Fundamentals of Airline Marketing

Strategies for Success in a Hyper-competitive Environment

Scott Ambrose, Blaise Waguespack

• Publisher: Routledge
• Year: 2021
• ISBN:
  9780429614163
• Edition: 1
• Topic: Technology & Engineering
• Subtopic: Aviation
• Index: Technology & Engineering

Applying fundamentals of marketing to commercial passenger air transportation, this textbook puts the emphasis on marketing principles and illustrative ways in which airlines can distinguish themselves within the highly competitive global marketplace.

Fundamentals of Airline Marketing begins with a survey of current airline business strategies and the macro forces that have shaped the airline industry in the past and will continue to do so in the future. The growing importance of technology is discussed both from the perspective of better understanding customer needs and engaging more effectively with them. The central role of the "customer" is explored through the lens of modern segmentation and branding approaches. Coverage then shifts to the tactical decision areas consisting of the 4Ps—product, place, promotion, and price—in which marketers shape and execute their strategies. The book concludes with a focus on executing marketing initiatives internally through customer-facing employee groups and externally through the measurement and management of the customer experience.

Fundamentals of Airline Marketing:

• is an accessible textbook on the fundamentals of marketing for commercial passenger air transportation
• chronicles the marketing innovations and controversies that have been central to the historic shift in airline fortunes
• demonstrates how airline decisions fit within the fundamentals of marketing and how the marketplace is continuing to evolve
• provides a bridge between key marketing principles and their specific application to the airline industry in each chapter

This textbook is written primarily for undergraduate college students enrolled in aviation business administration programs and related courses. It will also serve as an accessible primer on airline marketing for industry professionals not presently working in marketing and for frontline airline employees seeking to learn more about marketing.

CHAPTER 1
Airline strategy and structure

CHAPTER OUTCOMES

At the end of this chapter, you will be able to …

• • Describe the generic business strategies available to all companies
• • Identify generic strategies that are pursued by commercial airlines
• • Discuss the history and evolution of airline business models
• • Describe likely future airline strategies and business models based on theory
• • Use your understanding of chapter content to discuss a case study on the evolution of Singapore Airlines

Introduction

Marketing is a broad subject area, the scope of which is daunting to encapsulate in any single book. This broad scope will become evident as you move further along in your journey of exploring marketing within the context of commercial airlines. Regardless of industry, all marketing begins with the mission of the firm and having a clear understanding of the competitive strategy that will allow the firm to achieve its mission and future vision. As such, competitive strategies are executed through a firm’s chosen business model. You can think of a business model as a pattern of decision making, a blueprint of sorts, through which a firm enacts their larger business strategy in hopes of earning a profit. All industries have business models—the global airline industry is no different in this regard. The most successful airlines over time are the ones that execute well their chosen business model that is properly aligned with their overall mission and strategy, and is well suited for the specific environment in which they operate. Using a theoretical lens of generic competitive strategies, the various airline business models will be introduced and placed within their historical context as the chapter unfolds. These airline business models are referred to oft en by airline executives, industry press, and associated academic literature. Like most environments, the global airline industry is dynamic and constantly evolving; hence, the chapter will conclude with perspective on how airline business models are likely to evolve in the years to come.

Generic competitive strategies

It has been nearly 40 years since Michael Porter, famed strategist and Harvard Business School professor, first reported on the generic strategies of business (Porter, 1980). Encapsulated in a two-by-two matrix, Porter’s classification system of generic strategies has been used widely over the years in order to categorize various businesses in a wide range of industries, and oft en to categorize airline business models. Before we get to these airline business models, however, we first need to cover the theoretical underpinnings of Porter’s generic strategies.

Referring to the diagram in Figure 1.1, the vertical axis measures the scope of a firm’s competition, which ranges from narrow to broad. Firms that seek to serve a narrow segment of the market reside in the lower half of the matrix while firms that design market offerings for multiple market segments—oft en industry-wide—occupy the upper half. As you will see in Chapter 4, there are several potential ways to identify market segments. For airlines, targeting oft en refers to the geographical scope of the business—as in, does the airline operate in a narrow region, nationally, or does it have international presence? Scope does not have to be measured along geographical lines, however. It can be defined by the nature of customer segments as well. For instance, Ferrari only builds a few thousand cars each year exclusively designed for wealthy customers and high-income earners. Toyota, on the other hand, builds millions of cars each year designed for all drivers by offering a range of different models at various prices points.

Figure 1.1 Sources of competitive advantage

Source: Porter, 1985

The horizontal axis of Porter’s matrix, meanwhile, is anchored by differentiation on one end and low cost on the other. The assumption is that as firms seek competitive advantage they make tradeoffs in the amount of product enhancements offered (i.e., differentiation) based on the degree to which these enhancements necessitate additional costs.

Differentiation

The classic business strategy differentiation involves offering products at premium prices that customers widely perceive as being superior. This perception of superiority can come from a host of factors, a few of which include the quality of the physical product, the superiority of service offered, or even the prestige associated with a brand. At the time of this writing, Apple is among the most profitable companies in the world and is, in fact, among the most profitable companies in business history (Galloway, 2017). It can be placed squarely in box number 1 based on the loyalty and devotion that customers exude for Apple, despite the higher price tag. As Porter notes, however, firms that pursue a differentiation strategy cannot ignore costs. Along with commanding premium prices, what makes Apple so profitable is their relentless focus on building an efficient world-class supply chain. As Scott Galloway, marketing professor at the NYU Stern School of Business, metaphorically notes, Apple has the margins of a Ferrari with the production costs of a Toyota (Galloway, 2017).

