Fundamentals of Airline Marketing 2020050458, 2020050459, 9780367178024, 9780367178031, 9780429057731

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“Marketing has always been a vital part of the success of global airlines. Te current pandemic will make it even more important as airlines seek to address another challenge to their survival. If the last two decades have been about unbundling, creating value with ancillary services, and raising the bar on service quality, then the new decade will bring its own opportunities and threats. Tis book provides the standard basics of any good marketing text, but it goes beyond the ordinary to provide insight into the future of the industry. Whether they are talking about big data, new digital marketing or legal and ethical issues in pricing, this book ofers a clear and concise way to understand the airline industry. Te case studies at the end of each chapter help illustrate the concepts discussed and allow the reader to see how the material applies in real world situations. I would highly recommend this book for anyone with an interest in this dynamic industry.” — Dawna L. Rhoades, Embry–Riddle Aeronautical University, USA “Te one constant in the global airline industry is the dynamic, sudden, and impactful changes that always seem to arise. From going from record profts to being hit by the drastic impact of COVID-19, airlines around the world, whether small or large; local or global; always need a strong Marketing vision to succeed despite varying conditions. Fundamentals of Airline Marketing by Blaise Waguespack, Jr. and Scott Ambrose not only gives the reader the fundamentals of what every airline need to do, but it also lays a strong foundation showing how future trends will adjust the shape of marketing for years to come. Coupled with the real-world case studies embedded within each chapter, this book provides readers everything they need to know about the crazy topic that is Airline Marketing.” — Sam Patel, Vice President, Network Planning, GoAir “Tis book goes beyond just setting the standard for academic analysis of airline marketing fundamentals. Te text is anchored in establishing a thorough analysis and assessment of airline marketing fundamentals. Tis is no easy task given the fast-paced, always-changing nature of the airline industry, which has witnessed dramatic changes in marketing strategy, positioning, brand alignment and segmentation. Te rigors of each chapter are reinforced with a case study to frame academic application in a real-world context. Tis book provides a fresh look at airline marketing broadly and as well as both tactical and strategic developments in the feld. Dr. Waguespack and Ambrose provide not just historical context but how they will shape the future as well. Tis book is sure to become a reference piece for years to come. It’s easy-to-read and real-world application make it a great book for academics, professionals or those interested in airline marketing broadly.” — Brian J. Rynott, Director, Alinda Capital Partners, Global Private Equity, Aircraf Leasing, Aviation & Transportation Executive

Fundamentals of Airline Marketing 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. Te growing importance of technology is discussed both from the perspective of better understanding customer needs and engaging more efectively with them. Te central role of the “customer” is explored through the lens of modern segmentation and branding approaches. Coverage then shifs to the tactical decision areas consisting of the 4Ps—product, place, promotion, and price—in which marketers shape and execute their strategies. Te 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 shif in airline fortunes; • demonstrates how airline decisions ft within the fundamentals of marketing and how the marketplace is continuing to evolve; • provides a bridge between key marketing principles and their specifc application to the airline industry in each chapter. Tis 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. Scott Ambrose is an Assistant Professor of Marketing at Embry–Riddle Aeronautical University, Daytona Beach. A former marketing employee of a major US airline, Dr. Ambrose has numerous scholarly articles in leading marketing and sales journals. He has also taught airline marketing seminars for industry executives. Blaise Waguespack is a Professor of Marketing at Embry–Riddle Aeronautical University, Daytona Beach. A member of the Air Transportation Research Society and Atlantic Marketing Association, Professor Waguespack has published scholarly articles in leading aviation and marketing journals and co-developed the Airline Service Quality Index.

Aviation Fundamentals Series Editor: Suzanne K. Kearns

Aviation Fundamentals is a series of air transport textbooks that incorporate instructional design principles to present content in a manner that is engaging to the learner, at an accessible level for young adults, allowing for practical application of the content to realworld problems via cases, refection questions and examples. Each textbook will be supported by a companion website of supplementary materials and a test bank. Te series is designed to help facilitate the recruitment and education of the next generation of aviation professionals (NGAP), a task which has been named a ‘Global Priority’ by the ICAO Assembly. It will also support education for new air transport sectors that are expected to rapidly evolve in future years, such as commercial space and the civil use of remotely piloted aircraf. Te objective of Aviation Fundamentals is to become the leading source of textbooks for the variety of subject areas that make up aviation college/university degree programmes, evolving in parallel with these curricula. Fundamentals of International Aviation Law and Policy Benjamyn I. Scott and Andrea Trimarchi Fundamentals of Airline Operations Gert Meijer Fundamentals of International Aviation Second edition Suzanne K. Kearns Fundamentals of Airline Marketing Scott Ambrose and Blaise Waguespack

For more information about this series, please visit: www.routledge.com/AviationFundamentals/book-series/AVFUND

Fundamentals of Airline Marketing Scott Ambrose and Blaise Waguespack

First published 2021 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 52 Vanderbilt Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2021 Scott Ambrose and Blaise Waguespack Te right of Scott Ambrose and Blaise Waguespack to be identifed as authors of this work has been asserted by them in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafer invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identifcation and explanation without intent to infringe. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Names: Ambrose, Scott, author. | Waguespack, Blaise, author. Title: Fundamentals of airline marketing / Scott Ambrose and Blaise Waguespack. Description: New York : Routledge, 2021. | Series: Aviation fundamentals | Includes bibliographical references and index. Subjects: LCSH: Aeronautics, Commercial—Marketing. | Airlines—Marketing. Classifcation: LCC HE9781 .A63 2021 (print) | LCC HE9781 (ebook) | DDC 387.7068/8—dc23 LC record available at https://lccn.loc.gov/2020050458 LC ebook record available at https://lccn.loc.gov/2020050459 ISBN: 978-0-367-17802-4 (hbk) ISBN: 978-0-367-17803-1 (pbk) ISBN: 978-0-429-05773-1 (ebk) Typeset in Minion Pro by Apex CoVantage, LLC

To my girls, Kelly, Julia, and Lucy for your support

To my girls, Carla, Grace, and Annika for your support

—Scott Ambrose

—Blaise Waguespack

Contents

List of fgures List of tables List of boxes Preface Acknowledgments 1 Airline strategy and structure

xi xiii xv xvii xix 1

2 Global influences: the world in which airlines operate

21

3 Technology: airline digital marketing

43

4 Airline market segmentation

63

5 Product: the expanded view of passenger air travel

83

6 Place: airline channels of distribution

101

7 Promotion: building airline brand loyalty

123

8 Price: airline revenue generation and management

139

9 Airline services, internal marketing, and human resources management

159

ix

CONTENTS

x

10 Airline service quality: measuring and managing the customer experience

175

Appendix

195

Index

201

Figures

1.1 1.2 2.1 2.2 3.1 3.2 5.1 5.2 6.1 6.2 6.3 6.4 6.5 7.1 8.1 8.2 9.1

Sources of competitive advantage Competitive strategy placements Marketplace forces Available seat miles 2019—US airlines ˜e ÿve stages of travel Fare options Total product considerations Total product considerations—commercial airlines example ˜e direct channels ˜e ÿrst indirect channel ˜e dominant channel (1976–1995) ˜e internet adds channel options (1995–today) ˜e corporate channel responds (1995–today) Customer perceptions of airlines Airline RASM pyramid Revenue passenger seat miles 2019—US airlines ˜e ÿve I’s of airline service characteristics

2 11 22 24 45 51 85 86 106 107 108 111 114 126 141 145 160

xi

Tables

1.1 2.1 3.1 4.1 4.2 5.1 8.1 9.1 9.2 10.1 10.2 10.3

Te ten hallmarks of an LCC strategy Branded codeshare partners Te 7Cs of website design Customer segmentation Psychographic segmentation—global traveler tribes of the future Airbus A321 Ancillary revenue categories Global industrial actions, July–December 2019 Scope clauses ACSI customer experience benchmarks, 2019 ACSI scores JD Power scores

5 28 49 66 78 90 151 168 169 181 182 182

xiii

Boxes

1.1 1.2 2.1 2.2 3.1 3.2 4.1 4.2 5.1 5.2 6.1 6.2 7.1 7.2 7.3 8.1 8.2 9.1 10.1 10.2

Marketing in practice: Air Wisconsin—a regional airline on a mission Marketing in practice: JetBlue—the original hybrid airline Marketing in practice: Airbus—the challenge of market forecasting Marketing in practice: Recycling in the sky Marketing in practice: Southwest—educating people about “transfarency” Marketing in practice: EasyJet—tapping into the wanderlust of travel Marketing in practice: What road warriors want Marketing in practice: Don’t forget to “SEA” mom Marketing in practice: Who says coach passengers can’t enjoy seating comfort? Marketing in practice: Delta Air Lines and American Express—a lucrative partnership Marketing in practice: Te leading global distribution system frms Marketing in practice: Online travel agencies—growth, evolution, and expansion Marketing in practice: American Airlines—implementing a brand refresh Marketing in practice: Southwest Airlines—an integrated marketing campaign Marketing in practice: United Airlines—public relations nightmare Marketing in practice: Te death of People Express Marketing in practice: Qantas excels at ancillaries Marketing in practice: Examples of airline internal marketing Marketing in practice: Calculating a Net Promotor Score Marketing in practice: Airline customer service on Twitter

8 10 30 37 50 56 73 75 91 95 109 113 127 130 134 146 152 165 184 189

xv

Preface

Te global airline industry has changed dramatically in the two decades since the new millennium began—experiencing soaring highs and terrifying lows along the way. From the depths of a terrorist attack that ushered in the threat of economic ruin as the millennium began to a decade of prosperity the likes of which the industry has never seen in its history, the highs and lows have been extreme. Te last two decades have witnessed consolidation among many of the world’s legacy carriers with the restructured airlines fnding new life and strength in scale and partnerships. Meanwhile, new aggressive low-cost carriers gained a foothold and expanded across the global landscape. Te new decade is already shaping up to be every bit as volatile if not more so. In just a few short months the airline industry has been brought to the lowest level it has ever known. Te global pandemic stopped passenger air travel across the globe for months, airlines have already gone bankrupt, and many others have required massive government support in order to stay afoat. Experts predict that industry contraction is a certainty in the immediate future, with recent projections for growth diminished as airlines struggle to cope with a new reality. Trough it all, marketing principles have helped to guide and shape the competitive landscape. Arguably, the biggest innovation over the last two decades has been the unbundling and repackaging of the airline product. While highly controversial, there is no denying that airlines unlocked hidden value through more refned customer segmentation and positioning eforts. Carriers found new ways to extend their market oferings through more integrated strategic alliances. Meanwhile, advances in digital technology opened new avenues for airlines to engage with customers and promote their brands. When it comes to product innovation, airlines around the world created spectacular customer experiences in the front of the plane catering to the wealthy global elite. While equally innovative from a company proftability perspective, seat densifcation eforts in the back of the plane drew ire for their lack of customer empathy and proliferation of what many considered inhospitable fying conditions. Yet these eforts also brought record numbers of new passengers into the global aviation system. Tis book chronicles the marketing innovations and controversies that accompanied this historic shif in airline fortunes as the industry now faces a new crisis the extent of which was never contemplated by airline marketers. Te text demonstrates how airline decisions ft within the fundamentals of marketing and how the marketplace is adapting to what is being called a “new normal.”

xvii

Acknowledgments

We would frst like to recognize our research assistants Johanna Cedeno and Dani Mathew for their outstanding eforts in helping us to complete this project. We are also grateful and blessed to have many students in our courses at Embry–Riddle that inspire us with ideas as they complete projects and related coursework. Te following students contributed examples that were eventually incorporated into the text: Noah Eudy, Matthew Falkler, Marissa Pecora, Tibaud “Michael” Stainnack-Baudel.

xix

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. Tis 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 frm and having a clear understanding of the competitive strategy that will allow the frm to achieve its mission and future vision. As such, competitive strategies are executed through a frm’s chosen business model. You can think of a business model as a pattern of decision making, a blueprint of sorts, through which a frm enacts their larger business strategy in hopes of earning a proft. All industries have business models—the global airline industry is no diferent in this regard. Te 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 specifc environment in which they operate. Using a theoretical lens

1

AIRLINE STRATEGY AND˜STRUCTURE of generic competitive strategies, the various airline business models will be introduced and placed within their historical context as the chapter unfolds. Tese airline business models are referred to ofen 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, frst reported on the generic strategies of business (Porter, 1980). Encapsulated in a two-by-two matrix, Porter’s classifcation system of generic strategies has been used widely over the years in order to categorize various businesses in a wide range of industries, and ofen to categorize airline business models. Before we get to these airline business models, however, we frst 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 frm’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 frms that design market oferings for multiple market segments—ofen 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 ofen 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 defned 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 ofering a range of diferent models at various prices points. Te horizontal axis of Porter’s matrix, meanwhile, is anchored by diferentiation on one end and low cost on the other. Te assumption is that as frms seek competitive advantage Competitive Advantage

Competitive Scope

Differentiation

Broad Target

1. Differentiation

Narrow Target

3. Focused Differentiation

Figure 1.1 Sources of competitive advantage Source: Porter, 1985

2

Lower Cost

2. Cost Leadership

4. Focused Cost Leadership

AIRLINE STRATEGY AND˜STRUCTURE they make tradeofs in the amount of product enhancements ofered (i.e., diferentiation) based on the degree to which these enhancements necessitate additional costs.

Differentiation Te classic business strategy differentiation involves ofering products at premium prices that customers widely perceive as being superior. Tis 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 ofered, or even the prestige associated with a brand. At the time of this writing, Apple is among the most proftable companies in the world and is, in fact, among the most proftable 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, frms that pursue a diferentiation strategy cannot ignore costs. Along with commanding premium prices, what makes Apple so proftable 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 diferentiation 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. Tis can largely be explained by heavy regulation in the air transport sector that ofen did not exist in other industries. Routes, schedules, and fares were tightly regulated by the Civil Aeronautics Board (CAB) in the US, for example, ofen leaving airlines to compete merely by ofering ever more extravagant marketing frills. Tese 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, diferentiators included airlines that were government subsidized—ofen referred to as fag 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 diferent 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 infuence in key hub cities from which they could achieve economies of density in passenger fows. Tis aggregation of passengers in hub cities allowed legacy airlines to serve an ever growing number of markets (Efhymiou and Papatheodorou, 2018). Also, they continued to ofer multiple cabin classes through which they could ofer diferentiated levels of service over a range of prices. Hence, academics ofen refer to this group of airlines as full-service network carriers (FSNCs). Te most common attributes of a FSNC include: • wide route network ofen with multiple hub operations; • innovations that enhance the customer experience (e.g., lie-fat seats and enhanced in-fight meal service and entertainment options); • relationship marketing including frequent fyer programs and co-branded credit cards designed to increase brand recognition and customer loyalty.

3

AIRLINE STRATEGY AND˜STRUCTURE

Did You Know? The decades of the 1950s and 1960s are often referred to as the “Golden Age” of fying. 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 fying is a matter of one’s perspective Source: Llewellyn (2017)

Cost leadership Referring to box number 2 in Figure 1.1, frms pursue a cost-leadership strategy when they seek a low-cost producer status while serving a broad range of market segments. More specifcally, “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 diferentiators must still pay close attention to costs, the inverse applies to low-cost leaders. Tey cannot completely ignore the bases of diferentiation. 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. Te German-based discount store Aldi is considered a paragon of the cost-leadership business model. Operating in 19 countries, Aldi ofers ultra-low prices to consumers on basic goods assuming that many customers are willing to sacrifce even basic frills in exchange for low prices. Sacrifces include having minimal variety of product choice and forgoing services traditionally ofered 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 sacrifce, 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 ofen entails ofering a low price in order to stimulate demand, it should be noted that price is arbitrary. Regulatory restrictions aside, frms can either raise or lower prices at any time. A low price is only successful when it is predicated upon lower costs. Usually lowcost 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 diference between price charged and costs incurred simply fows straight to bottom line as proft. Te low-cost generic strategy suggests that frms need to have lower costs than other industry rivals also pursuing the same strategy, hence

4

AIRLINE STRATEGY AND˜STRUCTURE Porter’s naming of this box as low-cost “leader.” Te conventional wisdom is that frms lose the ability to truly diferentiate their product when using a low-cost business model, and in a world of commodities the lowest price almost always wins in the marketplace. Tis situation highlights an important caveat of following this strategy for frms that are not able to occupy a true cost-leadership position. Te frst 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 ofen 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. Terefore, the viability and proliferation of this business model did not happen until the 1990s when the European aviation market was liberalized and the internet ofered LCCs a commission-free way to sell tickets directly to customers that was more cost-efective 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 frst practiced by Southwest and subsequently adopted and refned by other cost-leader airlines in Europe include the following:

Table 1.1 The ten hallmarks of an LCC strategy Low Fleet Costs

Operating with one type of aircraft (e.g., Boeing 737 or A320) will reduce costs such as pilot training and maintenance.

Low Landing Fees

Including in the system little-used or uncongested airports will lead to a reduction of landing fees.

Short Turnarounds/High Aircraft Utilization

Limiting turnarounds to 25–30 minutes allows additional aircrafts rotations per day. In order to achieve this, the airline must speed passenger enplaning and deplaning, make the cleaning process quicker and easier, and avoid the pre-allocation of seats.

Limited On-Board Services

Some low-cost airlines are completely “no frills,” resulting in cheaper aircrafts, quicker cleaning, and extra seating. Others charge extra for meal and drink services, which reduces costs and increases ancillary revenue.

Point to Point Only

A point-to-point system can result in a reduction of several costs such as: data processing and communication capability, baggage handling, and lounge services.

Simple Fares

Low-cost airlines use revenue management techniques with the only difference that they offer limited fares, which increase as the departure date gets closer. (Continued )

5

AIRLINE STRATEGY AND˜STRUCTURE Table 1.1 (Continued) Low Distribution Costs

Most low-cost airlines do not pay commissions to thirdparty distributors. They sell their tickets to consumers directly, primarily through their own websites.

Non-Refundable Tickets

Low-cost airlines have a no refund policy, allowing a better cash fow, which in turn results in savings in interest costs.

Ancillary Revenues

Fares typically include the passenger's transport from one city to another. Extra charges are made for baggage, meals, seat selection, priority boarding, and in-fight entertainment.

Generation of New Traffc Flows

One of the strategies of LCCs is to stimulate new consumer demand through lower prices. Examples include demand to destinations for weekend breaks or commuter traffc to places that face a labor shortage.

Source: S. Shaw (2016). Airline marketing and management. New York: Routledge. (with modifcations)

A variant of the low-cost model ofen 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. Tese carriers eschew various tenets of the traditional low-cost model and ofen compete on a diferent set of metrics that largely take advantage of upselling to earn ancillary revenue. By ofering ultra-low prices that ofen 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, such as checked baggage, meal service, assigned seating, and so on. Te ancillaries can account for as much as a third or more of an ULCC’s total revenues and (Sorensen, 2018). Ancillary revenues are not the exclusive domain of low-cost carriers, however. Tis innovation of marketing will be covered more thoroughly at various points throughout subsequent chapters including a specifc defnition. Te latest development in the broad-scope/low-cost arena has been the rise of the lowcost long-haul carrier (LCLH). Once thought to be the exclusive domain of FSNCs, many LCCs have begun fying on stage lengths that extend considerably beyond fve hours. Examples include Norwegian Airlines that operates several transatlantic routes and AirAsia X that operates several long-haul routes connecting Asia and Australasia. Technological innovations on newer models of both Boeing and Airbus aircraf have improved the economics associated with LCLH fying. Still, the results of this business model are mixed to say the least, and many industry experts question its long-term viability. Most of the cost savings that LCCs can exploit happen on the ground such as having lower landing fees and higher aircraf utilization due to quick turnarounds. Tese savings do not apply as much to longhaul fying.

6

AIRLINE STRATEGY AND˜STRUCTURE

Focused differentiation According to Porter, focus strategies are quite diferent because they entail competing on a much narrower basis. Represented as box number 3 in the diagram, a focused-diferentiation strategy involves meeting the special needs of a particular market segment. Ferrari, once again, serves as a good example of this generic competitive strategy. Tey serve a narrow segment of consumers who seek the superior crafsmanship and, perhaps more importantly, the status and social prestige that comes along with owning a Ferrari. Examples of focused diferentiators within the aviation sector include integrated cargo carriers, all business-class airlines, and regional airlines to a certain extent. Integrated carriers such as FedEx and UPS illustrate the concept of focused diferentiation well. Tey forgo commercial passenger transport in order to focus exclusively on, and hence optimize, cargo and small package delivery (Shaw, 2016). Te special needs of certain businesses that require overnight delivery of sensitive documents and small packages allow integrated carriers that can meet these special needs to be rewarded with premium prices. While receiving minimal attention in this text, it should be noted that many airlines around the world also carry freight. In certain cases, cargo revenues can account for as much as a third of an airline’s revenues. Hong-Kong’s Cathay Pacifc and South America’s LATAM are two such airlines in export-heavy regions that place a heavy emphasis on their cargo business. Returning to commercial passenger travel, there have been several attempts over the years to launch airlines focused exclusively on business passengers. On the surface this makes sense because business travelers tend to be among the highest-paying customers. Yet, there have been signifcant difficulties in this approach as evidenced by the graveyard of airlines that have chosen this business model. Of more recent attempts, European-based EOS and Silverjet attempted to serve business travelers across the Atlantic between marquee cities such as London, Paris, and New York in the mid-2000s (Shaw, 2016). Unfortunately, their timing was horrible and none of them survived the global fnancial crisis that began in 2008. Tese airlines can fail for a host of reasons but a main culprit of this business model is not being able to ofer a robust network that many business passengers require. While they certainly enjoy the premium service, FSNCs can ofer business customers more robust destination oferings and loyalty programs through the synergies that come from serving a broad range of customer segments. As of this writing, La Compagnie—operating as an all-business class boutique airline primarily serving Paris and New York—has shown some modicum of success over the last few years and it will be interesting to see if their business model has staying power. Lastly, regional airlines provide a good example of focused diferentiation as they ofen serve as feeder spokes to the FSNCs hubs. By serving small markets that necessitate smaller aircraf (e.g., less than 100 seats), these airlines specialize in operating regional jets or turboprops. Because scale economies are ofen absent in these small markets, regional airlines must optimize their delivery methods and cost structure in order to succeed (Budd and Ison, 2016). Hence, the FSNCs ofen prefer to partner with these regional airlines by licensing their branding trademarks, without having to fully absorb the costs associated with serving such small markets.

7

AIRLINE STRATEGY AND˜STRUCTURE

1.1

Marketing in practice

Air Wisconsin—a regional airline on a mission Air Wisconsin is headquartered in Appleton, Wisconsin and has a proud heritage dating back to 1965. Yet, few people have ever heard of the airline. That is because Air Wisconsin is not on any of their planes. They fy exclusively for United Airlines using the colors and branding of United Express. Air Wisconsin primarily feeds United’s Chicago hub with a feet of Bombardier CRJ-200s—one of the smallest regional jets on the market. This niche airline is one of over 50 regional airlines dotting the landscape across the United States. Source: Air Wisconsin website

Focused-cost leadership A focused-cost-leadership strategy located in box number 4 can be successful when the narrow target market of choice is either unattractive or not suitable from a production cost standpoint for larger rivals to serve. In these cases, according to Porter, certain market segments can be over-served by broad-scope competitors allowing a frm that is able to meet the segments’ core requirements, and nothing more, to be successful. Whereas Ferrari pursues a focus strategy at the high end, SmartCar pursues a focus strategy at the low end. Te SmartCar is designed for urban city dwellers who have short commutes at lower speeds and have to deal with the parking constraints that accompany large cities. City dwellers are ofen over-served by larger vehicles and seek the electric-powered SmartCar as an inexpensive alternative with the added beneft of being eco-friendly—something that is especially attractive to younger urban dwellers who are also more likely to be single and need less space. In the airline arena, perhaps the best example of a focused-cost-leader strategy are the charter airlines. Primarily operating within Europe, charter carriers appeared on the scene in the 1960s providing seasonal service to holiday destinations (Efhymiou and Papatheodorou, 2018). Tese non-scheduled fights ofen serve as part of a larger package deal ofered by tour operators. Te advantage for customers is direct service to their leisure destination while keeping this portion of their travel expense as low as possible. Generally speaking, charter customers have been willing to trade of comfortable seating and onboard frills in order to keep this part of their holiday package reasonably priced. Following the proliferation of European LCCs in the early 2000s, many of the charter carriers found it difficult to compete and either converted into LCCs themselves or were absorbed by larger tour operators such as German-based TUI, making this even more of an industry niche (Efhymiou and Papatheodorou, 2018). Certain ULCCs ft the focused-cost-leadership generic strategy as well. US based Sun Country Airlines serves as a good example, operating fewer than 30 Boeing 737s at the time of this writing primarily to sunny destinations in Florida and the Southwest from colder cities primarily in the mid-west such as Minneapolis.

