (2012): 31-40. Print. Gilbert, David, and Robin KC Wong. Passenger expectations and airline services: A Hong Kong based study. Tourism Management 24.5 (2003): 519-532. Print. Knorr, Andreas, and Zigova, Silvia. 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