One could argue that the differentiation generic strategy, whether operated narrowly or widely, was the mainstay airline strategy employed as the industry gained momentum following World War II until late into the twentieth century. This can largely be explained by heavy regulation in the air transport sector that oft en did not exist in other industries. Routes, schedules, and fares were tightly regulated by the Civil Aeronautics Board (CAB) in the US, for example, oft en leaving airlines to compete merely by offering ever more extravagant marketing frills. These airlines encompassed the major carriers in the United States such as American, United, Delta, and Continental among several others. In other parts of the world, differentiators included airlines that were government subsidized—oft en referred to as flag carriers such as British Airways, Air France, Iberia, Air New Zealand, and Air Canada. Collectively, they came to be referred to as legacy airlines because they were formed during a different time, the age of regulation more precisely, which began in earnest with the Chicago Convention of 1944. As deregulation in the United States took hold in the late 1970s, followed by liberalization in Europe during the 1990s, many of these airlines moved to consolidate their influence in key hub cities from which they could achieve economies of density in passenger flows. This aggregation of passengers in hub cities allowed legacy airlines to serve an ever growing number of markets (Eft hymiou and Papatheodorou, 2018). Also, they continued to offer multiple cabin classes through which they could offer differentiated levels of service over a range of prices. Hence, academics oft en refer to this group of airlines as full-service network carriers (FSNCs).

The most common attributes of a FSNC include:

• wide route network oft en with multiple hub operations;
• innovations that enhance the customer experience (e.g., lie-flat seats and enhanced in-flight meal service and entertainment options);
• relationship marketing including frequent flyer programs and co-branded credit cards designed to increase brand recognition and customer loyalty.

Did You Know?

The decades of the 1950s and 1960s are often referred to as the “Golden Age” of flying. Since airlines were not forced to compete on price during this time of heavy regulation, they competed instead on marketing frills. Glamorous air hostesses as they were called, gourmet meals, and luxurious seating abounded. Yet, there were downsides too that went beyond customers merely paying exorbitant prices. The planes were less safe and long trips often took days instead of hours with multiple stops along the way. Thus, referring to this time period as the golden age of flying is a matter of one’s perspective

Source: Llewellyn (2017)

Cost leadership

Referring to box number 2 in Figure 1.1, firms pursue a cost-leadership strategy when they seek a low-cost producer status while serving a broad range of market segments. More specifically, “low-cost producers typically sell a standard, or no-frills, product and place considerable emphasis on reaping scale or absolute cost advantages from all sources” (Porter, 1985, p. 13). While differentiators must still pay close attention to costs, the inverse applies to low-cost leaders. They cannot completely ignore the bases of differentiation. If their products and services fail to achieve proximal comparability to competitors, they are destined to below average performance according to Porter. A cost-leadership strategy has been successfully enacted in all manner of industries. The German-based discount store Aldi is considered a paragon of the cost-leadership business model. Operating in 19 countries, Aldi offers ultra-low prices to consumers on basic goods assuming that many customers are willing to sacrifice even basic frills in exchange for low prices. Sacrifices include having minimal variety of product choice and forgoing services traditionally offered at no charge such as shopping carts and grocery bags to name a few. A broad cross-section of customer segments have indeed been willing to make this sacrifice, for Aldi has achieved tremendous growth in recent years.

Many people incorrectly refer to box number 2 as a low-price strategy. While cost leadership oft en entails offering a low price in order to stimulate demand, it should be noted that price is arbitrary. Regulatory restrictions aside, firms can either raise or lower prices at any time. A low price is only successful when it is predicated upon lower costs. Usually low-cost leaders will charge a lower price than rivals in order to stimulate more customer purchases and surpass rivals on market share. Yet, when circumstances allow, low-cost leaders can maintain comparable prices to rivals and win on margin by exploiting their lower-cost advantage. In these cases, the larger difference between price charged and costs incurred simply flows straight to bottom line as profit. The low-cost generic strategy suggests that firms need to have lower costs than other industry rivals also pursuing the same strategy, hence Porter’s naming of this box as low-cost “leader.” The conventional wisdom is that firms lose the ability to truly differentiate their product when using a low-cost business model, and in a world of commodities the lowest price almost always wins in the marketplace. This situation highlights an important caveat of following this strategy for firms that are not able to occupy a true cost-leadership position.

The first low-cost carrier (LCC), Southwest, appeared on the scene in the early 1970s competing exclusively within the state of Texas. Correctly assuming that customers were oft en being over-served by un-needed frills, founding partner and subsequent CEO of legendary status Herb Kelleher started Southwest on the premise that cheap fares and fun-loving service would turn out to be a winning recipe. While other LCCs were launched in the US in the 1980s following deregulation, most of them lacked the discipline of Southwest to maintain low costs and were ultimately unsuccessful. Therefore, the viability and proliferation of this business model did not happen until the 1990s when the European aviation market was liberalized and the internet offered LCCs a commission-free way to sell tickets directly to customers that was more cost-effective than previous direct channels. Ticket distribution through various marketing channels is a topic that will be further explored in Chapter 6. Meanwhile, the core tenets of a traditional cost-leader generic strategy as first practiced by Southwest and subsequently adopted and refined by other cost-leader airlines in Europe include the following:

A variant of the low-cost model oft en referred to as an ultra-low cost carrier (ULCC) has emerged over the last 20 years and is highly successful in many parts of the world. Examples include Spirit in the US, Wizz Air in Europe, and AirAsia in Southeast Asia. These carriers eschew various tenets of the traditional low-cost model and oft en compete on a different set of metrics that largely take advantage of upselling to earn ancillary revenue. By offering ultra-low prices that oft en include only a seat with a bare minimum of leg room, these airlines are able to entice customers into the purchase process. Once in the purchase funnel, many customers add incremental amenities, at a price, s...