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AIRLINE STRATEGY AND˜STRUCTURE Other examples of the focused-low cost strategy are the separate low-cost units launched by the FSNCs themselves. Ofen referred to as a carrier-within-a-carrier (CWC), these units have emerged in many parts of the world as an alternative allowing FSNCs to compete more efectively with LCCs. Porter readily acknowledged that frms can operate simultaneously in diferent generic quadrants as long as diferent corporate structures and processes are in place to properly align with the diferent strategic imperatives. What places this business model into the focused portion of the matrix is that it usually involves a limited market scope. Most FSNCs do not wish to dilute the margins of their mainline oferings and only deploy CWCs in markets where they face signifcant competition from LCCs. Tus far, the CWC airline business model has received mixed reviews as evidenced by its unbalanced performance across regions. Te best performing CWC to date, without question, has been Jetstar—a low-cost subsidiary of the Australian-based Qantas group. Other CWCs within the Australasia region have also been modestly successful such as Scoot which belongs to Singapore Airlines. Meanwhile, the US-based CWCs launched in the early 2000s to thwart LCC encroachment such as Delta’s Song and United’s Ted were all unsuccessful.

Stuck in the middle Perhaps the most controversial aspect of Porter’s generic strategies has been what he coined “stuck in the middle” outcomes. According to Porter, frms that try to be both cost leaders and diferentiators at the same time, and under the same management structure, are bound to get trapped in the middle. Whether operating narrowly or broadly, these middle dwellers achieve neither a true cost-leadership position nor a discernible diference in product ofering that leaves them destined for underperformance.

Did You Know? In his seminal book on competitive advantage published in 1985, Michael Porter used an airline, Laker Airways, as his cautionary tale to describe this undesirable “stuck in the middle” positioning. The airline had started as a focused-cost leader carrying price-sensitive leisure customers across the Atlantic—one of the original low-cost, long-haul carriers in fact. Following initial success, however, Laker Airways began to add frills and expand its route network, blurring its focus in the process, which ultimately led to Laker’s demise. Porter’s message is that you have to make choices—those who try to please everyone end up pleasing no one. This is generally good advice and many mid-size airlines over the years have found themselves stuck in the middle with no distinguishable competitive advantage.

As the decades since Porter’s original declarations have passed, however, critics have noted a growing number of exceptions to Porter’s stuck-in-the-middle rule of thumb. Tese are companies that have excelled at achieving among the lowest costs in the industry while

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AIRLINE STRATEGY AND˜STRUCTURE at the same time providing product features that customers perceive as being above the ordinary. A good example from the 1980s and 1990s in automobiles is Toyota. Tey were able to achieve some of the lowest production costs while ofering cars with features generally considered above average. In fact, these integrated strategies have become so common that many scholars have replaced Porter’s stuck-in-the-middle placement in the matrix with a ffh generic strategy dubbed the best-cost provider (Dostaler and Flouris, 2006). Te sharpening of capitalism in many industries, and around the world, has simply necessitated that frms are able to deliver superior value to customers while defly managing costs—in essence, fnding ways around the cost/diferentiation tradeof. Within the airline industry, these integrated strategy providers have generally come to be called hybrid airlines. In most cases, these are airlines that have transitioned over time from their traditional lowcost strategy to adopt characteristics more indicative of the FSNCs. Tese include a range of adjustments deviating from the core tenets of a traditional LCC strategy as outlined in Table 1.1 such as fying into more congested city-center airports, ofering frequent fyer programs, ofering multiple classes of service while operating more than one aircraf type, and distributing tickets through global distribution systems (GDS) in order to reach more business passengers. EasyJet of Europe is a case in point. Originally launched as an LCC according to the playbook written by Southwest Airlines (see Table 1.1), EasyJet now operates in several major European airports and ofers lounge access too. Similarly, the original LCC, Southwest, now fies into major airports, is listed in certain GDS systems, and serves international markets.

1.2

Marketing in practice

JetBlue—the original hybrid airline On February 11, 2000, JetBlue operated its inaugural fight from New York City to Fort Lauderdale, Florida. Founded by serial entrepreneur David Neeleman and based at John F. Kennedy (JFK) Airport in New York City, JetBlue was greeted with great enthusiasm and fanfare. The airline offered customers discount tickets primarily to leisure destinations in Florida. What made JetBlue such a hit were the frills that passengers received along with the price discounts. JetBlue leased brand new Airbus 320 aircraft with all leather seating and live satellite TV on every seatback—an industry frst. Their seats also had more legroom at the time than fullservice competitors such as Delta, United, and American who had failed to keep pace with refurbishing their cabin interiors. JetBlue also thrived by offering warm and friendly service that was not the norm on rivals at the time, who often had less than pleasing service offered by disgruntled staff. After just one year, the airline had reached a load factor of 79.9 percent, the highest percentage among US carriers at the time. Over the years JetBlue has adopted new strategies that continue to defy conventional wisdom that would have it aligning purely with either a traditional LCC or FSNC business model. On the one hand, they reduced legroom and began charging for baggage—drawing ire from ardent supporters. On the other hand,

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AIRLINE STRATEGY AND˜STRUCTURE

they introduced a premium class of service called “Mint”—receiving rave reviews from business travelers. To defne JetBlue as an LCC or FSNC is indeed diffcult to do for it has successfully integrated aspects of each approach. This is supported by JetBlue’s own positioning statement, adjusted in 2012 to defne JetBlue as “neither a low-cost airline nor a traditional network airline. Our proftable growth strategy enables us to compete effectively with both types of carriers” (Corbo, 2017). Now 20 years old, JetBlue had announced plans to offer direct service to Europe. While the COVID-19 pandemic has put those plans on hold at least temporarily, there is little doubt that their business model will continue to evolve in the coming years.

As Shaw previously noted, any two-by-two approach that seeks to place frms into discrete boxes will fall short of mimicking reality as the axes are more likely to operate on a continuum or spectrum (Shaw, 2016). Yet, despite the limitations of Porter’s matrix, it can still be applied in a more dynamic fashion. Airlines can simply be placed in more exacting positions within the matrix that are more representative of their strategic positions. Meanwhile, scholars have sought to develop various indices that can more accurately measure these nuanced positions. Figure 1.2 shows a theoretical placement of several airlines within the matrix that illustrate this nuance. Further still, airline strategists can perform their own such exercises in order to identify open positions that may signal strategic opportunity. Competitive Advantage

Competitive Scope

Differentiation

Broad Target

Emirates 1. Differentiation

Narrow Target

Lower Cost

Frontier Airlines JetBlue

2. Cost Leadership

La Compagnie

Sun country Airlines

3. Focused Differentiation

4. Focused Cost Leadership

Figure 1.2 Competitive strategy placements

Partnerships Most airlines around the world have sought partnerships as either a way to solidify their strategic positioning or to put them on a trajectory toward a new strategic positioning. Alliances in various forms have been around since the beginning of commercial air transport; yet, they have proliferated and grown in complexity over recent years. Te evolution of partnerships from least integrated to most integrated will be briefy discussed here with further coverage

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AIRLINE STRATEGY AND˜STRUCTURE in Chapter 2. Perhaps the simplest and most common form of partnership is a bilateral codeshare agreement. Tese are marketing arrangements between two carriers to sell seats using each other’s IATA codes (Castiglioni, Gallego, and Galán, 2018). Teir strategic value lies in the ability to extend the route networks of both airlines in a cost-efective manner while hopefully providing seamless service to customers. Once considered a strategic tool for FSNCs to boost their international networks, a growing number of LCCs have also engaged in codeshare arrangements in recent years. In fact, Frontier of the US and Volaris of Mexico entered into a code-sharing arrangement in 2018 that is being hailed as the frst of such deals between two ULCC carriers (Casey, 2018). A more integrated form of partnership involves a multilateral strategic alliance. Te best examples of this arrangement are the three global strategic alliances: Star, OneWorld, and SkyTeam. Each of these strategic alliances has over 20 member airlines ofen involving the largest carriers in the world. Tese partnerships ofer a range of benefts including easier access to new markets, increased yield and load factors, and better utilization of resources to name a few. We have also briefy discussed the concept of franchising in the case of regional airlines. Franchising, as defned, involves one company—the franchisor, to license its branding such as trademarks and operational know-how to another company—the franchisee. In the case of airlines this ofen involves allowing the franchisee airline to use the franchisor’s branding trademarks such as logos, livery schemes, cabin uniforms, and the associated operational processes (Lohmann and Spasojevic, 2018). In the United States the FSNCs ofen franchise their smallest spoke fying into their hubs, while working to ensure that the regional airline is meeting appropriate service standards and not tarnishing the brand. In Europe, the franchisee airlines ofen compete with charter carriers and allow the FSNCs such as British Airways and Air France a means of competing in this market niche where they lack the know-how and low-cost resources on their own in order to be successful (Lohmann and Spasojevic, 2018). While most nations have laws restricting the amount of ownership stake that foreign carriers can take in their airlines, this has not stopped foreign airlines from ofen taking up to the maximum level of ownership, and in the process forming joint ventures (JVs). Tis fast-growing trend exposes the limitations of global alliances as smaller JVs are fashioned in order to more tightly integrate marketing and operations among a small subset of carriers. In fact, the vast majority of transatlantic fights operate under joint venture arrangement, the most integrated form being “metal neutral” meaning that profts are evenly split no matter which carrier is doing the fying. An example across the Atlantic is the joint venture between Delta, Air France, KLM, and Virgin Atlantic. Te tightest form of integration involves mergers—the combining of assets of two or more companies into a single organization (Lohmann and Spasojevic, 2018). Since deregulation in the late 1970s in the US there have been multiple waves of mergers as airlines jockey for market position. Te most recent wave of consolidation started with the Delta and Northwest merger of 2008 and concluded with the merger completion of Alaskan and Virgin America airlines in 2018. During this wave ten carriers were reduced to fve. Meanwhile, Europe has also experienced a time of consolidation although European Union regulations and country-level factors have not yielded integration to the level of the United States. Tree major airline groups have emerged: IAG with British Airways and Iberia as

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AIRLINE STRATEGY AND˜STRUCTURE anchor members; Air France–KLM; and Lufhansa AG with Lufhansa and Swiss Air as anchor members. Regardless of the specifc method, the proliferation of associative behavior between airlines has escalated signifcantly in recent decades and is fundamentally changing the structure of the industry in the process. Te combination of focal airline operational strategies with their associative strategies has changed the ways that airlines compete and opened up new ways to classify airline business models (Castiglioni, Gallego, and Galán, 2018). As an indicator of this, a study noted that between 2005 and 2015 the percentage of routes operated by the focal airlines in the study fell from 49.2 percent to 39.2 percent. Tis development is labelled virtualization—a reduction in the percentage of routes operated directly by the focal airline as part of its total ofering of routes, and shows no signs of slowing down (Castiglioni, Gallego, and Galán, 2018).

Disruptive innovation: predicting the future Until now, we have mainly described the evolution of airline business models from World War II to the present time. What should be abundantly clear is the only constant is “change,” which is happening at an ever-quickening rate given the dynamic nature of the global airline landscape. Airline marketers, therefore, need to recognize patterns and develop predictive capabilities that can help them strategically position for future success. In this regard the theory of disruptive innovation—as put forth by Clayton Christensen in his seminal book Te Innovators Dilemma—can help (Christensen, 2003). As Professor Christensen points out, managers are taught to be data driven which can only tell us about the past. What we need when we look into the future is a good theory. Disruptive innovation is a good theory, for it provides an excellent lens for visualizing the ever-shifing nature of airline business models. An extremely condensed version of the theory goes like this: In many industries disruptive elements are not likely to come from industry incumbents, but instead from upstarts that enter the market not by ofering a superior product but by ofering a product that is ofen inferior. Te product is so attractively priced, however, that it ofen expands the lower end of the market. Once the upstart is able to establish a foothold in the lower end of the market, they inevitably go upstream by ofering superior products to higher margin customer segments. Tis happens for a variety of reasons, a few of which will be described in the subsequent examples. Up until the 1970s the big three automobile manufacturers in the United States—Ford, General Motors, and Chrysler—dominated the market. Japanese automobile manufacturers were able to gain a foothold in the US market not by ofering larger and more superior cars, but by ofering sub-compacts that were viewed as inferior. According to Christensen, the big three initially ignored the Japanese market entry and were willing to cede the bottom of the market for they had the privilege of selling to the top end of the market—where the margins were higher. It is rather common, in fact, for incumbents to initially ignore upstarts because the inferior and lower-priced products mainly stimulate new market demand that does not take from existing market share. As this expanding pie begins to slow, however, the upstarts are forced to take market share from the industry incumbents if they want to grow. By this point they have developed better iterations of their products that garner wider acceptance in the

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AIRLINE STRATEGY AND˜STRUCTURE marketplace. As they move upstream to more of a hybrid position, this opens up the bottom end of the market for new entrants to repeat the process. Following the likes of Honda and Toyota of Japan, the new bottom-end disruptors of the 1990s were Korean auto manufacturers Hyundai and Kia. Tey have subsequently developed higher-end cars and now, according to Christensen, the disruptors are Chery and BYD from China. If you look closely at how airline business models have evolved, a similar pattern has taken shape. Virtually every new airline across the globe over the past few decades that has achieved some measure of success, a daunting task in this industry, started on the lowcost side of Porter’s matrix. Counter to Porter’s initial advice, however, most eventually move upstream. Take Southwest, for instance. Te original low-cost leader initially had such remarkably low fares that they were able to convince people who had never fown before to come onboard. Instead of driving to their destination, bargain shoppers found it more economical to fy on Southwest. From its inception Southwest focused heavily on providing a fun and festive service. While incumbent airlines have rarely ignored the upstarts, in fact, multiple airlines fought vigorously in court to keep Southwest from ever taking fight—and fought vigorously on price once it did (Petzinger, 1996). Yet, Southwest has evolved over the years from a low-cost to a hybrid positioning further up on the continuum. Meanwhile, upstarts such as ULCCs Spirit and Frontier have solidifed their foothold at the bottom of the market as the low-cost leaders of this generation. And, there is even evidence that these upstarts have already taken steps to move more upstream along the continuum. It’s important to take a step back and determine what macro factors have led to the evolution of airline business models. For starters, legacy airlines originated during a completely diferent industry environment—the age of regulation—which did not necessitate having such a heavy focus on cost control. Furthermore, since the days of deregulation the best way to attack in the hyper-competitive airline industry has been from the bottom. While the industry will always require a tremendous amount of startup capital, new airlines are able to gain certain cost advantages by the mere fact that they are new—and not locked into historical choices. For instance, employee costs tend to be lowest at the outset. Given the high prevalence of unions, whose pay structures are largely driven by seniority, new airlines have the advantage of hiring a more junior workforce at less expense. Tese savings can be signifcant as labor and fuel are almost always the most costly expenses of an airline. By not being locked in by historical choices regarding aircraf purchases they can buy, or even lease, the newest planes that operate more economically and are less costly to maintain. Upstarts can also take advantage of the technological advancement in optimizing the aircraf and engine choices to their inaugural route choices. Speaking of routes, there has always been a weakness of the FSNC model in that it leaves them vulnerable to having their best connecting routes poached by point-to-point upstarts. Although there are economies of scale on the marketing side for operating a dense hub network, there are very few scale economies on the operational side (Shaw, 2016). Actually, there are ofen diseconomies of scale on the operational side as hub operations create staffing peaks and valleys in order to maximize connectivity that are less than efficient—operationally speaking. As long as an upstart can isolate a few point-to-point destinations that can be quickly established with the right-sized aircraf, though not easy, a foothold in the marketplace can indeed be gained.

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AIRLINE STRATEGY AND˜STRUCTURE Upstarts can also hire just the right number of employees, including fight crews and operational staf, to keep costs low while they are young and fragile; in turn, allowing them to scale incrementally and cautiously as they grow. By contrast, consider for a moment the amount of resources that would be required to start a new airframe manufacturing company before the frst plane is ever sold. As for why low-cost airlines eventually come to violate Porter’s rule by shifing to a hybrid position, this also can be explained by Christensen’s theory of disruptive innovation and the nature of costs in the airline industry. Te new demand stimulated by an upstart eventually begins to slow. In order to grow, the upstart is forced to take further market share from incumbents. Even if this were not the case, once low-cost carriers are established the allure of serving higher margin business customers can be signifcant. In order to best serve these higher-margin customers, however, they will ofen break with the traditional low-cost rules such as avoiding more congested and expensive airports that business passengers typically prefer as a matter of convenience. Correspondingly, as the airline ages it becomes susceptible to the same cost pressures that it was able to avoid at the beginning; namely, a more senior and costly workforce. Heeding Christensen’s advice, meanwhile, FSNCs fght vigorously not to cede the bottom of the market (Christensen and Raynor, 2013). Tey either launch a CWC subsidiary as previously discussed or they ofer a comparable product as the LCCs on their mainline aircraf by densifying the seating in the back of the cabin and eliminating frills. Following failed CWC attempts, the major US carriers have all found more success in combating LCCs using this second approach. All of this has led to what many scholars have called business model convergence, meaning, as airlines continue to copy each other’s innovations and strategically respond to competitive threats, the less distinguishable their business models have become (Urban et al., 2018).

Did You Know? During the early part of the decade when the global airline market was in the depths of despair, the only viable business model seemed to be the LCC. Things were so dire, in fact, industry trade group IATA commissioned none other than Michael Porter to further study the industry’s structural faws. A silver lining in the report dubbed “Vision 2050” was an illustration that all of the fundamental business models described in this chapter are successful in all major regions of the world, albeit in limited numbers (IATA, 2011).

Looking into the future, there will likely continue to be opportunity at the low end of the market. Consider for a moment how many trips you have delayed or forgone because of the associated travel expenses. Despite the proliferation of LCCs around the world that have democratized fying to a certain extent, concern still abounds with the expense of air travel outside of the small population that can aford it. Hence, there is still room for disruptive innovation to occur in which newer airlines employ the latest cost-saving technologies in

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AIRLINE STRATEGY AND˜STRUCTURE order to establish a customer base. Te disruptions are also likely to come from substitutes such as technological advancements in surface transport and virtual meeting environments. Tere will also continue to be room for a variety of airline business models to be successful. Tis is welcome news to marketers who generally prefer a dynamic industry environment in which companies can compete across an array of both product and price variation. Airlines collectively achieved the fve most proftable years between 2015 and 2019 in the history of commercial aviation. At the beginning of the past decade, the term “legacy airline” was once a euphemism for dinosaur and this is no longer the case. Some of these legacy FSNCs such as Delta and British Airways have been among the most proftable carriers in recent years. Tere has never been a shortage of risk in the world of airlines, however. Everyone knew the good times would not go on forever but no one could have predicted that 2020 would bring with it a global pandemic—COVID-19—the likes of which the industry has never faced before. As of this writing, airlines across the world are reeling and the only certainty at the moment is sustained contraction within the industry and a likely reshuffling of the competitive landscape as carriers succumb to the crisis. Nevertheless, airlines are nothing if not resilient and things will eventually improve. One thing is for certain, commercial aviation will not remain static and savvy airline marketers will stay ahead of the curve related to their strategies and business models.

Conclusion Functional level strategies in the various areas of the frm such as marketing, operations, and fnance can only be properly developed when there is a clear sense of the overall business strategy. Tis chapter has discussed the generic strategies that are available to all frms regardless of industry. Within this classifcation system, seven airline business models are described and placed within their historical context including: full-service network carriers, low-cost, ultra-low cost, low-cost long-haul carriers, regional airlines, carrier-withina-carrier, and hybrid airline approaches. Tese business models are converging to a certain extent, and it is helpful to think of them as representing a spectrum of strategic choice that is likely to further blend as airlines continue to add nuance to their various approaches. Te chapter concludes with a focus on disruptive innovation which is well suited to describe the evolutionary pattern of strategic decision making within the airline industry. Despite the present uncertainty, marketers are well poised to make signifcant contributions to further airline innovation. Subsequent chapters will explain the various roles of airline marketers, starting with Chapter 2 which articulates the environment that surrounds airline marketing.

Chapter review questions 1 In your own words briefy describe the four generic competitive strategies available to all industries. 2 Pick a region of the world (e.g., United States, Southeast Asia, Latin America) and classify airlines of the region according to Porter’s competitive strategies matrix. (i.e.,

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AIRLINE STRATEGY AND˜STRUCTURE draw Figure 1.1 and plot the airlines in the region onto the fgure according to which quadrant that you think best represents each airlines’ business strategy. 3 Briefy describe and defend each of your airline placements from number 2 above. 4 Pick three of your favorite airlines to research and describe their associative behaviors. Tese include other airlines that they have codeshare arrangements with, strategic alliances that they are part of, any recent or proposed regional airline and joint venture partnerships, and any recent or planned mergers. 5 Using the same region of the world that you picked in question 2 above, research disruptive innovations that have occurred over the past 20 years within the region. Have any airlines gone out of business, been reconstituted through bankruptcy, and have any brand new airlines started during this time period? Did the new airline(s) start as low-cost leaders as the theory of disruptive innovation predicts? 6 Either defend or refute that disruptive innovation in commercial air transport is likely to come from the low end of the market in the coming years. Provide examples of where you think the disruptions are most likely to come from.

CASE STUDY

SINGAPORE AIRLINES—EVOLVING WITH THE TIMES Singapore Airlines has been an industry paragon since its inaugural fight between Straits Settlement and Kuala Lumpur in 1947. Offered up by the iconic “Singapore Girls,” the airline has been known for its legendary in-fight service and customer pampering. It has been perennially at, or near the top, of the world’s most admired airlines throughout its history. Singapore has also had an impressive track record of proftability, much of it owing to its ability to carefully control costs. In fact, Singapore was profled on the pages of the venerable Harvard Business Review in 2006 not only for its superior product, but also for having some of the lowest costs in the industry. The authors referred to Singapore has having both the yin and yang prevalent in Asian culture, achieving a symbiotic relationship between offering superior customer experience, all while minimizing costs on everything that did not negatively impact the customer experience. Just as HBR was celebrating the height of Singapore’s glory, storm clouds were forming on the horizon. In the last several years Singapore Airlines has been under signifcant competitive pressure. The rise of ULCCs in the region such as AirAsia have put serious pressure on Singapore’s margins. Meanwhile, the rise of the Arabian Gulf airlines Emirates, Etihad, Qatar, and even Turkish Airlines to a certain extent, have created additional competition for Singapore. Often referred to as the superconnectors, these Arabian Gulf airlines have truly global hubs due to their superior geographic positioning. For instance, 66.67 percent of the world’s population resides within an eight-hour fight from Emirates hub in Dubai. The proximity of these airlines to Europe has made it more challenging for Singapore to compete on these historically lucrative routes between Southeast Asia and key European cities. The cabin luxury and service standards of the Arabian carriers rival the legendary service standards that have long been attached to the Singapore brand.

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CASE STUDY

AIRLINE STRATEGY AND˜STRUCTURE

Hence, Singapore is simultaneously being attacked at both the low and high ends of its customer base. Singapore has not been paralyzed, however, by these mounting competitive pressures surrounding them. In 2011 they launched a subsidiary called Scoot in order to compete directly with the other low-cost airlines in their home region. They have also formed partnerships in areas in which they have struggled to compete effectively.

Case study questions 1 How would you classify Singapore Airlines according to Porter’s generic competitive strategies matrix? 2 Of the six business models covered in this chapter, how would you classify Scoot? 3 What specifc partnerships and strategies has Singapore pursued in the face of stifening competition in recent years? 4 How does Christensen’s theory of disruptive innovation perhaps apply to Singapore’s situation? 5 As an airline that is perennially proftable, how has the recent COVID-19 pandemic impacted Singapore Airlines? As a carrier that relies extensively on international fying due to its small domestic market, has the pandemic negatively impacted Singapore even more than other carriers or less? Explain. 6 What strategic guidance would you give to Singapore Airlines as they seek to navigate the years ahead?

References Budd, L., and Ison, S. (Eds.). (2016). Air transport management: An international perspective. London: Routledge. CAPA. (2016, June). LCC models in Southeast Asia evolve as growth slows, though outlook remains bright. Retrieved from https://centreforaviation.com/analysis/reports/ lcc-models-in-southeast-asia-evolve-as-growth-slows-though-outlook-remains-bright-281589 CAPA. (2017, September). Sun Country converts to a ULCC, as full service airlines increase pressure on the model. Retrieved from https://centreforaviation.com/analysis/reports/ sun-country-converts-to-a-ulcc-as-full-service-airlines-increase-pressure-on-the-model-366038 Casey, D. (2018, June). US regulator approves ‘world-frst’ ULCC codeshare. Routes Online. Retrieved from https://www.routesonline.com/news/29/breaking-news/279323/us-regulator-approvesworld-frst-ulcc-codeshare/

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AIRLINE STRATEGY AND˜STRUCTURE Castiglioni, M., Gallego, Á., and Galán, J. L. (2018). Te virtualization of the airline industry: A strategic process. Journal of Air Transport Management, 67, 134–145. Chapman, B. (2018, September). Aldi tops supermarket sales league table with 12% growth over scorching summer. Independent. Retrieved from https://www.independent.co.uk/news/business/news/ aldi-supermarket-sales-growth-summer-heatwave-lidl-coop-tesco-a8542411.html Christensen, C. M. (2003). Te innovator’s dilemma: Te revolutionary book that will change the way you do business. New York: Harper Business Essentials. Christensen, C., and Raynor, M. (2013). Te innovator’s solution: Creating and sustaining successful growth. Boston: Harvard Business Review Press. Corbo, L. (2017). In search of business model confgurations that work: Lessons from the hybridization of Air Berlin and JetBlue. Journal of Air Transport Management, 64, 139–150. Delta. (2018). Delta, Air France-KLM and Virgin Atlantic sign agreements strengthening trans-Atlantic partnership. Retrieved from https://news.delta.com/delta-air-france-klm-and-virgin-atlanticsign-agreements-strengthening-trans-atlantic-partnership Dostaler, I., and Flouris, T. (2006). Stuck in the middle revisited: Te case of the airline industry. Journal of Aviation/Aerospace Education and Research, 15(2), 33–45. Efhymiou, M., and Papatheodorou, A. (2018). Evolving airline and airport business models. In Te Routledge companion to air transport management, pp. 122–135. Edited by Nigel Halpern and Anne Graham. London: Routledge. Ferrari. (2018, February). 2017 is another record year. Retrieved from http://corporate.ferrari.com/ en/2017-another-record-year-0 Galloway, S. (2017). Te four: Te hidden DNA of Amazon, Apple, Facebook, and Google. New York: Penguin. Gopalakrishna, P., and Subramanian, R. (2001). Revisiting the pure versus hybrid dilemma: Porter’s generic strategies in a developing economy. Journal of Global Marketing, 15(2), 61–79. IATA.  (2011). Vision 2050 Report. Retrieved from https://www.iata.org/contentassets/bccae1c5a24e43759607a5fd8f44770b/vision-2050.pdf Kurtenbach, E. (2018, April). China automakers focus on hybrid and electric vehicles: Te takeaway advice for incumbents is not to cede the bottom of the marketplace. ABC News. Retrieved from https://abcnews.go.com/Business/story?id=7376541&page=1 Llewellyn, M. (2017, April). Te Golden Age of plane travel: What fying was like in the 1950s and 1960s compared to now. Skyscanner. Retrieved from https://www.skyscanner.com.au/news/airlines/ the-golden-age-of-plane-travel-what-fying-was-like-in-the-1950s-and-1960s-compared-to-now Lohmann, G. and Spasojevic, B. (2018). Airline business in strategy. In Te Routledge companion to air transport management, pp. 139–153. Edited by Nigel Halpern and Anne Graham. London: Routledge. Petzinger, T. (1996). Hard landing: Te epic contest for power and profts that plunged the airlines into chaos. New York: Tree River Press. Porter, M.E. (1980). Competitive strategies: Techniques for analyzing industries and competitors. New York: Te Free Press. Porter, M. E. (1985). Te competitive advantage: Creating and sustaining superior performance. New York: Te Free Press. Shaw, S. (2016). Airline marketing and management. New York: Routledge. Sorensen, J. (2018). 2017 top 10 Airline ancillary revenue rankings. IdeaWorks. Retrieved from https:// www.ideaworkscompany.com/wp-content/uploads/2018/07/2017-Top-10-Airline-AncillaryRevenue-Rankings.pdf

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AIRLINE STRATEGY AND˜STRUCTURE Toyota. (2018, January). Toyota production in North America nearly 2 million in 2017. Toyota newsroom. Retrieved from https://pressroom.toyota.com/toyota-production-north-americanearly-two-million-in-2017/ Urban, M., Klemm, M., Ploetner, K. O., and Hornung, M. (2018). Airline categorisation by applying the business model canvas and clustering algorithms. Journal of Air Transport Management, 71, 175–192. U.S. Department of Transportation. (2015). Code sharing. Retrieved from https://www.transportation. gov/policy/aviation-policy/licensing/code-sharing

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CHAPTER 2

Global influences The world in which airlines operate CHAPTER OUTCOMES At the end of this chapter, you will be able to .˜.˜.  Identify and discuss the fve forces model in relation to the global airline business  Describe the marketplace infuences that impact airlines  Discuss the role of ownership restrictions in the airline business  Outline the impact of the environmental movement on the airline industry and the interactions with the other global infuences  Use your understanding of chapter content to discuss a case study on the potential return of supersonic fight

Introduction Chapter 1 presented the strategic choices facing airlines as a carrier determines a business model and competitive positioning in the industry. In implementing the chosen model there exist a variety of marketplace infuences airlines must be aware of that impact the airline. Many models have been put forward as a means of reminding managers of the variety of possible external marketplace infuences that can afect the carrier’s strategies, structure, and operations. In this chapter, these marketplace infuences are grouped into eight broad categories for review. Figure 2.1 depicts these categories and serves as an organizing framework for

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GLOBAL INFLUENCES

Competition

Environmental

Technology

Cooperative

Market Place Forces

Social

Economic

Legal

Political & Regulatory

Figure 2.1 Marketplace forces

the chapter. As a marketer, most of these forces reside external to the airline but must be proactively monitored and tracked for the potential impact on the airline. One task of the marketer is to provide senior leadership of the airline the needed explanations regarding these external infuences and the interactions that may occur between the market forces as they re-shape the dynamics of the global aviation marketplace.

Competition Chapter 1 highlighted the generic strategies available to airlines developed by Michael Porter. In examining the competitive situation a carrier has to operate within, another model from Michael Porter (1980) is ofen utilized. Te fve forces model examines the structure of a marketplace in a manner to make management aware of both direct and indirect competitive threats the frm may have to face. Te fve competitive forces—threat of entry, rivalry among current competitors, threat of substitution, bargaining power of buyers, and bargaining power of suppliers—reveal that competition within an industry goes beyond established frms. Moreover, across industries and locations diferent forces lead the way in infuencing competitive dynamics. Tese competitive factors, along with the cooperative factors reviewed afer, are external to the airline, but have a direct infuence on the airline’s internal operations and are ofen considered part of the task or microenvironment of the airline.

Threat of entry Over time various barriers to entry have existed that impact the airline marketplace. For example, government policy is one barrier to entry. Tere still exist foreign ownership limits in many parts of the world. To receive an air-carrier license the proper documentation

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GLOBAL INFLUENCES must be provided to the appropriate civil aviation authority. Te issue of slot allocation, to acquire the needed landing rights to serve an airport, may reside in a governmental agency. Other past entry barriers, such as access to expensive distribution channels for selling airline tickets, have mostly been eliminated, allowing new carrier access to marketplace using the internet and digital channels. While the capital requirements to start a new airline are high as indicated in Chapter 1, the development of the aircraf leasing industry has brought forth new fnancing sources for new entrants to get the needed access to capital and planes. As industries evolve and go through business cycles, entry barriers change and the impact varies due to market conditions. It is important to note that it is ofen not entry itself, but the “threat” of entry that is of concern. For airlines not only have to worry about the possibility of new carriers, but the potential invasion of current markets from existing competitors. A truism of the industry is that an airline’s most expensive assets (i.e., planes) can be redeployed to new markets in short order when aircraf are not successful in existing markets. By contrast, many sectors of the economy cannot simply redeploy their most expensive assets such as failing factories or failing hotels to compete in new markets overnight.

Intensity of rivalry among existing competitors Since the deregulation of the industry, rivalry between airlines has been considered intense. Michael Porter in an IATA (2011) report noted that industry proftability has ofen been hampered by destructive competition given the industry’s high fxed costs, perishability of the product, and incentive of customers to shop primarily based on price due to the lack of perceived diferences among the carriers. Hence, these structural conditions have ofen led to price wars among the airlines over the years. Given the sunk costs of aircraf ownership and low marginal costs of adding each passenger, there is considerable pressure on airlines to compete primarily through discounting. Te nature and degree of competition within the airline industry varies by region and over time. Within the US mergers and acquisitions since 2005, aided by a growing economy since 2010, reduced industry rivalry to a certain extent. While low-cost carrier growth occurred, examining the market share of the four largest air carriers in the US today (American, United, Delta, and Southwest), whether by available seat miles at (75 percent) or passengers enplaned at (70 percent), reveals that these four carriers have dominant market share (see Figure 2.2). Additionally, airline critics point to the existence of fortress hub airports, where one carrier may control over 50 percent of the fights from the airport. When examining some major US airports that serve as hubs for the respective airlines, such as Atlanta for Delta or Charlotte for American, the dominant carrier percentage rises to over 60 percent. While at many airports and on particular routes competition may be intense, for many passengers from smaller cities served by one regional airline at their home airport, the idea of a competitive airline marketplace does not exist. Meanwhile, in other parts of the world competition has never been more intense. Europe, for instance, has not seen the same level of industry consolidation as the US even with some airline bankruptcies recently. Te failed carriers were not able to maintain viability in such a hyper-competitive market. Similarly, Asia has seen the emergence of several low-cost

23

GLOBAL INFLUENCES

Available Seat Miles (ASM) 2019 AE 2% HA 2% FR 3%

AA 20%

SP 5%

AA-American Airlines

JB 6%

SW-Southwest Airlines DL-Delta Air Lines UA-United Airlines

AL 7%

AL-Alaska Airlines SW 19% UA 17%

JB-JetBlue Airlines SP-Spirit Airlines FR-Frontier Airlines AE-Allegiant Air HA-Hawaiian Airlines

DL 19%

Figure 2.2 Available seat miles 2019—US airlines Source: Bureau of Transportation Statistics (2019)

airlines that have put considerable pressure on the legacy airlines of the region. In sum, the nature of the airline industry generally sets up for intense competition. Yet, several factors impact this intensity across both time and region.

Threats of substitute products Substitute products in this context refers to alternatives for commercial air travel. Depending on the distance between origin and destination and nature of the geography involved, travel by car, rail, or boat may be viable substitutes. Generally speaking, the further the distance the less viable alternatives there are for air travel. Once again, these factors depend greatly on the region of the world under examination and nature of the geography involved. For example, one of the reasons for intense airline competition in Southeast Asia is the island geography that makes expedient travel between large population centers only viable through air travel. Meanwhile, a high-speed rail system and a well-developed road system provides for substitute forms of travel throughout much of Europe. In areas of the world where high-speed rail has been introduced, in fact, there has been noticeable impact on short-haul air-travel markets. Evidence from the European Union has found it is very difficult for air transportation to compete efectively with high-speed rail in short-haul markets of 500 kilometers (approximately 300 miles), or less (Buyck, 2008). Te key issue is not the distance, but the time involved in traveling using diferent transport modes. Consumers who have a choice between transportation options add up total travel time. Travel time to the airport, security

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GLOBAL INFLUENCES processing, waiting for the fight, fight time, and transport options upon arrival factor into making the decision. Rail travel in particular is perceived as a viable alternative when available due to ease of access and less fear of schedule disruption (Zhang and Zhang, 2018). High-speed rail in the US, in the form of the government-subsidized AMTRAK system, is limited in both scope and speed. Te Acela Express system, closest to high-speed rail at this time, is located in the northeast corridor and has a limited speed of 150 mph (240 km/h) while high-speed rail in other areas of the world ofen begins at a speed of 160 mph (250 km/h) (GAO, 2009). Other plans for a high-speed rail along the US West Coast linking Los Angeles and San Francisco have been halted due to the high cost of the project (Nolte, 2019). Te results are that in the US high-speed rail is virtually nonexistent in the transportation system. Other viable substitutes may not involve travel. Depending on the need, people may choose to simply communicate by alternate means such as by phone or virtually through digital communication technology. During the COVID-19 pandemic many people and frms became acquainted with virtual communication platforms like Zoom for the frst time. Only as recovery occurs over the next few years will it be determined if virtual communication tools are viable substitutes for air travel. It is important to note, and ofen overlooked, that the biggest substitute for air travel is simply deciding not to go. We have all found reasons, whether due to budgetary constraints or the hassles involved, to simply delay or forgo travel.

Bargaining power of buyers In many ways, the airline market should be relatively unafected by the bargaining power of buyers. Among the various conditions Porter stated where buyers may have power are situations in which a buyer group purchases in large volume, the product being purchased represents a signifcant fraction of the buyer’s costs of purchases or buyers pose a credible threat of backward integration. None of these conditions occur to a large degree in the airline industry. However, with the role of technology and the ability of consumers to compare airline prices across many diferent sales channels—for products that many consumers feel are undiferentiated—buyers do have a degree of power in the marketplace when a competitive situation occurs. As stated in the rivalry section above, there are locations in the US market where choice is limited and, therefore, buyer bargaining power is limited. Conversely, in the markets where a competitive situation exists and price competition is a threat, the power of buyers is present as customers select their fights ofen based on ticket price which customers can easily compare as the determining factor. Furthermore, buyers usually face low switching costs in choosing between airlines which raises their bargaining power to a certain extent. Tis is the primary reason why airlines have aggressively pursued loyalty programs— to introduce switching costs and incentivize customers to remain loyal. As mentioned earlier, multiple sales channels exist through which buyers can purchase airline tickets. Many of these channels operate independently of the airlines, including the highly concentrated global distribution systems (GDS). Before the development of the internet and growth in digital technologies, airlines were overwhelmingly beholden to the GDS for ticket distribution. In fact, at one time 75 percent of all tickets were sold through channels established by the GDS (Habtemariam, 2018). Te internet has greatly reduced this percentage, yet many airlines continue to pay fees to GDS and other intermediaries in order

25

GLOBAL INFLUENCES to distribute their tickets, especially to business travelers, a key buying group. As such, these sales channels will remain important in the years ahead and will be the focus of Chapter 6.

Bargaining power of suppliers When suppliers possess bargaining power, the supplier is able to demand and control the prices paid for by the buyer. Tis can lead to a situation where the supplier is able to leverage from the buyer favorable terms that increase supplier proftability. However, marketplace forces can change this dynamic. Airlines would seem to be at a disadvantage in the acquisition process for airplanes, as there are only two major suppliers. Instead the airlines are able to negotiate deals with discounts of up to 50 percent of of the published price from the manufacturers. Due to the competition between Boeing and Airbus, the airlines are able to possess a degree of monopsony power and pit the two against each other for a strong bargaining position (Golaszewski and Klein, 1998). Even for those carriers that follow a strategy of using one airplane type, for example the B-737 or A-320 family, the airlines are able to ofen secure favorable terms. While appearing to be locked in to a plane type would hamper the airline, due to the large number of planes ordered and the total value of a plane order, the airlines still possess negotiating power. It is important to keep in mind though that airframe manufacturers are just one of numerous suppliers to the airlines ranging from engine manufacturers to catering companies and beyond. Tese various suppliers are ofen highly concentrated and wield considerable power over the airlines and some of them will be discussed in the remaining sections.

Cooperative For many businesses being a member of a network or working with a group of other businesses to deliver a product or service to a customer is a fact of the marketplace—the same is true for the airline industry. All airlines must work with a variety of suppliers, partners and other service frms to be able to provide the products and services ofered to customers. Whether the relationships are built over time through repeated successful exchanges or created by contractual agreements entered into for relatively longer periods, without the cooperation and coordination required an airline will not be able to deliver the services wanted by customers. In this section, the two main cooperative partners an airline may deal with— airports and other airlines—are presented to highlight the importance of these cooperative arrangements.

Airports Airlines and airports are part of a symbiotic relationship. Both parties need the other to be successful. Airlines must work with airports for designing satisfactory customer service experiences. Among customer service factors to be coordinated are check-in counters, baggage handling, passenger hold facilities and passenger services (i.e., lounges). Gates and the landing slots needed for successful airline operations must be coordinated. For many international airports and routes, having a proper slot time for landing and servicing the airplane

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GLOBAL INFLUENCES can be a major factor for the success of a route. Many airlines must ofen balance the needs of their passengers with the scheduling and connectivity issues of operating a hub and spoke system. Besides the operational considerations, airlines and airports work to coordinate marketing eforts at the locale of the airport. Airport route development strategies to attract new airlines include marketing support as an airline enters the market or begins new routes. Tese route development proposals ofen include incentives such as lower landing fees for an agreed upon time period, a joint marketing plan, and other promotional assistance for the carrier as part of the sales pitch made by the airport when recruiting new carriers (Halpern and Graham, 2015).

Airlines Chapter 1 introduced the strategic co-operation that occurs between airlines in its two main forms, the relationships between the regional and major carrier partners along with codeshares, alliances, and joint ventures that exist between the major carriers. Te key to these relationships for the major carrier is the ability of the collaboration to provide the needed passenger numbers to feed the airline’s network. Te importance of the regional carriers can be taken from data provided by the Regional Airline Association (RAA). Te RAA found that 570 markets in the US depend on regional carriers for access to the air transport network. Breaking down the importance of the regional airlines to the US transportation system fnds that 96 percent of US airports have passenger services provided by regional airlines; 41 percent of all scheduled fights in 2017 were operated by regional airlines; and, moreover, at 63 percent of US airports regional airlines provide the only passenger service (RAA.org). Te size and importance of the regional carrier activity in the US is refected in airline operational statistics reported by the Department of Transportation in the Air Travel Consumer Report (ATCR). Recent changes made to the ATCR increased the number of carriers reporting and now includes the larger regional carriers. Regional carrier relationships with major airlines in the North American market are shown in Table 2.1. What can be seen is that two of the larger regional carriers, SkyWest and Republic Airlines, have contractual relations with multiple major carriers. While some of the regionals shown are owned subsidiaries of their major carrier partner, the number of partners shown for the three largest network carriers demonstrate the critical nature of these cooperative relations. When moving to the international operations of the FSNCs the focus shifs to mainly alliance relationships and joint ventures. Te reason for the existence of the three alliances Sky Team, Oneworld, and Star is that at this time a true international airline cannot exist. While airlines can fy internationally, due to ownership restrictions that exist, an airline is not free to fy as the carrier may want in another country’s airspace (Harper, 2019). Being in the alliance ofers the opportunity to ofer a global network, with promised seamless connections across the globe. While the alliance ofers global coverage, the inherent cooperative nature of the structure does not ofer the same control as if an owned entity. While at times possessing a degree of stability, alliance membership does change as mergers and acquisitions occur or frms examine their competitive position within an alliance. As mentioned in Chapter 1,

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GLOBAL INFLUENCES Table 2.1 Branded codeshare partners American Airlines Alaska Airlines

Delta Air Lines

United Airlines

Air Canada

Compass Airlines**

Horizon Air*

Compass Airlines**

Air Wisconsin Airlines

Air Georgian**

Envoy Air*

PenAir**

Endeavor Air*

Commutair

Exploits Valley Air Services

Mesa Airlines

SkyWest Airlines GoJet Airlines

ExpressJet Airlines Jazz Aviation LP

Piedmont Airlines*

Republic Airways Mesa Airlines

PSA Airlines*

SkyWest Airlines Republic Airways

Republic Airways

SkyWest Airlines

SkyWest Airlines

Trans States Airlines**

Sky Regional

* Owned by mainline carrier ** These airlines ceased operations in 2020 due to COVID-19 Source: RAA 2019 Annual Report and Air Travel Consumer Report

a growing form of cooperative arrangement involves joint ventures. In the US anti-trust immunity must be granted to operate a joint venture, but when granted by the DOT, this allows a closer integration of operations beyond what an alliance can o˜er.

Did You Know? The opportunity to “earn and burn” frequent fier awards within one of the three global airline alliances is often noted as a customer beneft. For example, a Delta SkyMiles member staying within the SkyTeam alliance airlines can circle the globe—fying from Atlanta to Paris on Air France, transferring to China Eastern to fy from Paris to Shanghai, and then onto a Korean Air itinerary from Shanghai through Incheon International Airport to connect back to Atlanta. While using three international carriers, all the earned miles would post to the customer’s Delta SkyMiles account.

Economic °e remaining forces to be covered from Figure 2.1 are generally considered part of the macroenvironment. Having considerable power to in˛uence airline marketing and operations, airlines must monitor and proactively respond to these forces in order to thrive. As such, the in˛uence of economics is a constant in the airline industry. A major focus of airline management is on the economic factors that bring prosperity or losses to a carrier. °e economic forces impact both the costs an airline attempts to control and the revenues an airline

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GLOBAL INFLUENCES attempts to collect from the markets and customers served. Across time and markets, economic factors such as the costs of borrowing and interest rates, infation, currency exchange rates, taxes, and wage rates infuence the attractiveness of a market. Airline decisions in areas such as feet planning, maintenance locations, fueling strategies, cabin confgurations, and route entry and exit decisions depend on economic considerations. Four of the key economic factors are presented to highlight the impact of economics on the airline industry.

Fuel Tere is no other cost factor tracked as closely as fuel. Currently, fuel is the second highest cost category behind labor as a percentage of airline cost for many carriers, while for some ultra-low cost carriers fuel is the leading cost (Oliver Wyman, 2019). Fears of fuel price increases, also called spikes, are always among the concerns of airline managers. Te importance of fuel cost is seen in many airline quarterly earnings reports where the airline price per gallon and cost per seat mile for fuel is reported. Fuel is reviewed as the frst of the economic factors as this can be the most uncontrollable of all airline costs. For markets in which fuel price increases cannot be passed along to customers, airlines fnd themselves especially vulnerable. Te record profts of the airline industry between 2014 and 2018 were driven in part by unusually low fuel prices. Airlines have tried to proactively manage the volatility of fuel prices over the years through various strategies such as hedging with varying degrees of success. Te fnancial losses reported in spring 2020 by many airlines, such as Southwest, Ryanair, EasyJet, and the IAG carriers, were not just pandemic related, but due to fuel hedge contracts that did not work as planned as fuel dropped to historic lows in early 2020 (Dunbar and Singh, 2020). While unforeseen upheavals such as COVID-19 impact airlines’ fnancial health, the fortunes of the overall industry are still closely tied to prevailing fuel prices and will remain so in the years ahead.

Labor Te largest cost category for major airlines is ofen labor. Being a service industry, airlines require a large number of personnel to deliver the various services needed to provide the customer experience. From pilots, fight attendants, maintenance personnel, gate agents, ramp workers, and other operational support employees, to analysts and managerial staf who work in corporate headquarters, airlines require large stafs. As many of these workers are unionized, costs are somewhat controlled as contracts signed with a union provide a known rate of increase per year in labor costs across the groups. Control is a relative term, however. When times are bad airlines are ofen able to extract concessions from various labor groups and when times are good the unions seek to reap the benefts. Industry analysts examine an airline’s cost per seat mile by labor as a means of projecting the economic wellbeing of a carrier. Hence, there is always pressure on airline executives to manage labor costs.

Business cycle Te term business cycle refers to a number of macroeconomic factors that infuence the demand for air traffic. One of the frst measures tracked for the infuence of the business

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GLOBAL INFLUENCES cycle is the gross domestic product (GDP) of a nation. Te GDP measures the total market value of all fnal goods and services produced in a country in a quarter or a year. Te travel industry, of which airlines are a major part, accounts for a little over 10 percent of global GDP. GDP refects how well an economy is doing over a period of time and directly infuences the demand for air travel. When economies are in a growth period, business is usually doing well and this is ofen refected in higher demand for air travel. In measuring the impact of GDP on demand some studies have found an almost doubling efect—if an economy grows by 5 percent air travel demand can grow by 10 percent. Te same relationship is also found during slowdowns—if an economy shrinks by 2 to 3 percent demand will decrease by 4 to 6 percent at a minimum (Zhang and Zhang, 2018). With GDP not moving in a steady pattern, economic forecasting and the timing of the business cycle is a major economic concern with airlines ofen having difficulties projecting growth or being ready for a recession.

2.1

Marketing in practice

Airbus—the challenge of market forecasting In trying to gain some insight into the probability and timing of a business cycle event, the forecasting team at Airbus monitors a collection of seven external factors in a traffc-light manner in an effort to determine a turn in the business cycle and presents this in the manufacturer’s yearly global market forecast. One of the major indicators listed is GDP as Airbus tracks “World real GDP” and fnds that while this remained steady from +3.3 percent in 2017 and +3.2 percent in 2018, they anticipated a slight dip for 2019 and 2020. Meanwhile, the long range forecast for 2050 projected nearly 70 percent of the world population—seven billion people—will live in an urbanized location. As air travel is a primary means of connecting urban clusters, the commercial air travel industry was projected to grow signifcantly over the coming years on a global basis. However, the COVID-19 pandemic in 2020 illustrates just how diffcult it can be to make these predictions even for experts. Source: Airbus (2019)

Personal income As a larger percentage of passengers are leisure travelers—ofen paying for their own tickets—measures of personal income are also tracked. Per capita income, which measures the amount of money earned per person in a nation or geographic region, has been found as one of the key measures to predict the potential for growth of airline passenger demand in a country. As people earn more money travel becomes afordable and demand for both domestic and international air travel grows. Boeing (2019) projected that the Asian marketplace, especially China, would pass the US as the largest aviation market by 2028. Tis

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GLOBAL INFLUENCES projection was driven by a combination of factors: the large number of consumers, with the growth of the Chinese middle class estimated at 400 million people, and the presence of a robust low-cost carrier industry to serve these consumers. However, due to the COVID19 pandemic in early 2020, and the resulting downturn in the US economy and aviation market, China overtook the US as the largest domestic market in late spring 2020 (CAPA, 2020). Whether this is a short-term occurrence due to the pandemic or a permanent result will be determined by the recovery time and lasting economic impact of the pandemic. As travel is ofen a discretionary spending category for many consumers, in periods of recession travel spending will drop faster than other budget items. In the US, for example, during the period known as the Great Recession (2008–2010) travel spending fell 10 percent which was 3.7 times higher than overall spending declines. Yet, at the time of this writing the degree of growth is very uncertain as experts predict it may take years for air travel demand to return to the same level as 2019 due to the COVID-19 pandemic. In just a few short months over 50 percent of travel-related jobs in the US have been lost due to the pandemic. Tis fgure is over twice the percentage of jobs that have been lost in other industries illustrating just how devastating the current situation is (U.S. Travel Association, 2020).

Legal Airlines around the world tend to operate in tightly regulated legal environments. Tis is not surprising given the safety implications involved and the high-profle, geo-political nature of the industry. In fact, we have broken out the political/regulatory aspects as a sub-focus in this text in order to further articulate the stakes involved. Meanwhile, this next section will briefy focus on legal oversight in the US to demonstrate the evolution and myriad ways in which commercial air transport is managed. Te controlling law establishing the marketplace for the US airline industry is the Airline Deregulation Act of 1978. What is not realized by casual observers when they hear of this law is that, in fact, the US industry is not deregulated. Te Deregulation Act of 1978 brought about the closing of the Civil Aeronautics Board (CAB). Te CAB controlled the competitive and operational aspects of the interstate US airline industry, such as which airlines could fy particular routes and what fares airlines could charge. As such, any changes to interstate routes and fares required CAB approval. A major argument made for the passage of the Deregulation Act was that the CAB had become too bureaucratic and took too long to make decisions, hampering the growth of the airline industry; that while the CAB did bring about stability to the industry, the costs in terms of high fares and lack of industry innovation was limiting air travel to a select few who could aford to fy. Te passage of the Deregulation Act of 1978 led to the CAB ceasing operations but did not end government oversight of the airline industry. Te law lef many aspects of airline operations under the control of the Department of Transportation (DOT) and the reformulated Federal Aviation Administration (FAA). Language in the law gave the DOT, through the FAA, the power to regulate aspects of airline commercial operations. While such power is easily recognized in the area of safety—as the grounding of the Boeing 737 Max feet in 2019 demonstrated—in other areas the FAA has the authority to act, but has chosen at times not to exercise that power. As further evidence of this unique operating environment is the oversight of airline

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GLOBAL INFLUENCES advertising practices. Wherein most introductory marketing textbooks show the Federal Trade Commission as the lead US agency for overseeing advertising practices across many US industries, for the airline industry the DOT is the controlling authority. Another major legal issue with diferent standards across the world is citizenship requirements and restrictions regarding airline operational control and ownership. To be granted a license to operate within a country or region governments enact rules designed to control the amount of foreign infuence. In the US the current legal limit on foreign ownership is 24.99 percent. As such, by US law 75 percent of the controlling interest in an airline must be owned by US citizens. Across the globe, such restrictions are commonplace. In the EU, for instance, the controlling standard to be considered an EU airline is that ownership must be over 50 percent by EU citizens and operational control demonstrated by EU citizens. Over the past ten years IATA has recommended elimination of such limits across the globe; however, recent IATA leadership admits such eforts are not likely to succeed (Harper, 2019). Te global alliances and joint ventures previously discussed illustrate the manner in which airlines have sought to integrate within the legal restrictions of foreign ownership.

International operations Te framework for international aviation operations was established at the Chicago Convention of 1944. World War II had demonstrated the importance of air power militarily and in meeting logistical needs. With foresight, the countries present at the convention established the groundwork for the structure and growth of international aviation. Tree major outcomes of the convention were: (1) the bilateral framework; (2) the Freedom of the Skies; and (3) the establishing of the role for what was eventually formulated as the International Civil Aviation Organization (ICAO). Te bilateral framework is the mechanism by which air service between countries (i.e., nation states) is structured. A bilateral is an agreement between two countries on what airline services will be allowed by the countries. When frst formulated many bilaterals were, and still can be, very controlling with respect to air-service activities (Rhoades, 2014). Factors that could be specifcally spelled out in the bilaterals included designation (which airlines will fy a route), frequency (how many times during a given period a fight may be allowed), port of entry (what airport is to be used to provide international air service), and fares (what prices can be charged). Over time the US, when and where possible, has moved to an “Open Skies” framework dropping many of these strict controls and allowing free-market access, although ownership limits remain. A practice called cabotage—the carrying of passengers within a country by a foreign airline—is not allowed in the US or in most countries across the world due to ownership restrictions. Additionally, with the formulation of the EU, individual bilaterals with each EU member were eventually dropped and the creation of the “multilateral” came into being. EU aviation authorities in Brussels now negotiate air-service agreements across the EU member states.

Political and regulatory While ofen combined with the legal discussion in many marketing textbooks, due to the unique interactions that can occur in the political and regulatory area, these aspects of airline

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GLOBAL INFLUENCES marketplace infuences are separated. Te political and regulatory sphere will ofen bring various industry stakeholders into evolving relationships. At times, the diferent interest groups will unite in agreement for a cause, while for some issues the interest groups may take opposing sides. In examining political and regulatory forces, we introduce in the Appendix the mission for some of the leading trade groups in both the US and air transport industry at large. When examining the websites of these groups one will fnd a major tab in the area of governmental or legislative afairs. While some of the groups ofer additional educational opportunities to their membership in the respective feld of air transport, most will state as a duty of the organization to represent their members’ interest in the political and regulatory systems in their home country or internationally as the situation dictates. Te International Civil Aviation Organization (ICAO) attempts to coordinate with civil aviation authorities globally to provide a base set of standards for the safe and efficient operation of the air transport system. ICAO does not supersede individual country aviation authorities and regulations, but attempts to bring forth a base series of standards and procedures across the countries of the world. ICAO does not have enforcement powers, the agency cannot fne an airline or stop a carrier from operating, but many countries demand ICAO standards be followed before an international carrier may be allowed to operate within their airspace. Lastly, the International Air Transport Association (IATA), already introduced, serves as the global aviation industry trade group. IATA has over 290 airline members around the world and works on behalf of its members to create a regulatory framework in which the industry can thrive.

Social Social issues arise from the interactions among human beings, the way they live and the belief systems that guide and infuence their behaviors. In discussing social infuences, cultural beliefs, customs, ceremonies, and rituals are studied for their impact on purchasing and consumer behavior. Te infuence of social forces can span from personal spending, to family dynamics, to shared consumer behavior. Social infuences interact in many ways with the other infuences reviewed, especially economics and technology, and can be the cause for regulatory policies. Social issues have to be monitored so that airlines are ready to respond when social movements arise. Te growth of environmental topics to prominence in airline strategic decision making mandating a separate discussion in this text highlights how social infuences can grow to impact airline operations. Social and cultural events and rituals are signifcant infuencers for recurrent travel patterns in global air transport. Whether Tanksgiving and Christmas travel in the US, increases in travel during periods of the Lunar New Year in Asia, travel throughout the Middle East during the annual Hajj to Saudi Arabia, social and cultural infuences drive airline travel. While some periods are well established, such as the Christian calendar in the US with Christmas always occurring on December 25, due to the diferent calendar cycles in other cultures, the time period for such travel will vary. Religious and cultural holidays are not the only social events that drive travel demand. A wide range of events from yearly festivals (e.g., New Orleans Jazz and Heritage in May; the Donauinselfest in Vienna in June) to sporting events such as the Super Bowl in the US or the Champions League fnal in Europe, to

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GLOBAL INFLUENCES quadrennial events such as the Winter and Summer Olympics or World Cup fnal, foster air travel to the host countries and cities. Such events provide sponsorship and other marketing opportunities for airlines which are discussed further in Chapter 7 focusing on promotion. A social infuence that must be addressed that negatively afects air travel demand is terrorism. Ofen driven by a variety of sociocultural and political beliefs, the fear of terrorism has greatly shaped the air travel marketplace. To many US consumers, part of the hassle factor of air travel is the airport screening procedures carried out by the Transportation Security Administration (TSA) that have come into being since the events of September 11, 2001. Tese advanced screening procedures have added to the negative attitudes toward air travel. Individual terrorist acts have lasting impacts on air travel to the locations of such events. Te focus on terrorism concerns in the US has been on the use of the airplane as a weapon of destruction and mass casualty. While ofen providing warnings to US citizens about where not to travel due to possible terrorist activities, the US now fnds itself starting to be a country of concern for other foreign governments (Spinks, 2019). Te increasing gun violence and mass shootings occurring in the US are areas of growing concern for international visitors. Another concern that is a combination of both social and environmental factors is the spread of infectious disease. At various times over the last 20 years outbreaks such as SARS and H1N1 had substantial regional impacts. Te COVID-19 pandemic, meanwhile, has brought havoc to the global airline industry in a manner not seen before. It has crippled airline operations across the world and is the largest threat that air transport has faced to date. IATA has projected losses for 2020 reaching into the hundreds of billions of dollars for the industry worldwide. Already vulnerable airlines will fnd it extremely difficult to survive the crisis and there are sure to be lasting impacts for how the industry manages public health crises in the future. Changes such as the wearing of masks, temperature checks, deep cleaning, and attempts to sterilize airplanes afer each fight have begun and some of these may become a permanent part of airline operations. Te long-term social consequences are simply unknown at this point as health and aviation authorities re-evaluate how passengers interact with each other not to mention how people’s attitudes may change toward air travel.

Technology Te history of the airline industry is closely tied to the history of the airplane and its evolution. Technological advancements in engine propulsion provided more power that allowed the means for airplanes to grow in size, allowing more passengers and cargo to be carried and increasing the range that the airplane could fy. However, not all advancements have proven successful such as the supersonic Concorde which only few commercially from 1976 to 2003; and the recent announcement by Airbus which is planning to close down the production of its largest jetliner the A-380 in 2021 (Katz and Kammel, 2019). Airplanes now exist from both Boeing and Airbus that allow direct connections between cities that in the past would have required multiple stops to reach. For example, at the beginning of international air travel in the 1930s a fight from London to Brisbane, Australia, the longest route available in 1938, took 11 days and included over two dozen scheduled stops (Novak, 2013). Today a number of international fights exist of over 17 hours connecting major cities of the world. Technological advancements in airplane design and engine performance continue to interact with the changing marketplace and consumer preferences to meet industry needs.

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GLOBAL INFLUENCES Some of the other technological advances projected to infuence the aviation market over the next 30 years are discussed next.

Supersonic aircraft While Concorde was not able to sustain a long production run, due to a combination of economic inefficiencies and operational limitations, the dream of faster than the speed of sound fight for commercial aviation continues to drive research. Current rules in the US prohibit supersonic fights over land due to the efects of engine noise and sonic booms. Both Boeing and NASA are pursuing the technologies needed to make supersonic fight operationally possible in a way that is economical and reducing noise and sonic boom efects to make the fights environmentally sustainable. Besides the needed engine research for a supersonic aircraf, many of the proposals for a supersonic aircraf recognize the need for new materials beyond the current blends of composites (Chow, 2018). As supersonic fights are likely to occur at higher altitudes than airplanes now fy, new sustainable materials and aircraf designs are needed to improve operational efficiencies to fulfll the proposed concepts.

Airspace technologies As equally important as new airplane technologies are the application of new technologies for efficient and maximum use of air space. As the cost of fuel is a major economic concern and the use of fuel a major environmental concern, any efficiencies in fight that can reduce fuel usage are welcomed by airlines. Ongoing improvements and new investments in airspace technologies can assist airline operations in many ways. For instance, the FAA in the US has begun demonstrating precision navigation landing approaches utilizing improved satellite technologies into congested airports at peak periods to eliminate the practice of airplanes circling while waiting to land. Tis saves both time and money for airlines and customers. Additionally, the FAA continues to implement new technologies to the ongoing air traffic control modernization program to aid not only large commercial fight systems but a future with increasing unmanned aerial vehicles sharing US airspace.

Digital technologies and big data Many of the new digital technologies entering into use generate large amounts of data that industry struggles to both use and protect. Futurist guides for how technology will afect the human existence in a world of artifcial intelligence, biometric identifcation, and alternative monetary and payment systems note how such systems will generate more data about our lives as consumers. Tat data will be used to personalize services as consumers access new applications and purchasing portals. Te challenge will be anticipating what those needs are from the vast amount of data that is generated by consumer interactions in the digital world. As a world of social media has already brought forth systems that allow consumers to instantly notify and engage frms across the purchasing process, consumers will only expect these options to expand in form and format with personalized responses. When engaging in the lives of the consumer, expectations will be for frms to protect that data and the consumer’s privacy. If frms are not willing to do so, regulators have recently shown their willingness

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GLOBAL INFLUENCES to become involved to safeguard consumer data. Digital technology is of such importance to airline marketers these days its coverage is the primary focus of Chapter 3.

The future While taking an optimist view that technological advancements will ofer new means and opportunities to serve and interact with consumers, technological advances may pose competitive threats to air transport. While high-speed rail fnancial and environmental barriers has stopped its growth in the US, other technological advances could appear. One such technology is development of a hyperloop transport system. Small-scale testing of the technologies for such a system are ongoing around the globe. Besides the high-speed potential, others focus on the potential for more sustainable travel with a hyperloop. Such a system could eventually provide a viable alternative for many shorter trips taken by air under four to fve hours in length. While looking to the future, across many of the marketplace factors already discussed, technologies are now being developed that will drive the airline industry forward while placing more burden on airlines in the management and use of the technologies deployed.

Environmental Although this section is primarily focused on the environmental harm of air transport and sustainability eforts to lessen aviation’s environmental degradation, it should be noted frst that airlines must contend with natural disasters as well. Hurricanes, tsunamis, earthquakes, volcanic eruptions, blizzards and tornadoes have all had an impact on air travel in the last several years. Airlines must be aware of the environmental and climate threats most prevalent in the locations served and have contingency plans in place to manage through the events efectively. While beliefs in climate change and global warming may be considered controversial in some political discussions, there is little doubt the aviation industry must address the activism that has formed on the conviction of the harmful environmental impact of airline operations. Te topics range from airplane CO2 emissions to the various sources of pollution, including ground and water that may arise from airline operations at airports. Te concern of local citizens about quality of life brought about by increasing air traffic and the associated noise pollution can lead to organized interest groups seeking to have operating restrictions at airports, limiting air service and growth. Airlines and airports individually and cooperatively must be ready to address environmental concerns. An emphasis of the environmental movement is on airplane emissions and their role in climate change and global warming. According to the Intergovernmental Panel on Climate Change aviation accounts for approximately 2 percent of global CO2 emissions produced by human activity. Recognizing this impact, IATA has led an efort to have the world’s airlines meet a goal of lowering carbon emissions to 50 percent of 2005 levels by 2050. As part of this efort, 2018 saw the launch of the Carbon Ofsetting and Reduction Scheme for International Aviation (CORSIA). Operating within the ICAO framework, CORSIA was adopted as part of an aspirational goal of international aviation reaching carbon-neutral growth from 2020 onward (IATA, 2019). Starting in 2019, all airlines with annual emissions greater than

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GLOBAL INFLUENCES 10,000 tons of CO2 are required to report their emissions for international fights on an annual basis. Te data from 2019 and 2020 was to be used to set future targets for CO2 emission reductions. With the COVID-19 pandemic decreasing fight activity across the globe in 2020 airlines have proposed that CORSIA benchmarking be delayed until a future year. Tis is creating confict between the environmental movement and airlines who support the process (Massy-Beresford, 2020). Te CO2 eforts are closely linked to the more visible issue of sustainability that is a focus across the business world. Sustainability as a concept derives from the need for sustainable development, which has been defned as development “that meets the needs of the present without compromising the ability of future generations to meet their own needs,” and integrates environmental, economic, and social concerns (Sdoukopoulos et al., 2019). Proposed actions for developing a sustainable air transport system include improvements in aircraf technologies such as lighter airframes, higher engine performance, electric-powered aircraf, operational improvements (e.g., improved ground operations and air-traffic management), and sustainable alternative fuels (SAF). Many of the world’s leading carriers have already begun using bio-fuels including United, Qantas, JetBlue, and Cathay Pacifc, and carriers across the globe have entered into agreements to increase the use of bio-fuels in the future (Bachman, 2018). Airports in Los Angeles, Oslo, Stockholm, and Bergen, Norway, are aiding by ofering to blend biofuels into existing fuel supplies. Other eforts in the area of sustainability are attempts by airlines to limit the diferent types of trash and garbage that come from a fight. Many airlines stress the recycling eforts domestically, but that is not always possible on international fights where due to bio-security concerns all waste is destroyed or incinerated (Pepper, 2018). Te issue of single use plastics has gained momentum with business frms and cities instituting bans, for instance, on such items as plastic straws. Tis is difficult in the airline industry as the use of plastic during fight reduces weight; in turn, less weight leads to less fuel consumption and ultimately less CO2 emissions (Enelow-Snyder, 2019). Nevertheless, airlines are instituting plans to make fights as waste neutral or “zero waste” as possible.

2.2

Marketing in practice

Recycling in the sky Qantas conducted a test fight in May 2019 with the goal of all waste to be disposed via composting, reuse, or recycling. For the fight, about 1,000 single-use plastic items were substituted with sustainable alternatives or removed altogether, including individually packaged servings of milk and Vegemite. Alternative products used during the fight included meal containers made from sugar cane and cutlery made from crop starch, all of which is fully compostable. At the end of the meal service, Qantas cabin crew collected the items left over for reuse, recycling, or composting in multiple waste streams established with partners in the waste and recycling industry. Source: Qantas, 2019

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GLOBAL INFLUENCES Environmental issues are a factor in growing discussions around the world centered on environmental degradation and the impact of overtourism. Generally speaking, overtourism refers to a situation of too many visitors in a location, bringing crowds into confict with the local population and the resulting over-demand and negative impact on the location’s infrastructure and environment (Jet, 2018). Overtourism as an issue bridges across the social factors discussed earlier in the chapter. Already some locations across the globe have begun limiting visitors as a means of dealing with overtourism. During the summer of 2019, Europe saw the beginning of an anti-fying or fight shaming movement in the Scandinavian countries of Denmark, Norway, and Sweden that spread across northern Europe. New words and phrases have appeared on social media sites that characterize the thinking of those worried about the environmental impact of airlines with terms such as Flygskam (fying shame), tagskryt (train bragging), and smygfyga (fying in secret) now in use (Whyte, 2019). Among the activities reported are people no longer posting pictures of their vacations on Instagram or frequent fyers no longer faunting their membership status in order to avoid being shamed. Te pressure on airlines to be more environmentally engaged has intensifed with the COVID-19 pandemic. Environmental organizations have petitioned governments contemplating airline bailouts to include environment goals for the airlines as part of the monetary packages to be granted. As part of a government bailout for Air France, the French government has demanded the carrier reduce emissions and the number of domestic fights. Estimates range as high as 2,600 older plane models being retired by airlines globally in 2020 to 2021 (Bouchard and Aso, 2020). Te older aircraf being retired are not only fuel-inefficient but also have engines that produce higher levels of CO2 and therefore a more toxic impact on the environment. Tis may be one of the few positive outcomes the airline industry can state from the pandemic.

Conclusion Te examples and issues used in the environmental discussion only reinforce that while the marketplace infuences were presented separately, in addressing many of the impacts on airline marketing, the various infuences are interrelated. For instance, to address the rising environmental concerns will involve changes to social forces such as traveler behavior, technological advances through growth in biofuel supplies, economic advances by making alternative fuels fnancially viable, and more than likely additional government regulations and policies. Rarely will a possible marketplace infuence be of a singular nature. As airline managers look towards the various factors that impact decision making, no one factor can be addressed without considering the interactions across the many elements that can infuence the goal of a thriving and sustainable air-transport system. Te next chapter will focus on one particular force—technology—that has arguably impacted airline marketing the most over the last ten years.

Chapter review questions 1 Pick your favorite airline and analyze it from a fve forces perspective. Are there any of the forces that your airline is particularly well-situated to blunt the force of or are

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GLOBAL INFLUENCES there any of the forces that are especially intense with respect to the impact on the airline you chose? 2 What types of cooperative relationships does your favorite airline have with other airlines? Does it partner with regional carriers? Is it a member of one of the three global alliances? Does it have any joint venture partnerships? Describe the nature of these relationships. 3 Examine whether you can get around the world earning frequent fyer points through your favorite airline’s partnerships. List the routes that would complete the journey. 4 List the type of aircraf that your favorite airline operates. Does it appear that they have any of the latest technologically advanced aircraf in order to fy particular routes? 5 Describe the nature of the legal and regulatory environment that your favorite airline operates within. 6 What is your favorite airline doing to mitigate concerns related to COVID-19 and the spread of infectious disease? 7 What is your favorite airline doing to mitigate environmental concerns?

CASE STUDY

SUPERSONIC FLIGHT—WILL IT RETURN AGAIN? According to some, supersonic fight is now on the verge of returning within this decade. Along with Boeing and NASA, there are three private aerospace companies with the same goal of reviving supersonic fight. However, each company has different designs and missions. Aerion Supersonic, Boom Supersonic, and Spike Aerospace are all on the forefront of the supersonic market. Aerion aims to be the frst to enter the market. From a marketing perspective, they want to connect families and friends by reducing the travel times associated. Their jet, the AS2, hopes to offer a mach 1.2 “Boomless Cruise” allowing for supersonic fight over land. Aerion has multiple partners such as Boeing, GE Aviation, Honeywell Aerospace, and many more (Aeiron, 2020). Meanwhile, a company called Boom Supersonic aims to make the world more accessible with their aircraft named the Overture, which will reach speeds of mach 2.2. From a marketing perspective, Boom is focusing on what you will be able to do with the time you saved. They are promoting that you can leave the USA at 6:00AM, fy to London for meetings and dinner, and then return by 7:30PM local time to say goodnight to your kids. Boom has more than 30 preorders and is currently on track to fy the frst fight of its test aircraft, the XB-1, in 2020 (Boom, 2019). Lastly, Spike Aerospace hopes to be the frst company to crack the sonic boom issue. Their design, the S-512, is a small 18-passenger jet with a potential cruising speed of mach 1.6. They are hoping to produce the frst ever supersonic aircraft that will produce quiet sonic booms, less than 75 PLdB (perceived loudness level). This technology could revolutionize the aerospace industry (Spike, 2018).

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GLOBAL INFLUENCES

Case study questions 1. Research each of the three companies listed in the case study and provide an update on their progress and anticipated timelines. 2. Are any of the three best situated for the marketplace in your view? Explain. 3. Review the forces covered in this chapter and describe which ones may work in favor or against supersonic fight. 4. Research the social and environmental implications in particular and make a case for or against supersonic fight.

References Aerion Supersonic. (2020). Home Page. Retrieved from https://www.aerionsupersonic.com/ Airbus. (2019). Global Market Forecast: Cities, Aircraf & Airports, 2019–2018. Retrieved from https:// www.airbus.com/aircraf/market/global-market-forecast.html AMTRAK. (2019). Next-generation high speed trains. Retrieved from https://nec.amtrak.com/project/ next-generation-high-speed-trains/ Bachman, J. (2018, September). Airlines’ biofuel-powered fights might soon take of. Bloomberg. Retrieved from https://www.bloomberg.com/news/articles/2018-09-13/airlines-biofuel-poweredfights-might-soon-take-of Belobaba, P., P., Odoni, A., and Barnhart, C. (2016). Te global airline industry. Chichester: John Wiley & Sons. Boeing. (2019). Commercial market outlook 2019–2018. Retrieved from http://www.boeing.com/ resources/boeingdotcom/commercial/market/commercial-market-outlook/assets/downloads/ cmo-sept-2019-report-fnal.pdf Boom Technology Inc. (2019). Supersonic Passenger Airplanes. Retrieved from https://boomsupersonic.com/ Bouchard, J. and Aso, K. (2020). Why aerospace’s recovery from COVID-19 may take fve years. Forbes. com. Retrieved from: https://www.forbes.com/sites/oliverwyman/2020/05/20/why-aerospacesrecovery-from-covid-19-may-take-fve-years/#1a9b33ee3d94 Bureau of Transportation Statistics. (2019). BTS Quick Links. Retrieved from https://www.bts.gov/ topics/airlines-and-airports/quick-links-popular-air-carrier-statistics Buyck, C. (2008). Planes versus trains. Air Transport World, 45(1), 38–42. CAPA. (2020, April 20). China becomes the largest aviation market in the world. CAPA-Centre for Aviation. Retrieved from: https://centreforaviation.com/analysis/reports/china-becomes-thelargest-aviation-market-in-the-world-521779 Chow, D. (2018, June). Boeing’s planned hypersonic airliner could fy from NYC to London in two hours. NBCNEWS. Retrieved from https://www.nbcnews.com/mach/science/ boeing-s-planned-hypersonic-airliner-could-fy-nyc-london-two-ncna887111 CTV News. (2017, October). Te hassle factor of fying to the U.S. is about to rise. Retrieved from https:// www.ctvnews.ca/business/the-hassle-factor-of-fying-to-the-u-s-is-about-to-rise-1.364958 4 Dunbar, N., and Singh, M. (2020, April 20). Covid-19 puts airline hedge strategies under new focus. EuroFinance. Retrieved from: https://www.eurofnance.com/news/covid-19-puts-airline-hedgestrategies-under-new-focus

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GLOBAL INFLUENCES Enelow-Snyder, S. (2019, June). Airlines may have a tougher road to reducing plastics than hotels. Skif. Retrieved from https://skif.com/2019/06/10/airlines-may-have-a-tougher-road-to-reducingplastics-than-hotels/ GAO (U.S. General Accountability Office). (2009). High speed passenger rail: Future development will depend on addressing fnancial and other challenges and establishing a clear federal role. U.S. Retrieved from https://www.gao.gov/products/GAO-09-317 Golaszewski, R.S., and Klein, F.J. (1998). Airline and manufacturer issues in marketing large commercial transport aircraf. Handbook of Airline Marketing, pp. 189–206. Edited by Butler, G.F. and Keller, M.R. Washington, DC: Aviation Week Group. Habtemarian, D. (2018, October). A brief history of air travel distribution. Business Travel News. Retrieved from https://www.businesstravelnews.com/Research/Distribution/A-Brief-History-ofAir-Travel-Distribution Halpern, N. and Graham, A. (2015). Airport route development: a survey of current practice. Tourism Management, 46, 213–221. Harper, L. (2019). Foreign owners still a taboo subject. Airline Business, 35(4), 16–19. Hood, R (2014, September). Te hassle factor. Aviation Pros. Retrieved from https://www.aviationpros. com/airports/airports-municipalities/blog/11684056/the-hassle-factor International Air Transportation Association. (2018, October). Lowering carbon emissions to 50% of 2005 levels by 2050. Retrieved from https://www.airlines.iata.org/news/iata-reaffirmscommitment-to-reducing-emissions International Air Transportation Association. (2019). Fact sheet: CORSIA. Retrieved from https:// www.iata.org/pressroom/facts_fgures/fact_sheets/Documents/corsia-fact-sheet.pdf International Civil Aviation Organization. CORSIA FAQ page. Retrieved from https://www.icao.int/ environmental-protection/CORSIA/Pages/CORSIA-FAQs.aspx Jet, J. (2018, August). How is overtourism impacting travel to popular destinations? Forbes. Retrieved from https://www.forbes.com/sites/johnnyjet/2018/08/20/how-is-overtourism-impactingtravel-to-popular-destinations/#4b9f879b35b8 Katz, B., and Kammel, B. (2019, February). Airbus ends production of A380 superjumbo afer Emirates rethinks order. Fortune. Retrieved from https://fortune.com/2019/02/14/ airbus-ends-production-a380/ Massy-Beresford, M. (2020, May 28). Te CORSIA conundrum. Aviation Daily. Retrieved from: https:// aviationweek.com/air-transport/aircraf-propulsion/daily-memo-corsia-conundrum Nolte, C. (2019, June 29). Who needs high-speed rail? California already has a slow train to nowhere. San Francisco Chronicle. Retrieved from https://www.sfchronicle.com/bayarea/nativeson/article/ Who-needs-high-speed-rail-California-already-has-14060529.php Novak, M. (2013, November). What international air travel was like in the 1930s. Gizomodo. Retrieved from https://paleofuture.gizmodo.com/what-international-air-travel-was-like-in-the1930s-1471258414 Oliver Wyman. (2019). Airline economic analysis 2018–2019. Retrieved from https://www.oliverwyman.com/content/dam/oliver-wyman/v2/publications/2019/apr/APRIL262019_Airline_Economic_Analysis_2018-2019vFweb.pdf Pepper, F. (2018, August). Flights create millions of tonnes of passenger waste per year, with little recycled. Australian Broadcasting Corporation. Retrieved from https://www.abc.net.au/ news/2018-08-21/plastic-waste-created-in-plane-cabin-no-easy-solution/10117576 Porter, M.E. (1980). Competitive strategies: Techniques for analyzing industries and competitors. New York: Te Free Press.

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GLOBAL INFLUENCES Porter, M. E.  (2011). Vision 2050 IATA Report. Retrieved from https://www.iata.org/contentassets/ bccae1c5a24e43759607a5fd8f44770b/vision-2050.pdf Qantas (2019, May 8). Qantas operates world’s frst zero waste fight. Retrieved from: https://www. qantasnewsroom.com.au/media-releases/qantas-operates-worlds-frst-zero-waste-fight/ Regional Airline Association. Annual Report, 2018. Retrieved from https://www.raa.org/wp-content/ uploads/2019/04/raa_annual_report_2018_v18_o.pdf Rhoades, D. (2014). Evolution of international aviation: Phoenix rises. Burlington, VT: Ashgate. Sdoukopoulosa, A., Pitsiava-Latinopouloua, M., Basbasb, S., and Papaioannoua, P (2019). Measuring progress towards transport sustainability through indicators: Analysis and metrics of the main indicator initiatives. Transportation Research Part D, 67, pp. 316–333. Spike Aerospace, Inc. (2018, June 5). Spike Aerospace. Retrieved from http://www.spikeaerospace. com/. Spinks, R. (2019, August). Why is the U.S. never deemed ‘unsafe’ as a travel destination? Skif Magazine. Retrieved from https://skif.com/2019/08/06/why-is-the-u-s-never-deemed-unsafe-asa-travel-destination/ US Department of Transportation. (2019). U.S Air Carriers. Retrieved from https://www. transportation.gov/policy/aviation-policy/licensing/US-carriers U.S. Travel Association (May, 2020) Travel-related unemployment hits 51% just ahead of Memorial Day. U.S. Travel Association. Retrieved from https://www.ustravel.org/press/ travel-related-unemployment-hits-51-just-ahead-memorial-day Vasigh, B., Fleming, K., and Tacker, T. (2018). Introduction to air transport economics: From theory to application. New York: Routledge. Whitley, A. (2019, June). Qantas scales back ambitions for ultra-long fights. Skif. Retrieved from https://skif.com/2019/06/03/qantas-scales-back-ambitions-for-ultra-long-fights/ Whyte, P. (2019, May). Te anti-fying movement is slowly starting to hurt European airlines. Skif. Retrieved from https://skif.com/2019/05/28/the-anti-fying-movement-is-slowly-starting-tohurt-european-airlines/ Zhang, A. and Zhang, Y. (2018). Airline economics and fnance. Te Routledge companion to air transport management, pp. 171–188. Edited by Nigel Halpern and Anne Graham. London: Routledge.

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CHAPTER 3

Technology Airline digital marketing CHAPTER OUTCOMES At the end of this chapter, you will be able to .˜.˜.  Describe the role of big data and marketing analytics as they relate to airlines  Identify the various travel stages and how airlines use digital strategies to market to travelers in each stage  Differentiate between the various digital marketing platforms that airlines use  Discuss the relative strengths of each digital platform and how airlines leverage them  Use your understanding of the chapter content to discuss an industry case study related to airline digital marketing

Introduction One of the macroeconomic categories touched upon in Chapter 2 is the role of technology. While technological advancement is a large force in many industries, it is hard to argue that any other macro factor has had as much of a disruptive force in the airline industry as technology. Whether it has been advancements in aircraf technology allowing airlines to fy more non-stop fights on longer routes with smaller and more cost-efficient aircraf, radio-frequency identifcation (RFID) bag-tracking devices and automated check-in capabilities at airports, or sophisticated applications allowing customers to easily book fights in a matter of minutes on their mobile devices, technology is pushing the industry forward and will be the focus of this

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TECHNOLOGY chapter. More specifcally, customer-facing technology will be the focus as advancements in this area have the greatest marketing implications. Tese advancements, when taken collectively, have come to be known as digital marketing—the use of all digital media including the internet and mobile to communicate and create exchanges with customers (Pride and Ferrell, 2019). Perhaps no other area of marketing over the last 20 years has had such a profound efect on business strategy, customer relationship management, and ultimately proftability as an airline’s presence in cyberspace. Hence, its coverage resides early in this text so that practitioners and students alike can envision how it applies as subsequent marketing fundamentals within the text are covered. Te airline digital footprint actually began back in the 1960s with the frst computerized reservation systems (CRS) used to book airline tickets (Hanke, 2016). However, the history of these systems will be covered in Chapter 6 which focuses more specifcally on the evolution of marketing channels and ticket distribution in the airline industry. Instead, digital marketing as covered here can be assumed to have its origins with the popularization of the World Wide Web starting in the mid-1990s. Tis digital revolution of the last 25 years has brought several advantages to airlines. For starters, digital platforms have become the most cost-efficient means by which airlines sell tickets. Second, these platforms allow for more frequent interaction with customers compared to more traditional forms of advertising. Lastly and increasingly, digital marketing allows airlines to more efectively target consumers and personalize marketing ofers. Before we discuss the various digital platforms that airlines use to connect with customers throughout the stages of travel, we will frst talk about the supporting role of big data and marketing analytics.

Big data and marketing analytics Te rise of big data and associated analytics have profoundly infuenced the travel sector in the last several years. It is important to frst distinguish what is meant by these concepts. Afer all, airlines have been using computers and analytics to track and improve all sorts of business activities for decades now. As chronicled in the Harvard Business Review, big data has ushered in a digital revolution for businesses frst by the sheer volume of data for which analytics can be applied to (McAfee et al., 2012). For instance, have you ever heard of a petabyte? It is the equivalent of one quadrillion bytes of data or the old-world equivalent of 20 million fling cabinets worth of information (McAfee et al., 2012). Many companies such as the global retailer Walmart are now operating in this volume of data within single datasets. In the airline world, it is commonly known that a single fight on a newer aircraf such as the Boeing 787 can generate up to a half of terabyte worth of operational data on all manner of things including parts performance and fuel burn efficiency. On the marketing side, the sheer volume of tracking data alone that airlines now have related simply to how visitors navigate their websites is overwhelming. Te second diferentiating factor of big data is velocity—the speed by which data is generated and can be acted upon in real time allowing companies to be more agile, especially in the area of marketing (McAfee et al., 2012). Airlines are starting to use artifcial intelligence and machine learning in all manner of ways to improve their operations. Better knowledge

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TECHNOLOGY about demand trends, for instance, have helped airlines to quickly shif extra fights to markets that are trending because of special events (Josephs, 2019). Lastly, the third “v” that makes the big data era unprecedented refers to the variety of data and means by which it is generated. Whether through connected sensor readings on airplanes, ofen referred to as the “internet of things,” wearables such as a smartwatch, Global Positioning System (GPS) signals generated by mobile phones, or images posted on social media, companies now have access to a treasure trove of real-time information both structured and unstructured. Meanwhile, through decades of database management airlines have learned that the more they understand about their business the better decisions that they can make. Te advanced tools and techniques by which marketers make sense of big data comprise the analytics side of the equation. Most companies, including airlines, are drowning in data. Te real value comes from an airline’s ability to mine big data, recognize patterns, and bring to the surface unique and actionable customer insights. Te airline industry is ideally suited for data management and analytics because airlines, by law, have to capture more information about customers who are fying. Fortunately, data scientists are learning to work with and glean intelligence from all sorts of both structured and unstructured data. Correspondingly, airlines are recognizing that their ability to work with such data complexity is a big factor in their future success. As previously alluded to, the range of technology and big data application for airlines is virtually limitless; hence, the remainder of this chapter will focus on airlines ever growing digital footprint in the area of marketing.

The five stages of travel Before we discuss the myriad ways in which airlines market digitally, it is frst helpful to understand the various stages of travel from the perspective of travelers themselves. When we think of airlines we tend to focus on the actual fying or airport experiences associated with the traveler journey. Yet, when thinking about the role of airline digital marketing it can be insightful to consider a more holistic view of the traveler journey as encompassed in fve diferent stages.

Dream

Plan

Book

Experience

Share

Figure 3.1 The fve stages of travel

Dream We are all dreamers and one of the things that we like to dream most about is travel—ofen to far-away places that are conducive to air travel. Tourism and destination marketers have understood this for a long time and have sought to provide the inspiration for dreaming that leads to subsequent stages of travel. Trough traditional marketing tactics such as TV

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TECHNOLOGY commercials, picturesque print ads, and clever advertising slogans these tourism marketers hope to spark desire. Yet, this dreaming process may be fostered more organically through inspiration provided by someone’s family and friends who share their own travel experiences online. Certain digital platforms such as social media are ideally suited for this type of word-of-mouth sharing and will be subsequently discussed. According to a Google report, when US leisure travelers are in this dream stage of the travel cycle, 78 percent of them have not decided what airline they will travel with (Google, 2016). Hence, airlines are wise to learn more about customer behaviors and thought processes during this exploratory phase.

Plan Travel planning can be a daunting process as evidenced by the countless number of travel experts that seek to ofer guidance. Traditionally, these travel agents have functioned in a bricksand-mortar world where they met with travelers to help plan trip details including air travel itineraries. Te digital landscape has greatly disrupted this traditional process allowing for all sorts of new planning tools and approaches online while relinquishing more control of the process to travelers themselves. By this stage in the cycle, in fact, it is not uncommon for travelers to have visited hundreds of unique online sites, ofen having revisited some of the same sites multiple times. How airlines go about making themselves visible in cyberspace as travelers’ progress through this phase is critical. Search engine optimization (SEO), for example, is one such way that airlines can increase their chances of being recognized during this phase. Te meaning of SEO along with other ways in which airlines can be noticed in cyberspace will be addressed.

Book Tere comes a point in which the traveler is done with the research phase and is ready to make their travel reservations which may include buying an airline ticket, booking a hotel, purchasing a rental car, or a host of other elements related to their journey. Once again, this process was traditionally handled by a travel agent and has increasingly shifed online. Not only has it shifed online, but according to the same Google report previously referenced, 94 percent of leisure travelers shif between devices as they plan and book their trips. Terefore, the ever-growing importance of mobile technologies will also be a focus in this chapter. Further still, once airlines have travelers in the booking process, the manner in which they display booking options to the traveler can have a large impact on the revenues ultimately obtained by the airline. Hence, we will briefy cover the role of psychology as it applies to the consumer decision process. Incorporation of consumer psychology as airlines determine how they present and sequence their oferings online not only impacts airline revenues in the short run—but also traveler affinity toward the brand in the long run.

Experience Of course the actual experience on an airline is most likely to determine if a traveler will fy on that airline again in the future. Te airline must meet or exceed customer expectations that are set during the previous stages and these are all before the traveler even takes a seat on the

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TECHNOLOGY plane. In fact, ample opportunity exists for airlines to continue making digital ofers afer the fight is booked and prior to departure. Tese ofers can enhance the traveler experience if handled defly by the airline. Tere is also growing traveler reliance on technology throughout the journey whether it is to receive timely updates pertaining to the fight status on the airline’s mobile application or the in-fight connectivity that allows the traveler to work, be entertained, or even be better informed about their destination. Afer all, according to the same Google report, 85 percent of US leisure travelers decide on specifc activities only afer having arrived at their destination. In-fight technologies will be further discussed in Chapter 5 as they align with the airline product, but suffice it to say there are ample opportunities for airlines to connect digitally with travelers throughout this stage and beyond.

Share Finally, the trip is over and the airline’s job is done, right? Not so fast. Technology has provided all sorts of ways for an airline to continue the relationship with travelers afer the journey. Whether it is through timely email queries asking for feedback or digital ads promoting the next potential trip, the marketing maxim that it is usually easier and more cost-efective to retain a customer versus constantly having to get new ones certainly applies to these posttrip communications. Also, it is important to consider how this stage in the travel life cycle connects to the frst stage of dreaming. Travel marketers refer to this stage as “sharing” or sometimes “refecting.” Tis pertains to the propensity of travelers to share about their travel experiences online, especially through posting photos on social media. Tis sharing serves as digital word-of-mouth that inspires the next set of dreamers. In fact, well over 50 percent of leisure travelers claim to have shared photos of their vacations online and this number climbs to a whopping 90 percent among younger travelers who actively share their vacation photos on social media during their trips (Del Gigante, 2018). Trough technology, airlines have signifcant opportunity to encourage travelers to share about their experiences which not only help to inspire the next set of dreamers but can help these dreamers make the connection to the airline brand in the process. In closing, though it is helpful for airlines to consider all fve travel stages, it is important to reiterate that this framework is primarily based on the thoughts and behaviors of leisure travelers considering holiday and vacation trips. Tese are merely a subset of travelers and not all potential airline customers go through all fve stages or go through the stages in the same manner. Chapter 4 will focus on customer centricity and the entire range of market segments that airlines must consider. Meanwhile, the remainder of this chapter will focus on the digital technologies through which airlines can market to existing and potential customers.

Did You Know? The lines between traditional and digital marketing have blurred to the point that it has become diffcult to classify all of the various communication methods. A common framework used by marketers is POE, which stands for “paid,” “owned,”

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and “earned.” Paid refers to a third-party channel in which the marketer pays for promotion. Owned refers to a channel of promotion that a marketer creates and controls. Meanwhile, earned refers to an unpaid channel of promotion generated by third parties. As you learn about the various digital media that airlines use in the remainder of this chapter, consider how the media may be classifed according to the POE framework.

Airline websites Given the range of newer digital platforms including social networks and mobile applications, a company-owned website might seem downright old-fashioned at frst blush. Yet, the website remains the single most important digital property for any airline. Airline websites are likely to be visited throughout the travel stages previously discussed—ofen multiple times. According to airline e-commerce expert Michael Hanke (2016), the frst official airline website for marketing purposes was launched by US-based Southwest Airlines in March of 1995. Primarily launched as a glorifed brochure of information about Southwest, airline websites have come a long way since that time. A common tool used to evaluate website design and functionality is the 7Cs framework (Marshall and Johnston, 2019). As such, an analysis of airline website interface considerations according to this framework is ofered in Table 3.1. Diferences in website design are ofen predicated on the overall site’s core purpose. For instance, Google has become famous for the simplicity of their website having just the name and a large search bar in the middle surrounded by whitespace. From the very beginning, Google signaled that they are a gateway for “search” and this clarity of purpose has been one of the hallmarks of their success. Other websites such as news outlets have the primary objective of delivering content. A visit to ESPN.com will fnd a screen awash in scoreboards, pictures of athletes, and an overwhelming array of sports-related news content. A sports fanatic is not as concerned with simplicity of design as they are with getting their daily dose of sports news and insights about their favorite teams. Meanwhile, the primary objective for most airline websites around the world is to drive commerce. While Southwest Airlines may have been the frst airline to launch an official website, the frst airline to conduct commerce through the web was Alaska Airlines in December of 1995 (Hanke, 2016). Airlines use what is ofen referred to as an internet booking engine (IBE) to sell tickets and related travel products online. Having a robust website that can handle purchases directly with customers helps an airline to greatly reduce costs associated with their call centers. Selling tickets directly through a company-owned website is also cost-efective because the airline is not having to pay a commission to a third party to distribute its tickets. Perhaps most importantly, having complete authority of this digital property allows airlines to fully control their market oferings to customers and they have become very adept at dynamically upselling and cross-selling all manner of products and services as customers move through the purchase process. Further still, travelers generally believe their best opportunity for the lowest fares are likely to happen when booking directly with an airline (OAG, 2017).

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TECHNOLOGY Table 3.1 The 7Cs of website design Context

Refers to a site’s overall layout and design. The main goal for airlines is to be visually appealing with their graphics and design features without sacrifcing speed and ease of navigation.

Commerce

The extent to which a site is designed to handle commercial transactions. Considering that this is the single most important objective for airline websites, it is critical that they make this the focus and ease the process for customers. Most airlines place the booking process right at the center of their main page and even prepopulate the departure airport based on a user’s location and prior history on the page.

Connection

The degree to which a website is linked with other sites (both coming and going). Airlines often work closely with various third-party partners to drive traffc to their sites and to connect customers with a greater array of related travel products.

Customization

Refers to the degree to which customers can personalize the website based on their own preferences. Most airlines allow customers to customize the look and feel of their websites to a certain extent. Airline websites will allow customers enrolled in their frequent fyer programs, for instance, to view personalized activity associated with their account. It is also extremely important for airlines with an international presence to allow for customers to navigate the website using their native language.

Communication

The degree to which a website fosters two-way communication between the company and customers. Commercial air transport can be a complicated and confusing process and airlines need to provide multiple ways to contact them so that customers can choose their preferred method. This can involve simple approaches such as offering a toll-free phone number, email address, and customer service form to more sophisticated approaches such as chat functions, online digital assistants, and digital avatars.

Content

Refers to the specifc text, pictures, videos, and even related sounds that a company wants to present to a customer at a given time. In the past, companies often merely put their existing print materials online, but these companies have come to realize that the web offers a great outlet to provide original content and even offer products and services that customers cannot get through traditional storefronts. Airlines have also come to realize that their e-commerce platforms allow them to become true retailers and many airlines now promote a vast array of travel-related products and services.

Community

Relates closely to communication, but in this case it refers to the degree to which a company fosters customer-to-customer communication. Some airlines host blogs and discussion forums; however, most airlines these days prefer to foster community on their social media platforms while keeping the primary objective of their website focused on commerce.

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TECHNOLOGY Several airlines, especially those born afer the internet revolution, consider e-commerce as a primary fxture in their overall business strategy. Even Lufhansa—the German-based legacy carrier—now drives more than half of its bookings directly through its online platforms (O’Neill, 2019). Many airlines also manage microsites—auxiliary website domains that are usually connected to the airline’s main website. Tese microsites allow the airline to focus more specifcally on sub-areas of their business such as air cargo and holiday travel packages. Another microsite that some airlines operate is a blog—short for “web log” which is a website dedicated to building community among users with conversational style topics and ofen discussion forums related to travel tips and other airline-related matters.

3.1

Marketing in practice

Southwest—educating people about “transfarency” In 2015 Southwest Airlines launched a marketing campaign centered on a word they made up called “transfarency.” The savvy marketers involved in the campaign even created a pronunciation and defnition for the word in the same style as a dictionary would. As part of this campaign, Southwest created a microsite called transfarency.com. On this microsite Southwest touted their mantra and associated hashtag #Fees Don’t Fly, while giving customers a means of comparing all of the fees that competitors charge that Southwest claimed were hidden ways to nickeland-dime customers into paying more. By highlighting the transparency of their approach, Southwest sought to differentiate their airline in the minds of customers and the public at large. This microsite has since been scaled back to mainly focus on communicating Southwest’s core philosophy of transparency and —just as importantly—to connect customers with their internet booking engine so that they can plan their next journey. Source: Southwest website

As alluded to earlier, airlines have seen tremendous revenue growth through raising the sophistication level in which they present their market oferings online as customers navigate through the booking process. In many cases airlines have adopted principles from successful online retailing giants such as Amazon. Tese retailing principles are ofen predicated on behavioral economics—the study of economic decision making from a psychological perspective. Richard Taler, professor and Nobel laureate, is ofen considered the father of behavioral economics (Gino, 2017). He notes that people can ofen be “nudged” in their decision making based on an understanding of how the mind works, biases that we are susceptible to, and the context in which information is provided (i.e., framing). One airline example of this “nudging” is ofered in Figure 3.2 by Jay Sorenson—recognized expert in airline ancillary revenue best practices. In this case, when shopping for a fight on a European carrier people are primed for choosing based on a phenomenon ofen referred to as

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Classic

Premium

Light

Snack S & Beverage

Snack & Beverage Snack & Beverage

1 x Hand baggage

1 x Hand baggage

1 x Checked baggage

1 x Hand baggage 1 x Checked baggage

Booking changes for a free (possible price di˜erence)

Seat in preferred zone Booking changes for a fee (possible price di˜erence) Change to earlier fight on the same day

$ 79 $ 99

$ 124

Figure 3.2 Fare options Source: Sorenson (2018)

the “magnetism of the middle”—meaning that the middle choice is most popular because it allows people to avoid the extremes (Shotton, 2018). Marketers, in fact, will ofen add a third choice on the high end primarily to make the middle choice more appealing. As Sorenson notes, when a customer initially chooses an economy ticket option while in the booking path for this airline, she is presented with three branded fare options (Light, Classic, and Flex). Tis presentation makes it easy for customers to discern what they are getting with each option, while the forward placement and highlighting of the Classic option in the middle makes it the focal point. Marketers will ofen add a “recommended” banner as an extra dose of reassurance for the preferred choice. When airlines frame their oferings efectively online they have found that customers are ofen willing to spend above the basic ofering. Focus will now shif to other digital platforms and tactics that airlines must carefully consider.

Search marketing When a person types in a word or phrase that they want to know more about into their favorite online search engine such as Google or Bing, they are engaging in “search.” Travelers, of course, seek all sorts of information as they consider potential trips. In fact, during the planning phase of the travel life cycle, leisure travelers indicated that search is the most common way in which they discover the brand they ultimately book with (Google, 2016). Marketing in this area is commonly split into two main categories: search engine marketing (SEM) and search engine optimization (SEO). Along with many travel-related companies, airlines compete to be on the frst page of search results based on traveler queries—preferably as high as possible. SEM seeks to achieve this advantageous positioning through active sponsorship ofen referred to as paid search. Tere are multiple forms of paid search including bidding on keywords and it is crucial that airlines carefully consider which key terms that they want to bid on. SEO, meanwhile, refers to unpaid search in which a digital site has been optimized to place highly on search engine results pages (SERPs) organically. To achieve high rankings organically depends on the search engine’s algorithms such as Google and Bing. Tese proprietary algorithms evaluate several factors such as the popularity of the website and manner in which it was constructed.

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TECHNOLOGY Airlines must carefully develop holistic strategies that jointly consider both SEM and SEO goals and they will ofen work with third-party marketing agencies that specialize in digital media. Searches can include generic phrases such as “cheap fights,” branded terms such as a particular airline’s name, or trademarked frequent-fyer program (e.g., Delta Air Lines and SkyMiles), or even a combination of these. Hence, airlines have to consider which of their branded terms they are going to pay to have a sponsored link at the top of search results versus which ones they think can achieve a high-ranking organically. Industry e-commerce expert Michael Hanke advocates a strategy in which airlines spend money optimizing their own sites via SEO for branded terms because customers will already be familiar with the airline when searching for branded terms and likely further along in the travel purchase process. Meanwhile, he advocates for more aggressive SEM spending on generic terms— especially niche terms—as these terms provide an opportunity to bring in new customers who are likely using the generic search terms when they are earlier in the travel planning process and less committed to a particular airline brand.

Display advertising Another digital promotional tool ofen used by airlines is digital display advertising—the creation and execution of advertisement via any form of digital media (Marshall and Johnston, 2019). Display ads are one of the most popular forms of promotion in cyberspace for a host of reasons. First, they are extremely cost-efficient in relation to most other media options. Second, display ads can be highly targeted. Most digital advertising these days is handled programmatically through automated advertising exchanges. In fractions of a second, airlines can decide if they want to bid for an ad placement based on a web traveler’s previous online surfng behaviors paired with information the airline may have internally about the web traveler such as demographics and frequent fyer status. A simpler form of digital display advertising that many have experienced is a practice called retargeting. For instance, if we have visited an airline website but stopped short of purchasing a ticket it is likely that we will start to see display ads for the airline chase us around the internet across various sites that we visit. Considering the host of websites that people visit during the dreaming and planning stages of the traveler life cycle this tactic can be especially efective for airlines. Another inherent advantage of digital advertising is the speed and ease with which it can be measured. Companies that use display advertising, for example, can measure the number of impressions (i.e., each time someone is exposed to an ad), click-through rates, and even conversions which occur when a customer subsequently follows through with a purchase. Tese display ads come in a variety of sizes/formats and can include text, graphics, interactive elements, and video. Hence, they can be used by airlines to both increase brand awareness and to promote immediate calls for action such as fare sales. Lastly, these display ads can be quickly customized and adjusted for viewing on desktop, tablet, and mobile devices. A downside to this marketing approach is that these ads can annoy potential customers and hurt the brand in the process. It is more likely that these display ads will simply be ignored. From the frst display ad in 1994 that achieved click-through rates over 40 percent, the click through-rates these days for people exposed to an ad are ofen fractions of a

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TECHNOLOGY single percent (LaFrance, 2017). One special form of display worth noting is the sponsorship banner. As a heavily used form of promotion by airlines, sponsorship will be covered more holistically in Chapter 7. Yet, most sponsorship agreements that airlines make with properties such as sports teams, arts festivals, and other community groups usually entail a certain amount of digital signage on the respective organizations websites signifying the partnership. Tese displays are mainly meant for brand building but can, on occasion, be tied to more immediate sales promotions and contests. Digital sponsorship signage is generally part of a larger efort to generate goodwill for the airline.

Emailing marketing Similar to traditional websites, direct marketing through email may be considered an antiquated tool for many at frst blush. Quite the contrary, email marketing is still one of the most efective marketing vehicles that airlines have at their disposal and will be for some time to come. Airline email communication involves a host of themes including weekly e-newsletters, fare promotions, contests, frequent-fyer status updates, and customer service related communications. It is important to distinguish between marketing-related emails and customer-service emails as the latter are only supposed to be related to operational matters such as fight notifcations. Few people realize that marketing-related emails, by law, must involve active consent on the front end and customers must also have an easy means of unsubscribing to the email notifcations (Hanke, 2016). Tere are a variety of means for airlines to obtain permission such as when customers book a fight with an airline, sign up for an airline’s loyalty program, or even sign up for potential rewards related to an online contest or sweepstakes. Te key is that by opting in for email notifcations there is a greater chance that this segment of customers actually prefers to receive communications this way from airlines, and, further still, customers can even share preferences allowing for customized emails. As long as airlines do not over-communicate with too many emails (i.e., spamming customers) they actually have an above average chance of conversions meaning that an email notifcation for a fare sale or some other call-to-action actually prompts the customer to follow through. Well-timed emails are especially valuable for sparking inspiration during the dreaming stage of the travel life cycle (Bitzer, 2012). As an indication of the potential, more than 18 million people have opted in to receive the weekly email-based “Click ’n Save” deals newsletter from Southwest Airlines (Southwest Media, 2019). Tis can become habit forming for customers to check their weekly newsletter and the primary means by which they book fights. Modern sofware allow for personalized content to be generated quickly and costefficiently giving airlines an extremely targeted approach for communicating with customers directly. Similar to display ads, airlines have ample ability to track engagement with email right down to particular themes and phrases that generate more click-through traffic. When emails are clever enough they may even generate free shares from customers passing them along to their family and friends. Once again, it is important that airlines stay abreast of all laws pertaining to email marketing as violations cannot only generate brand backlash but legal ramifcations as well.

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Social media marketing Over the last decade or so airlines have taken advantage of the proliferation of social media usage that has happened around the world. Loosely defned as websites and applications that allow users to create and share content along with participating in social networking (Pride and Ferrell, 2017), these channels are a natural ft for airlines for a number of reasons. For starters, travel is one of the most widely discussed topics on social media and fts well with the travel planning life cycle discussed earlier. People routinely share comments and photos of their trips on social media and their network of family and friends use these postings as inspiration when planning their own journeys.

Did You Know? KLM, the Dutch-based airline, happens to be the oldest airline in the world. Yet, KLM is widely regarded as one of the best companies in the world, not just among airlines, at mastering the new world order of social media. Few people realize, however, that KLM’s social media prowess was born of necessity. On April 14, 2010 a volcano erupted in Iceland causing air traffc over the Atlantic to ground to a halt and impacting millions of travelers. KLM’s customer service desks and call centers were completely overwhelmed forcing passengers desperate for information to turn to social media platforms such as Twitter and Facebook with pleas for help. KLM responded by creating a social media room where company volunteers took turns working in shifts responding to customers. In the process KLM’s belief in what social media can accomplish was born. Source: KLM company blog (2015)

As previously mentioned, social media is ideally suited for leveraging the two Cs of website design, namely, connection and community. Te structure of major social media platforms allows for quick and easy posting with links that can connect users to all manner of newsworthy content about the airline. Te heart of social media is fostering engagement. Tis happens through two-way conversations between airline and customer and through community building as customers can carry on conversations of their own by sharing, commenting, and replying to various posts. Hence, social media is ideally suited for viral marketing—a situation in which a marketing message gets spread not just by those who created it but by those who are exposed to it. YouTube, the video-sharing platform, ofers one such way for airlines to create intriguing videos that, on occasion, earn millions of views across the internet. Social media also provides a unique opportunity to engage in infuencer marketing. Defned as marketing that uses key leaders to spread a brand’s message, airlines routinely work with individuals who are popular on social media, especially travel experts and

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TECHNOLOGY bloggers, to help advocate for the airline’s brand. Te word-of-mouth potential given the large followings of these so-called infuencers makes them an attractive marketing outlet for airlines. British Airways, Southwest and Qantas are three such airlines that have been lauded in recent years for their campaigns which involved having social media infuencers travel on their respective airlines and post about their journeys (PMYB, 2018). Yet, a word of caution is in order considering that there is a high degree of online fraud involving fake accounts and ways for social media users to buy artifcial engagement. Hence, it is important for airlines to do their homework when deciding which infuencers to partner with. It is worth noting that social media also provides another opportunity for airlines to engage in display advertising, generating context specifc advertising messages that appear alongside user newsfeeds. Te overall extent to which airlines are able to build brand loyalty through social media is unknown. However, as long as airlines post regularly and provide meaningful content, social media can aid in brand awareness both when customers are at various stages of the travel planning life cycle and during periods of travel dormancy. A detailed discussion of individual social media platforms is beyond the scope of this book. Nevertheless, airlines are advised not to make half-hearted attempts to be on all social media platforms, but instead airlines are better served by picking a few that they are committed to maintaining an active presence on and for which they have strategic intent (Hanke, 2016). Te major social media platforms include Facebook, Twitter, Instagram, YouTube, and LinkedIn. Yet, social media has a regional component to it as well. WeChat, for instance, is the most popular social media platform in China and other parts of Asia. Airlines are wise to follow the marketing rule of thumb to be where their customers are at. Since Finnair has a large proportion of their route structure connecting Europe and Asia they maintain an active presence on WeChat (Nigam, 2016). Strategies on the various platforms will vary, but the key is for airlines “to have a strategy” and a cohesive plan to build engagement. Airlines need to determine their primary objectives for each platform which can involve branding, destination marketing, sales promotion, entertainment, interactivity, customer service, or some combination of these. Another aspect that airlines need to carefully consider is their tone of voice (i.e., personality) when communicating on social media. Is it friendly, professional, warm, playful, sarcastic, casual, authoritative, inspiring, or some combination of these? Some brands including the popular fast-food chain Wendy’s have gained notoriety by being sarcastic on social media and some people actually seek a good ol’-fashioned roasting by Wendy’s. Teir most sarcastic posts have been shared across the internet far and wide. Given the seriousness of fight safety and lack of adequate customer service that the industry is known for, it would unwise for airlines to adopt a sarcastic tone on social media. Yet, there are several options to choose from and it is important that airlines adopt a tone that matches the core ethos of their brand. Given the rapid uptake of social media, some airlines have even developed command centers in which they actively monitor and engage in social listening to see how the airline is being discussed across the internet and respond in real time in order to better manage the reputation of their brands. Automation tools are also gaining adoption to help companies manage the volume and complexity of online communications. For example, some airlines have started using chatbots—computer programs designed to simulate human conversations with users over the internet—in order to handle routine customer inquiries. With such an

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TECHNOLOGY approach there are tradeofs to consider between speed of response and personalization of the message. Customer service will be covered more thoroughly in Chapter 10; however, there are indications that it is wise for airlines to respond, and respond quickly, to customer service complaints. A study demonstrated that customers who tweeted airlines with a complaint were willing to pay, on average, almost $9 more on future fights when they got a response from the airline. And, the faster the airline responded the more customers were willing to pay (Huang et al., 2018). An airline’s presence on social media in some cases has even extended to the personalities that run them such as Richard Branson of Virgin and Tony Fernandez of AirAsia that have sizeable followings on social media and routinely post about a range of company topics.

3.2 Marketing in practice EasyJet—tapping into the wanderlust of travel Instagram, the popular photo-sharing social media platform is ideally suited for the “dreaming” stage of travel as people see exotic photos posted by their friends and become inspired to want to go there themselves. In 2018 the European-based airline EasyJet tapped into this wanderlust by providing a means on their app to easily book a fight to a European destination based on simply providing a screen grab of an Instagram post. The app uses artifcial intelligence to determine the location of the picture and geo-search capability to fnd the nearest airport. This clever feature shows what can be accomplished when theory about travel motivation is combined with advances in technology. Source: EasyJet website

Mobile marketing and beyond Te biggest source of growth potential in the digital arena for airlines is on mobile platforms such as smartphones, tablets, and wearables. Mobile has achieved mass medium status with the advantages of being private, interactive, immediate, and always on (Hanke, 2016). Nearly 50 percent of visits to Google Flights, in fact, occur on a mobile device and this is only projected to grow in the future (Google, 2016). As such, the smartphone is particularly wellsuited for use throughout the travel stages described earlier. Airlines routinely advertise on mobile sites, through mobile search, and within various mobile applications. Meanwhile, most airlines these days have their own downloadable mobile applications with ever-increasing functionality. Tese applications once were primarily a means of getting general airline information and, at best, a means of checking on frequent fyer awards and operational information for pending fights. However, these applications have morphed to become booking engines in their own right and the primary means by which customers track the location of their baggage in real time.

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TECHNOLOGY Increasingly, these applications are becoming the go-to digital source during the fight experience stage of travel due to their ability to easily and conveniently notify travelers of all manner of operational aspects including fight delays and gate-change notifcations. Considering that customers are not likely to download more than a couple of airlinerelated apps, the ones that customers become familiar with can become a source of brand affinity for the airline. A growing mobile technology that has practical implications for the travel sector is geolocation marketing—involving the ability of a marketer to determine the radius within which to show an advertisement based on users’ GPS coordinates as registered on their smartphones. Tis approach allows for highly targeted marketing messages based on user behaviors allowing for context-specifc timing. Small airports, for instance, will target ads to potential customers who live within their catchment area but display the tendency of using bigger airports farther away. Based on GPS technology, these potential customers may receive the ads making them aware of the convenience of their local airport while they are in the larger airport making for a highly targeted and contextually relevant outreach by the small airport. Another common approach used by airlines is combining aspects of both traditional and digital marketing—ofen creating elements of augmented reality. For example, a print ad for an airline in a magazine may contain a quick response (QR) code that takes the user to a richer digital medium such as a video or game site when scanned by a smartphone. German-based carrier Lufhansa, for instance, launched a “walk-in ad” via the Shazam mobile app in which customers could view holiday destinations served by Lufhansa such as Hong Kong and New York City complete with sound efects and 360-degree views of the destinations controlled by motion sensing technology. Tere is also functionality to book a real life trip on Lufhansa directly from the mobile app (Fenn, 2018). Lastly, airlines are getting more involved with wearable technology through such features as applications for smartwatches and RFID bracelets for unaccompanied minors. Some airlines are even aggressively pursuing advances in virtual reality as the profle of ANA below suggests.

Did You Know? In a bold announcement ANA Holdings, the parent of Japanese-based Nippon Airways, announced it is developing mobile robots for aircraft-free trips through avatars. Representing the digital embodiment of a person, these avatars will someday allow people to quickly travel anywhere in the world—“virtually” of course. While this may seem counterintuitive to an airline’s business goals, ANA president Shinya Katanozaka thinks otherwise. He indicated that the mission of ANA goes beyond simply fying aircraft and they intend to have a front-row seat in a future avatar-driven world. Source: Nannichi (2019)

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TECHNOLOGY

Conclusion Technology is a disruptive force and airlines are wise to consider the latest technological advancements as a means of diferentiating their brands in the marketplace. As the chapter opening suggests, airlines that are best able to use marketing analytics to gain actionable customer insights from the vast amount of data now available in both structured and unstructured form will position themselves for success. Meanwhile, there are a host of digital platforms that are well suited for airline marketers to communicate with customers and foster goodwill and community surrounding their brands. While certainly not an exhaustive list, airline marketing in cyberspace can generally be categorized in terms of websites, search marketing, display advertising, email communication, social media engagement, and the ever-growing marketing opportunities on mobile devices. By considering the full travel cycle including the stages of dreaming, planning, booking, experiencing and sharing, airlines can best determine how the various digital platforms can be leveraged for marketing purposes that drive an airline’s fnancial goals while beneftting the customer at the same time. Speaking of which, there are many types of customers and the focus will now shif in Chapter 4 to better understand the major market segments that airlines need to consider.

Chapter review questions 1 Pick your favorite airline’s website and evaluate it according to the 7Cs framework. 2 Using your favorite airline, search for it on Google. Does the airline website show up at the top of the search results organically or does it display as a sponsored result? How about the airline’s trademarked programs such as their frequent flier program? How do these results relate to the concepts of SEM and SEO? 3 Does your favorite airline host a blog? If so, what is the blog’s primary intent? 4 Which social media platforms does your favorite airline host? How many followers does the airline have on each platform and how does this level of engagement compare with what you consider to be the airline’s top competitor? 5 Download your favorite airline’s mobile application. What major functionality does the app ofer? How would you rate its ease of use and would you be likely to use it during the various travel stages discussed in this chapter? 6 Visit www.google.com/settings/u/0/ads to see the data that Google uses to target ads for you. How much of it seems accurate based on your demographic characteristics and interests?

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CASE STUDY

AIRASIA TO BECOME THE AMAZON OF THE SKIES? On November 15, 2019 AirAsia did something rather remarkable. They became the frst airline to start selling other airlines on their own website AirAsia.com. Of course, they sell the fights of other airlines only to destinations not currently served by AirAsia themselves. This is just one innovation that is part of a larger vision of AirAsia’s co-founder and CEO Tony Fernandes to transform the company into an e-commerce giant. “Believe the unbelievable” and “Never say never” are familiar refrains from AirAsia as the airline shot to stardom in Southeast Asia from humble beginnings in 2001. It is Tony’s goal to have AirAsia become the one-stop travel shop in the region which means greatly expanding the airline’s digital market offerings. Consolidating multiple website businesses into one, the airline recently relaunched AirAsia.com with functionality to sell a range of travel-related products such as hotels and holiday packages and the future promise to use artifcial intelligence and machine learning to deliver features that no online travel agency (OTA) is yet doing. A big advantage that AirAsia is banking on is the treasure trove of customer data and brand equity that the airline has amassed over the last 20 years. As the frst airline in the region to sell tickets directly through its website, AirAsia has over 65 million active visitors to its site each month and netted $4 billion in online ticket sales in 2018. Sources: Hamdi (April 2019, November 2019)

Case study questions 1 Do you think this vision is feasible for AirAsia? 2 Who are AirAsia’s biggest regional competitors in travel e-commerce? 3 Do you think that AirAsia may lose its focus on its core airline operations by pursuing such a strategy? 4 Visit AirAsia.com or download their mobile app and evaluate it according to the 7Cs framework described earlier in the chapter. 5 Research the latest information on AirAsia’s e-commerce strategy and comment on their progress to date. For instance, has the global pandemic slowed down or derailed their eforts?

References Bitzer, M. (2012, February). How to target customers in each of the 5 stages of travel. Blue Magnet Interactive. Retrieved from https://www.bluemagnetinteractive.com/blog/how-to-targetcustomers-in-the-5-stages-of-travel/

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TECHNOLOGY Del Gigante, M. (2018). Vacationing the social media way infographic. MDG. Retrieved from https://www.mdgadvertising.com/marketing-insights/infographics/vacationing-thesocial-media-way-infographic/?utm_source=outreach&utm_source=hs_email&utm_medium= email&utm_medium=email&utm_campaign=blog_2262&utm_content=cta&utm_content= 63373178&_hsenc=p2ANqtz-82E-VZA5IC6LfKAYjU5eCCz1hB41sWxne_RcUhMitvuwL0cPq1RBAKiz9Sx9xoxUZf3tDlwnU9mhnyneu_SslTlqJ8w&_hsmi=63373178 EasyJet. (2020). Look and book a fight using just a photo. Retrieved from https://www.easyjet.com/en/ look-book Fenn, A. (2018, October). Lufhansa launches AR “walk-in ad” experience via Shazam app. Display Daily. Retrieved from https://www.displaydaily.com/paid-nerws/mdm/mdm-in-brief/ar/ lufhansa-launches-ar-walk-in-ad-experience-via-shazam-app. Gino, F. (2017).Te rise of behavioral economics and its infuence on organizations. Harvard Business Review, 2–4. https://hbr.org/2017/10/the-rise-of-behavioral-economics-and-its-infuenceon-organizations Google/Phocuswright. (2015, October). Leisure traveler study, base: U.S. leisure travelers. Google Flights Data. (2016, April). Mobile devices including both smartphones and tablets. Hamdi, R. (2019, April). AirAsia CEO looks to disrupt again, this time in online travel. Skif. Retrieved from https://skif.com/2019/04/03/airasia-ceo-looks-to-disrupt-again-this-timein-online-travel/?utm_campaign=Daily%20Newsletter&utm_source=hs_email&utm_ medium=email&utm_content=71473244&_hsenc=p2ANqtz-_AyU85tGU-TJqQ5WBMmn EejBxo90M2OfNe_6Ro-jkI1w7sJBnt9uHiiHlO9yms_vlcnd_h0nxBIi6HBXCIWMdZQ DmZlQ&_hsmi=71473244 Hamdi, R. (2019, November). AirAsia.com starts selling competitors’ fights via kiwi.com partnership. Skif. Retrieved from https://skif.com/2019/11/15/airasia-com-starts-selling-competitorsfights-via-kiwi-com-partnership/ Hanke, M. (2016). Airline e-commerce: Log on, take off. London: Routledge. Harr, G. (2015). What has KLM learned from 5 years of social media service? KLM Company Blog. Retrieved from https://blog.klm.com/what-has-klm-learned-from-5-years-of-social-media-service/ Huang, W., Mitchell, J., Dibner, C., Ruttenberg, A., and Tripp, A. (2018). How customer service can turn angry customers into loyal ones. Harvard Business Review. Retrieved from https://hbr. org/2018/01/how-customer-service-can-turn-angry-customers-into-loyal-ones Josephs, L. (2019). From CES to rodeos, airlines chase high-paying travelers with extra fights for special events. CNBC. Retrieved from https://www.cnbc.com/2020/01/06/airlines-chase-high-payingtravelers-with-extra-fights-for-special-events.html LaFrance, A. (2017). Te frst-ever banner ad on the web. Te Atlantic. Retrieved from https://www. theatlantic.com/technology/archive/2017/04/the-frst-ever-banner-ad-on-the-web/523728/ Marshall, G., and Johnston, M. (2019). Marketing management, 3rd edition. New York: McGraw-Hill. McAfee, A., Brynjolfsson, E., Davenport, T. H., Patil, D. J., and Barton, D. (2012). Big data: Te management revolution. Harvard Business Review, 90(10), 60–68. Nannichi, K. (2019, November). ANA developing mobile robots for aircraf-free trips through avatars. Te Asahi Shimbun. Retrieved from http://www.asahi.com/ajw/articles/AJ201911070001.html Nigam, S. (2016). SOAR: How the best airline brands delight customers and inspire employees. Washington, DC: Ideapress. OAG. (2017). Travel tech landscape intensifes: Why millennials and the transparency economy are shaping the industry. Retrieved from https://www.oag.com/hubfs/Free_Reports/Travel_Tech_ Landscape_Intensifes/Travel%20Tech%20Survey.pdf

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TECHNOLOGY O’Neill, S. (2019, March). Lufhansa now drives more than half its bookings directly. Skif. Retrieved from https://skif.com/2019/03/14/lufhansa-now-drives-more-than-half-its-bookings-directly/ PMYB. (2018). 3 Airline brands fying ahead of their competitors through infuencers. Retrieved from https://pmyb.co.uk/3-airline-brands-competitors-infuencers/ Pride, W. M., and Ferrell, O. C. (2017). Foundations of marketing. Boston: Cengage Learning. Shotton, R. (2018). Te Choice Factory: 25 behavioural biases that infuence what we buy. Petersfeld: Harriman House. Sorenson, J. (2018). Airline retail ’round the world: A global tour of ancillary revenues best practices. IdeaWorks. Retrieved from https://www.ideaworkscompany.com/wp-content/uploads/2018/10/ Airline-Retail-Round-the-World.pdf Southwest Media. (2019). Southwest corporate fact sheet. Retrieved from https://www.swamedia.com/ pages/corporate-fact-sheet

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CHAPTER 4

Airline market segmentation CHAPTER OUTCOMES At the end of this chapter, you will be able to .˜.˜.  Identify the marketing concept and companies that put customers frst  Distinguish between customers and consumers and articulate why it matters for airlines  Identify and distinguish the various bases of market segmentation  Apply market segmentation principles to the airline industry  Use your understanding of chapter content to discuss a case study on the evolution of airline shuttle services

Introduction You would think that customers have always been “king” for businesses, right? We tend to learn lessons the hard way as marketers though, for customers have not always been at the center, and are still not in certain frms and industries. Peter Drucker, the great management sage, said nearly 70 years ago, “the purpose of a business is to create and keep a customer.” Te mantra ever since, however, puts forth proft as the sole purpose of a business. Indeed, profts are ultimately needed in order to satisfy stakeholders, achieve growth, and ensure a frm’s longevity. Yet, these same profts are predicated on something more fundamental, namely, customers. All organizations need customers to survive and it is only through customer acquisition

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AIRLINE MARKET SEGMENTATION and nurturing that frms can deliver the profts desired. Global e-commerce giant Amazon has hardly been among the most proftable companies since its inception; yet, Amazon undisputedly puts customers at the center of its business. As evidence of this centricity, when customers are not actually present at corporate meetings an empty seat is maintained to represent the voice of the customer (Koetsier, 2018). In turn, investors have rewarded Amazon handsomely with one of the largest valuations in the world, and as of this writing, one of the largest market capitalizations in the history of business. Tis chapter starts by making important distinctions among customer groups and segues into the various theoretical bases of customer segmentation. Te chapter concludes by demonstrating how these classical segmentation approaches apply to airlines.

Evolution of the marketing concept As previously mentioned, frms have not always put customers at the center of their business—certainly not airlines. At the dawn of the industrial age most frms could be said to have a production orientation. Te focus was on mass-produced goods and, by standardizing operations, frms ensured wide market availability through afordable prices. Tis period of industrialization—extending into the 1900s—was important for it brought many previously unafordable goods into the households of the middle class (Tedlow, 1996). Te downside of this marketing approach is that the voice of the customer was forsaken in this pursuit of production efficiency. No other company personifes this production orientation more than the early years of Ford Motor Company—as chronicled in several marketing texts. Ford’s best-selling Model T prospered under the motto of “you can have any color you want so long as it is black” (Ford and Crowther, 1922). Te translation being: we do not care what you want, black is what you are going to get. Other frms eventually began to realize that by starting with customer needs and wants frst, they were more likely to ofer desirable products. A case in point, as households began to trade in their frst cars, Ford lost the lead to General Motors who catered to customer wants by ofering diferent car designs in a variety of colors in what can be described as an early attempt at market segmentation. In turn, GM took the market lead from Ford and maintained it for most of the twentieth century. Tis approach to putting customers at the center eventually came to be known as the marketing concept—a holistic company approach to focusing on customer needs and wants.

Customer or consumer—what’s the difference? Before we can make the customer “king,” however, we have to know who the customer is and what their true needs and desires are. As noted in a previous airline marketing text, distinguishing between a customer and consumer is a good starting point and of critical importance for airlines (Shaw, 2016). The consumer is the actual passenger that flies; however, she may not be the customer—the one who actually pays for the ticket. This distinction is important because motivations of customers and consumers are not always in alignment. As such, savvy marketers are in a position to capitalize on this misalignment.

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Did You Know? Southwest Airlines was once the largest distributor of Chivas Regal Scotch whisky in the state of Texas. The story goes like this: As Southwest sought to establish itself as a new airline in the early 1970s, it offered one-way fares on its routes for the low price of $26. Meanwhile, as an established carrier in the region, Braniff Airlines was not about to relinquish market share to the upstart and lowered its price on the same routes to $13—half of Southwest’s price! Southwest cleverly countered by offering consumers a choice. They could have the one-way fare for $13, matching Braniff’s price, or they could have a free bottle of Chivas Regal Scotch while still paying the low $26 dollar fare. Having purchased the ticket on their employer’s dime, many business passengers opted for the free bottle of Scotch, while Southwest was able to book the full $26 dollar fare. This case illustrates Southwest’s understanding of the different motivations that often exist between customers and consumers and how they can be leveraged for marketing value. Source: Petzinger (1996)

In most industries there are two general categories of customers business and consumer— airlines are no diferent in this regard. Marketing eforts geared to business customers are ofen referred to as business-to-business (B2B), while eforts geared to consumers are referred to as business-to-consumer (B2C). In B2B markets, products and services are sold to businesses for their internal use or to be used in their products and services for downstream customers. In B2C markets products and services are sold to end customers. Tese end customers are ofen referred to as consumers because they are the ones who use or consume the fnal product or service. Tese divergent marketing groups are discussed in multiple places throughout this text; yet, a brief commercial aviation example proceeds as such. In the case of B2B, travel agencies and management companies work with businesses to arrange travel and to help develop and manage travel-related policy. In fact, when business potential is large enough airlines choose to work with corporations directly by providing frms with discounted tickets and a host of related travel benefts in order to secure their loyalty. Tis theme will be further explicated in Chapters 6 and 7. It should be noted, however, that in all cases B2B markets are ultimately predicated on the success of B2C markets meaning that ultimate consumption of goods and services by end consumers activates the supply chain and drives the economy forward. Attention will now shif to the theoretical principles by which marketers divide potential customers’ groups.

Market segmentation Te goal of marketing is not to try to be all things to all people, but instead to be the right ft for the right group(s) of customers that the frm is best able to serve. Market segmentation is the process of fnding these right group(s) and consists of dividing a heterogeneous mass

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AIRLINE MARKET SEGMENTATION Table 4.1 Customer segmentation Segmentation Category

Component

Geographic

Regions, countries, cities, population density (urban, suburban, rural)

Demographic

Age, gender, income, occupation, education, religion, ethnicity

Psychographic

Social class, lifestyle, personality

Behavioral

Occasions, benefts sought, usage patterns, loyalty status

market of customers into sub-groups that have more homogeneous characteristics related to buying behavior. Table 4.1 represents classical approaches to customer segmentation. While not an exhaustive list of variables by any means, this table contains segmentation components that are most applicable to the airline industry. For segmenting markets, generally speaking, the geographic category answers the question “where,” demographic refers to “who,” psychographic to “why,” and behavioral to “what.” Tere is signifcant overlap between these segmentation approaches; yet, each category can provide a useful lens to marketers, and hence will be covered in turn. Many businesses use geographic variables as principal determinants in choosing markets they want to serve. Tere are global regions, countries, and other geographic sub-classifcations to consider within the context of political boundaries and legal regulations pertaining to business operations. Despite more liberal policies in recent years, the airline environment is still one of the most restrictive in terms of political and legal boundaries as discussed in Chapter 2. Firms will also choose markets based on population density. Many retail chains such as restaurants use population density as a primary variable in choosing where they want to open their next location. Applebees, for instance, a casual dining restaurant chain operating in 16 countries originally expanded in the United States by choosing towns containing at least 25 thousand people. Conversely, the largest retail chain in the world, Walmart, had an original market segmentation strategy of picking sparsely populated rural locations. Tese rural areas allowed Walmart to operate cost-efectively and draw customers in from a wide catchment area—all while dominating smaller locally owned stores that simply could not compete efectively against Walmart’s scale. Demographic market segmentation principles determine the “who” and have been used heavily by marketers going all the way back to the early 1900s. Te components listed in Table 4.1 are merely a sampling of the myriad ways in which people can be described and grouped. For example, people tend to buy diferent products based on their age and life stage. Moreover, gender is ofen the primary determinant of market segmentation for many consumer products. Consider the range of personal care products such as deodorants, hair care, shaving razors, and shampoos that are designed and marketed based on gender diferences— whether real or perceived. Many companies and industries use income as a primary way to segment markets. Recall our earlier discussions about cars—income tends to be the primary way in which companies segment markets. Most major car companies including Ford and GM ofer a range of vehicles at various price points that are meant to appeal to difering

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AIRLINE MARKET SEGMENTATION groups of wage earners. Other components of demographics will also be touched upon as they relate specifcally to airline customers. Te last two segmentation categories—psychographic and behavioral—have assumed greater importance as marketing has evolved. For they go beyond the descriptive to consider inner motivations and behavioral drivers that manifest in customer actions. One’s social class is a composite of demographic components including income, occupation, education, and accumulated wealth. Marketers generally consider social class as a component of psychographics, for when these demographics are taken collectively, they ofen comprise a pattern for living. Several industries, including airlines, have found ways to cater to the ever more wealthy global elite in recent years. Tere is also growing discussion about the potential negative implications for society when marketers accentuate and reinforce diferences in social stratifcation. Lifestyle is generally considered the essence of psychographic segmentation as it comprises one’s activities, interests, and opinions; the logic being that a group of people can share similar geographic and demographic characteristics, and yet demonstrate entirely diferent consumption patterns. Tis is likely because people get involved in diferent activities, have diferent interests, and thus ofen have difering opinions. Take a traditional college class, for instance: most of the students will be of similar ages and have similar education levels—and yet outside of class they ofen assume diferent activities, clubs, and interests. Tese diferences impact consumption choices and accentuate perceived diferences among classmates even when their demographics may be very similar. Trough making psychographics the focus, some companies can even form emotional bonds with customers and achieve status as “lifestyle brands” such as Apple and Nike. In the United States, Bass Pro Shops has dotted the landscape with megastores all geared to the outdoor enthusiast. Appealing to this outdoor lifestyle, customers can shop for just about any type of outdoor activity and even join knot-tying clinics. Taking it a step further, those who congregate around certain activities, interests, and opinions are ofen labelled as tribes by marketers. As a case in point, Starbucks and Dunkin Donuts are two competing cofee and pastry shops that have loyal tribes of followers that rarely cross over in their patronage (Godin, 2018). Brands can even have success in making connections with people’s personalities. Several years ago when Apple was a distant second to Microsof in the market for personal computers they ran an advertising campaign linking the Apple experience to a personality that was young and cool while linking the Microsof experience to a personality that was old and nerdy. Te two actors who appeared opposite of each other in a series of commercials literally personifed the diferences between the two brands that Apple wanted to accentuate. Despite being covered last, most modern-day marketers agree that it is best to start the market segmentation process in the behavioral category when feasible. While the behavioral category has overlap with the psychographic category with respect to underlying motivations, what separates it is a heavy focus on actual customer behaviors—as in the voting that customers do with their wallets. Customers ofen have a difficult time when completing marketing research surveys or during focus groups being able to articulate exactly what they want, or may not even fully understand or recognize their inner motivations (Sutherland, 2019). Moreover, customers may be unwilling to share their true motivations. Referring back to the Southwest Airlines story from above, the overwhelming number of business

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AIRLINE MARKET SEGMENTATION travelers who booked the full $26 dollar fares on their company’s dime in order to secure the free bottle of liquor would probably not have admitted to this motivation in a research study. Yet, when feasible, marketers can study the actual decisions that customers make and ofen discern underlying motivations through patterns that emerge. Afer all, the ability to fnd customer insights from usage patterns is at the heart of digital marketing covered in Chapter 3. Some common usage categories include light users versus heavy users or frst-time users, regular users, and even ex-users. As a former subscriber of the venerable Economist magazine many years ago, I still occasionally receive marketing materials from them with the imprint of “become unexpired” prominently emblazoned on the front of the envelope. Tere is no doubt that through database management eforts, marketers at the Economist can quickly identify “ex-users.” Further still, they probably have a good idea of the marketing eforts needed to convert ex-users back to regular users of their magazine and the likely success rates of pursuing this marketing strategy compared to the other ways in which they gain new customers. Marketers are also well aware of occasions that drive purchase behaviors. Tink for a moment about all of the purchases that you make that are motivated by a particular occasion. For example, you may buy something for your mother not simply because you know that she has been wanting it, but because she is about to have a birthday and you need to get her a gif. Certain companies such as specialty chocolate purveyors might obtain 80 percent or more of their yearly revenues within small windows of time leading up to holidays such as Valentine’s Day. Knowing the power of “occasion” buying, marketers have sought to accentuate purchases based on occasions. Consider the craf brewing market for a moment. Not only is there an endless variety of beers now, but there are even beers for diferent seasons such as October beers, winter lagers, and summer ales. Savvy marketers also realize that diferent people ofen seek diferent benefts in the same product being purchased. One person, for example, may purchase a membership to a local swimming pool primarily so that they can train for a triathlon. Another person may purchase a membership to the same swimming pool in order to have a place to relax and sunbathe on the weekends. In the frst case, the person might seek benefts such as clear swimming lanes and an early opening time on weekdays so that they can train before heading of to work. Te second person may seek benefts such as plenty of open space for foating and ample poolside seating for sunbathing on the weekends. Lastly, marketers routinely examine customer loyalty and ways to increase loyalty through various programs such as ofering rewards for frequent purchases. In reality, marketers must use a combination of segmentation categories and components in order to better understand and serve their target markets. Attention will now shif to demonstrate how market segmentation has been traditionally used by airlines along with some recent approaches in the behavioral and psychographic areas.

Market segmentation in the airline industry Considering sources of segmentation in the airline industry, one is tempted to assume that it begins with geography. After all, none of the other segmentation categories mean anything if an airline does not fly to a particular location, right? This view, however,

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AIRLINE MARKET SEGMENTATION takes the production orientation—seeing the market through the given routes that an airline serves. Instead, it can be more helpful to enact the marketing concept, and view flying from the lens of the customer. If we do this, we realize that one’s flying motivation starts in the behavioral category. More specifically, motivation begins with a customer’s occasion to fly. This is only fitting as we already established that looking at the behavioral area first, when feasible, is usually the best place for marketers to start. The traditional approach has been to separate passengers who are flying for business versus those who are flying for leisure. There has been a rising motivation for travel that combines both business and leisure, dubbed bleasure or bleisure, but we will address this at a later point. To further establish that occasion is the starting point—and not geography—consider the following: Some people are not even sure “where” they want to fy, they simply know that they want to take a vacation (e.g., occasion) and work with a travel agent to arrange the particulars. In addition, the same passenger who takes a trip for business during the week likely has a diferent set of fying expectations when taking a family trip for leisure over the weekend. Remember from the earlier distinction between customers/consumers and B2B/ B2C markets, this same person may not have even known what the trip costs in the case of the business trip.

Did You Know? Airlines have long used behavioral patterns to segment customers. Before the rise of big data, airlines had a good idea of those who were fying for business versus those who were fying for leisure based on usage patterns alone. More specifcally, airlines could pinpoint the distinction simply by looking at whether someone few over a Saturday or not. Business passengers typically fy out early in the week and traditionally have done everything feasible to get back before the weekend. Leisure passengers, meanwhile, often include the weekend as part of their journey because they are free from work and can often minimize vacation days taken by traveling over the weekend. Around the time of deregulation in the United States, American Airlines originated a segmentation practice dubbed “fencing” by industry insiders. One of the fencing tactics designed to keep business travelers from booking the lower fares meant for leisure travelers involved a Saturday night stay requirement. Few airlines still require a Saturday night stay, however. According to Scott McCartney of the Wall Street Journal, this tactic does not work anymore for a host of reasons. Airlines have countered with another form of fencing in the form of basic economy branded fares. By loading up on restrictions for basic economy such as baggage, boarding, and upgrade limitations, many corporate travel departments block basic economy fares from even displaying as purchase choices for business travelers. The result is that business passengers continue to book higher-priced tickets. At the same time, traditional airlines get the best of both worlds by enticing leisure travelers with heavily discounted basic

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economy fares that are price competitive with LCCs. These segmentation practices of traditional carriers are vital as just 15 percent of the customers can generate roughly half of an airline’s revenues. Source: McCartney (2018)

Te business/leisure distinction has indeed been a useful one for airlines. However, as previously mentioned, the modern reality is that most businesses use multiple bases of segmentation—airlines are no diferent in this regard. Hence, the following sections will focus on further segmenting these two major groups. A fow of sorts is ofered spanning the various segmentation categories and components. It is important to recognize, however, that this is not an exhaustive segmentation exercise. Nevertheless, marketers who take the time to explore all of the potential avenues for meaningful segmentation— through the process—can ofen uncover hidden opportunities to target potential customers more efectively.

Business For business travelers, the next logical segmentation component is occupation which resides within the demographic category. Certain business professions require more travel than others. Consultants and salespeople, for example, tend to travel quite a bit. It also matters whether the business traveler is independent or traveling on behalf of a corporation. Te former is more likely price conscious. Beyond occupation, just about every one of the demographic components is a supporting factor. One’s occupation is ofen predicated upon education level, with business travelers ofen among the most highly educated. Age and life-cycle stage are two important factors in defning this group as well. Te most common business travelers tend to be singles building their careers and married professionals between the ages of 25 and 55. Considering gender for a moment, the gender-biased terms “businessmen” and “salesmen” no longer ft with reality in many parts of the world as corporate travel providers cite a growing number of women road warriors over the last several years (Reed, 2018). Now that we know a bit more about the demographics of business travelers—answering the question of “who”—it is important to further consider the “where”—as in the huge role of geography in explaining the business travel segment. Of course regions and countries of origin are tied closely with demographic factors such as ethnicity and will infuence business travel behaviors. For instance, expectations for onboard service, including meals and in-fight entertainment, are ofen culturally driven. In the United States and certain parts of Europe where ULCCs have proliferated and most fights are less than four hours, expectations for meals, comfortable seating, and in-fight service are ofen minimal. Tese draconian conditions can be rather jolting for people from other countries even when they know the ticket prices are low. Conversely, on fights in many Latin American countries the expectations for service are much higher.

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AIRLINE MARKET SEGMENTATION Continuing in the geographic domain, airline travel is a game of connecting cities. In fact, airframe manufacturer Airbus made “Cities” part of its theme in its annual market forecast for 2019 noting that in 1950 only a third of the global population was urbanized. Now, over half of the world’s population lives in cities and this is projected to grow to roughly 70 percent by 2050 (Airbus, 2019). Business occupations are disproportionately represented in areas with higher population densities. The necessity of business travel is also closely tied to the relative distance between cities in which business is conducted. The travel data firm OAG puts out an annual ranking of the most profitable commercial airline routes and the route between London and New York City routinely tops the list due to the prevalence of traffic between these two global business hubs (Rosen, 2019). All of this comes together to determine the “what”—as in the benefts sought by business travelers which takes us back to the behavioral category. In general, business customers typically prefer the following benefts which align with Shaw’s original assertions with some added nuance based on the present climate of ever growing customization thanks to technological advances.

High number of frequencies and optimal timings On short-haul fights business passengers prefer airlines that maintain a high level of weekday frequencies. Considering that their plans can change quickly, these passengers desire the fexibility of knowing that there will not be a long wait between fights if their plans change. At the same time, business passengers typically prefer fights in the morning and late afernoon that correspond with the traditional work day. Tis can cause operational issues for airlines and airports that service several business routes as it leads to traffic congestion and staffing peaks at these two times of day. Nevertheless, airlines that have sought to serve short-haul business routes have found that there is an accelerating efect in the number of passengers that they can gain by having a higher number of frequencies and more optimal timings than rivals.

Punctuality and operational reliability Of course, business travelers are going to expect operational reliability from airlines as they ofen need to make it to scheduled meetings on short notice. Considering that the business meeting is most likely the sole reason for the trip, the consequences of fight delays and cancellations can mean lost business deals and consequently lost trust for the carriers that do not honor their brand promise. Te Wall Street Journal chronicled an interesting study performed by Delta Air Lines in 2010. When given the choice between a canceled fight and automatic rebooking, or a delay, the customers preferred the delay. Surprisingly to Delta, the delay signaled a greater level of certainty (McCartney, 2014). Based on this customer insight, Delta began to change its operation—at considerable cost—to ensure that it avoided cancelations. By steadfastly sticking to this goal of operational reliability, Delta has been rewarded with business traveler loyalty. From a marketing perspective, the sales representatives that call on corporate accounts now have a powerful message in illustrating

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AIRLINE MARKET SEGMENTATION the operational advantage that Delta ofers and how this advantage can translate into greater business performance for their corporate customers.

Convenient airport location For short-haul business trips customers will usually seek the most convenient airport location to their home or place of work. Coupled with a robust fight schedule and optimal timings, regular business passengers are less willing to trade of convenience for a cheaper ticket than other market segments unless their travel policy dictates it. Tis can be largely due to the fact that they are ofen not the ones paying (e.g., the customer/consumer distinction) and are therefore less sensitive to price. However, since business passengers ofen travel alone, they may be seeking the most convenient airport access in order to minimize time away from home and family. In fact, some business customers may even choose an LCC with fewer amenities—not for the lower price—but because it is more convenient to home or work based on their individual circumstances.

Seat availability and flexibility Business passengers can be very demanding for airlines to serve because of their needs for both seat availability and fexibility. Teir business schedules tend to be much more fuid than leisure passengers and they will choose air carriers that do not punish them with restrictions. Tey ofen need to travel on short notice and their meeting plans will change ofen. Tis causes operational challenges for airlines as business passengers expect accommodations when their plans change and they no-show for a fight. Airlines must anticipate this happening which is a leading factor in their decisions concerning over-booking policy. Another balancing act for airlines is determining the right amount of seat availability to maintain for last-minute business travelers. Airlines manage this by shifing seat inventory between fare categories based on historical booking patterns and complex revenue management projections. It can be costly for airlines not to sell discounted seats to willing buyers if the last-minute business passengers do not materialize—an industry situation called spoilage. At the same time, business passengers will be leery of booking on airlines that do not keep seats available because having a robust schedule does not mean much to the business passenger if they are unable to book fights when needed.

Frequent fl ier benefits Te degree to which frequent fyer benefts matter for business passengers on short-haul routes is a matter of debate. For starters, many airlines in recent years have shifed their loyalty rewards away from miles fown to dollars spent which decreases the focus away from distance slightly. However, the longest distances including international fights ofen still serve as a proxy for higher amounts of money spent. Moreover, the emphasis placed on dollars spent over miles fown rewards business passengers that have traditionally paid more regardless of distance fown. An opportunity to accrue points is certainly a bonus but

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AIRLINE MARKET SEGMENTATION traditional evidence indicates that other factors such as convenience and optimal fight timings tend to be more important for business passengers—at least on short-haul routes (Shaw, 2016).

Airport service Given that the airport wait time may be longer than the fight itself in short-haul markets, business passengers will ofen be looking for reduced friction at the airport. Tis may involve automation such as baggage drop kiosks, designated ticket counters that allow business travelers to avoid long ticket lines at check-in, or pre-clearance that minimizes friction while moving through security. It also means that business passengers will appreciate dedicated lounges that allow them to work or relax in peace while they wait for their fight. Tese services will be addressed more thoroughly in the next chapter related to airline products.

In-flight service In-fight service including drinks and meals may or may not be important for the business passenger depending on the length of fight and time of day. When in-fight service allows a business passenger to have breakfast, lunch, or dinner conveniently, this service can be an added perk that infuences their airline choice. However, if this service comes at the expense of other more important concerns outlined in this section such as convenient schedules and airport locations, it is not likely to be a determining factor. On longer fights, in-fight service becomes signifcantly more important for business passengers. Wanting to ensure that they are ready for peak performance upon arrival, business passengers seek travel comfort ofered through such things as lie-fat seats for sleeping and Wi-Fi connections for work productivity. Tese perks are ofen included in business-class fares—aptly named—and it is usually a matter of a company’s travel policy or an independent business traveler’s willingness to spend more for a business-class ticket. When companies or independent business travelers are unwilling to splurge for business class, a growing trend in recent years has been for business passengers to book premium economy fares. Tis usually entails getting more comfortable seating and other perks such as enhanced food and beverage options not available in standard coach.

4.1

Marketing in practice

What road warriors want Often among the best customers for airlines—and subject to a considerable amount of their attention—are a special breed of business travelers called “road warriors.” Based on recent reporting, road warriors can be defned as “those between 24 and 66 years old who have taken at least four business trips—mostly by plane—and stayed at least 35 nights away from home in the last 12 months.” The report is focused on business trip success and, according to the survey, in order to ensure

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trip success and stave off travel burnout road warriors seek the following top fve things (ranked in descending order of importance): 1

More sleep before and during the business trip

2

Getting or keeping business class seating on fights over six hours

3

Having more exercise and/or healthier meals while traveling

4

Getting or keeping premium economy seating on fights under six hours

5

Getting higher-quality or more convenient hotels

Taken collectively, these represent travel-friendly policies. For those travel managers focused on cost-reduction policies, this report offers an opportunity to reconsider as the short-term cost savings may be negated by long-term effects of road warrior fatigue and potential turnover. As the report states, “business travel is about business, not travel, and corporate travel programs should be designed accordingly.” Source: Kane (2018)

Leisure Te occasions for leisure travel tend to be more varied than for business travel, and hence so are the benefts sought as they cover a wider range of demographic, geographic, psychographic, and behavioral factors. To demonstrate this variability, a group of students may fy to watch their football team play in the collegiate championship. An elderly man may make a once-ina-lifetime religious pilgrimage to the holy city of Jerusalem. A young mother may travel to a specialty clinic to receive treatment for her cancer. While this last one can hardly be considered a leisure trip, of course, anything not directly related to business travel typically receives the initial leisure designation. In celebration of this diversity of occasion for travel Southwest Airlines recently ran a marketing campaign called “Every Seat Has a Story.” As an airline that markets toward leisure-based travel, the campaign featured emotional videos illustrating the varied occasions for people’s travels and emphasized that Southwest understands these occasions and is the best airline to accommodate them. Given this variability, airlines can beneft from using the travel planning stages of dreaming, planning, booking, experiencing, and sharing as outlined in Chapter 3 to develop holistic strategies for marketing to leisure passengers. Generally speaking, the predominant benefts sought by leisure travelers include low ticket prices and punctuality. In most cases, leisure travelers pay for the airfare themselves and exhibit more motivation to shop for the lowest prices. Te airfare is ofen just one cost associated with a larger trip and travelers are motivated to keep these costs down as the fight may only last a few hours. By keeping this portion of costs low, the traveler will have more money to spend at their destination which is their purpose to fy afer all. Leisure travelers will also care about punctuality as this may impact their destination plans; however, even

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AIRLINE MARKET SEGMENTATION with punctuality, leisure travelers ofen display more fexibility than business travelers as evidenced by their greater willingness to accept airline enticements when fights are overbooked. Leisure passengers will also exhibit more fexibility with the other categories that were deemed important to business travelers. Because they tend to plan their trips further in advance, leisure customers are more willing to plan around not having a high degree of fight frequencies or optimal timings. In some cases, in fact, they may even prefer of-peak fight timings in order to minimize using vacation time. Moreover, leisure travelers are more willing to trade of experiential aspects such as seat comfort and in-fight meals in order to receive a lower ticket price. In this regard, the unbundling of the product has allowed airlines to capture more ancillary value from the varied wants of leisure travelers. Te parents of a large family may be willing, for instance, to pay for enhanced entertainment and gaming options in order to keep their young kids occupied on a long fight. Within the broad spectrum of leisure fiers, patterns for potential segmentation emerge. Tere are two occasions for leisure travel—in particular—that warrant additional focus as sub-segments: visiting friends and relatives (VFR) and traveling for vacation or over a holiday.

Visiting friends and relatives (VFR) VFR travelers have long been studied by the tourism industry. Despite their desire for cheap airfares, this group constitutes a signifcant travel segment. And, because accommodations are ofen provided free of charge at their destination, airlines are able to reach this socioeconomic group that typically has lower income than traditional fiers. Southwest, the original LCC in the United States, ofen quipped that their low fares are what kept distant romantic relationships alive (Petzinger, 1996). Emerging research indicates that even the distinction between visiting friends and visiting relatives can be meaningful for marketers. Tose visiting relatives (VR) ofen take more trips, are more likely to travel with children, tend to be older, and ofen stay longer than those visiting friends (VF) (Backer, Leisch, and Dolnicar, 2017). When it comes to purchasing airline tickets, VF travelers are more likely to search and be infuenced by a variety of media sources; whereas, VR travelers are heavily infuenced by the airline recommendations of their hosts and limit their searching to making online travel bookings (Backer, Leisch, and Dolnicar, 2017). Tese insights provide implications for airline marketers seeking to fne tune their communication eforts. For instance, marketing to locals will be more important when seeking to attract VR customers due to their heavy reliance on host recommendations.

4.2

Marketing in practice

Don’t forget to “SEA” mom In August of 2018 Delta Air Lines launched a VR-related advertising campaign primarily centered on its growing presence as a hub carrier in Seattle, Washington. Leveraging the fact that more than 60 percent of Seattle residents are transplants, Delta used tongue-and-cheek humor, having moms coax their sons and daughters currently living in Seattle to come home for a visit. Using billboards throughout

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the city, Delta cleverly targeted this market segment and connected with them in a meaningful way. The campaign even included videos in which Seattle residents were surprised with free tickets on Delta to go “SEA” mom, all geared around the many places that Delta fies to from Seattle of course. Source: Savadelis (2018)

Vacation/holiday travel Tose traveling on holiday or for seasonal vacations (e.g., true leisure passengers) cover a broad range of geographic, demographic, behavioral, and psychographic combinations. Despite this variety, airlines have found creative ways to leverage this large market segment. Some airlines including charter carriers and certain LCCs, in fact, make this customer segment the sole basis of their targeting eforts. As alluded to in Chapter 1, charter airlines in Europe such as TUI have been fying vacation goers to sunny destinations in southern Europe and along the Mediterranean for decades. Similarly, airlines in the United States have long sought to connect passengers from northern cities to sunny destinations in Florida during cold-weather months. While more likely to be of the low-cost variety, these airlines cater to myriad family vacation travelers and seniors looking to escape the cold. One such example is Sun Country Airlines, a niche carrier that primarily connects vacation goers from cold winter locations such as Minneapolis to warmer places in Florida, California, and Mexico. Te name alone ofers a strong signal of the airline’s focus on leisure travelers. Generally speaking, airlines ofen fnd it easier to target this segment of customers because they tend to fock to popular tourist and beach destinations. Although true vacation/holiday goers tend to have higher incomes than VFR travelers, these vacation/holiday goers ofen have even greater incentive to keep the travel portion of their vacation costs low. A family of four traveling from New York to Disneyworld in Florida, for example, will have to purchase four separate plane tickets and is guaranteed to spend a considerable amount on commercial accommodations at their destination. Hence, while vacation travelers tend to book well in advance they are most likely shopping extensively for fight bargains and tend not to be among the most lucrative airline customer segments. Demand to popular destinations also tends to be highly seasonal—leaving charter carriers and LCCs to fnd other places to fy their planes during non-peak seasons. Some charter airlines have had success reallocating their planes to popular ski resort destinations during non-peak seasons but success has been limited (Efhymiou and Papatheodorou, 2018).

Did You Know? David Neeleman, the founder of JetBlue and serial airline entrepreneur, initiated his business career by selling vacation packages while he was in college. A devout Mormon, Neeleman sold vacation packages to people from Utah who could not

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get enough of the popular travel destination Hawaii. Business was going well, so well in fact that Neeleman dropped out of college to work full time. However, he received a harsh lesson in the boom/bust nature of the airline industry when a new carrier he was working with at the time, Hawaii Express, called him just before Christmas in 1982 to tell him that they were ceasing operations the next day. Having pre-purchased all of his tickets, Neeleman was forced to declare bankruptcy. He eventually made it back into the vacation travel business fying direct routes from Salt Lake City to Honolulu under a new company named Morris Air Charters—owned by a family friend. A few years later Southwest bought the company for $130 million, buying not only the airline but also Neeleman’s entrepreneurial e-ticket travel system—the frst e-ticketing system in the world. Neeleman’s prosperity was short-lived though, as his frenetic working style clashed with the Southwest culture and he was fred by legendary Southwest CEO Herb Kelleher after only six months. After literally crying in Kelleher’s arms, Neeleman was forced to dust himself off and start again. He went on to start JetBlue only to be forced out of this highly successful airline that he founded following an operational meltdown. He dusted himself off, yet again, and went on to start another highly successful airline, Azul. This airline, which also means “blue,” is based in Brazil, the country in which Neeleman was born and did his missionary work as a Mormon in his formative years. He has come full circle and, in many ways, Neeleman’s career mirrors the airline industry with soaring highs and painful lows. And, it appears that he is not done yet having announced plans to start another airline in the United States. So stay tuned! Source: NPR “How I Built This” (February 4, 2019)

Psychographic—traveler tribes Te one airline segmentation domain receiving scant attention thus far is the psychographic category. Given the complexity involved in a more interconnected and globalized world, travel companies have moved beyond traditional segmentation approaches in order to incorporate more psychographic factors. As previously alluded to, this segmentation category looks closer at the underlying motives of travelers, or “why,” as a refection of their social class, lifestyles, and personalities. In some regard, the travel industry has long used social class as a means of guiding the product ofering. Afer all, airlines have always designated their diferent onboard products as “classes” of service (e.g., frst, business, coach). Meanwhile, the Virgin Group, owned by the iconic Richard Branson, has been successful managing a diverse portfolio of businesses based on Virgin’s unifying element of embracing a youthful and indulgent lifestyle. Hence, a subscriber of Virgin mobile is more likely to fy Virgin Atlantic because it exemplifes a young and rebellious archetype—albeit controversial at times. Several travel companies have performed their own behavioral and psychographic segmentation exercises to identify various future tribes of global travelers that cut across

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AIRLINE MARKET SEGMENTATION traditional business/leisure designations and incorporate more underlying lifestyle elements. Table 4.2 describes six such tribes as determined by European-based travel company Amadeus—one of the primary global distribution systems (GDS) used by airlines. We have added a third column to the table describing ways in which airlines can appeal to these emerging tribes in meaningful ways. In many cases, there are airlines already doing these things. It is also important to note that these tribes are not mutually exclusive. In fact, customers are more likely than not to occupy diferent tribes depending on their travel occasion. Yet, the real value of psychographic segmentation is the insight that it provides marketers in creating the marketing appeal. By taking into consideration the lifestyles and personalities associated with each tribe, airlines can capture this ethos in their various marketing campaigns. As Table 4.2 illustrates, some of these tribes cut across the traditional business/leisure boundaries. For example, obligation meeters may seek to combine both business and leisure Table 4.2 Psychographic segmentation—global traveler tribes of the future

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Profles

Description

Reaching this Tribe

Simplicity Searchers

Value above everything else ease and transparency in their travel planning and holidaymaking and are willing to outsource their decision making to trusted parties to avoid having to go through extensive research themselves.

Airlines with networks that connect the emerging middle class in BRIC countries to popular leisure and tourist destinations will excel with this tribe. Having strong connections with travel agencies and easy to choose bundling options will help.

Obligations Meeters

Have their travel choices restricted by the need to meet some bounded objective. Business travelers are the most signifcant micro-group of many falling within this camp. Though they will arrange or improvise other activity around this purpose, their core needs and behaviors are mainly shaped by their need to be in a certain place, at a certain time, without fail.

Airlines that have robust networks, reward loyalty, and can offer value, reliability, and effciency will excel with this tribe. Airlines should also seek to customize fight schedule offerings for highly sought events.

Ethical Travelers

Allow their conscience, in some shape or form, to be their guide when organizing and undertaking their travel. They may make concessions to environmental concerns, let their political ideals shape their choices, or have a heightened awareness of the ways in which their tourism spend contributes to economies and markets.

Airlines that have authentic and robust corporate social responsibility (CSR) initiatives will excel with this group. Airlines should seek to be forthright with eco initiatives and offer passengers a way to contribute both directly and indirectly to offset their travel concerns.

AIRLINE MARKET SEGMENTATION Profles

Description

Reaching this Tribe

Social Capital Seekers

Understand that to be welltraveled is an enviable personal quality, and their choices are shaped by their desire to take maximal social reward from their travel. They will exploit the potential of digital media to enrich and inform their experiences, and structure their adventures with the fact of their being watched by online audiences ever present in their mind.

Airlines that are most comfortable in the social media realm will excel with this tribe. To win with this tribe airlines must be willing to engage with social media infuencers (e.g., paid for word-of-mouth).

Cultural Purists

Treat their travel as an opportunity to break themselves entirely from their home lives and engage sincerely with a different way of living.

Will be most diffcult tribe for global airline brands to reach. Connections to the sharing economy such as Uber, Airbnb, and niche tourism may help.

Reward Hunters

Are the luxury travelers of the future that seek a return on the investment they make in their busy, high-achieving lives. Linked in part to the growing trend of wellness, including both physical and mental self-improvement, they seek truly extraordinary, and often indulgent “must have” experiences.

Airlines that can provide premium service and perks will excel with this tribe (e.g., chauffeur service). Airlines should seek to identify these elites within their loyalty programs and customize offerings to deliver truly indulgent experiences.

Source: Amadeus – Future Traveler Tribes 2030 Report with interpretations added by the author

activities (e.g., bleasure or bleisure) as previously mentioned. It should be noted that demographic characteristics can also be layered in with the tribe perspectives for additional insights. People that are born between certain years are classifed as part of a generational cohort and marketers ofen design their appeals with this in mind. Reward hunters, for example, are typically older and more likely to be members of the Baby-Boom or Generation X cohorts. As such, Emirates Airline ran a major marketing campaign a few years ago with global superstar Jennifer Anniston as the spokeswoman. She is age-appropriate for the reward hunter tribe and she is shown getting pampered by Emirates luxury service as part of the marketing campaign; afer all, reward hunters ft very well with Emirates premium brand positioning. Meanwhile, in 2019 the travel news company Skif released their frst ever report on the travel habits of Millennial and Generation Z cohorts. Recognizing that they value experiences over material things, these younger generations are traveling more than their predecessors and they have their own related behaviors and travel preferences. For instance, Generation

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AIRLINE MARKET SEGMENTATION Z tends to have a more mobile-frst mindset when it comes to online behaviors including the ways in which they navigate through travel experiences (Carty, 2019). Te fact that the young and more fearless adventurers are leading the way so far in Asia’s post COVID-19 travel recovery illustrates that these younger generations will be more important than ever for airline marketers to efectively reach in the coming years.

Conclusion Airline success is ultimately predicated upon creating and keeping customers. Tis chapter has discussed key diferences in customer groups and how airlines can better defne their current and potential customers according to theoretically driven market segmentation approaches. Using various components within geographic, demographic, psychographic, and behavioral categories, well-documented market segments of business and leisure travelers emerge. Among the leisure designation are the sub-segments of visiting friends and relatives (VFR) and vacation travelers. Mirroring successful companies in other industries, airline segmentation practices have evolved to consider psychographic characteristics and some airlines have even achieved status as lifestyle brands. Te global landscape for travel is projected to grow signifcantly in size and complexity over the coming years. Airlines that continue to analyze all market segmentation variables, manage complexity across the categories, and recognize customer shifs will be best positioned to capitalize on opportunity. Focus will now shif to the 4Ps of marketing and the tactical decisions that marketing managers make to win customers and keep those customers loyal. In Chapter 7 we will return to how airlines target customer segments and position vis-à-vis competition to standout for the customer segments that they are best able to serve.

Chapter review questions 1 Pick your favorite airline and review recent website announcements, press releases, or news articles using the lens of market segmentation as outlined in Table 4.1. Describe the announcement and how the market segmentation categories and components apply. 2 Research on the internet the concept of bleisure or bleasure mentioned earlier in the chapter. Describe what it means and give an example of an airline that has found a way to cater to this customer group. 3 A source of signifcant debate is the growing polarization among social classes in several developed nations such as the US. Te gap between the “haves” and “havenots” has widened signifcantly in recent decades. Do you think that the way airlines market to high-income earners and the stratifcation between classes of service on airlines accentuates this polarization or not? Explain. 4 Several years ago Turkish Airlines promoted a video ad in which global superstars Lionel Messi and Kobe Bryant took the selfe challenge in which they scampered the globe trying to outdo each other taking pictures in destinations that Turkish Airlines fies to. Review the traveler tribes in Table 4.2, then perhaps watch the video on YouTube and explain which traveler tribe the ad appeals to most. Explain your choice.

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CASE STUDY

AIRLINE SHUTTLES—MARKET SEGMENTATION IN PRACTICE In 1961 Eastern Air Lines started a new concept on fights from New York City to Boston and Washington, DC. Branded as the Air Shuttle, Eastern offered fights every two hours which soon became hourly. What truly made the service unique was that customers did not need to reserve a seat in advance. All they had to do was show up at the airport and they would be guaranteed to be on the next fight out. Standby aircraft were kept nearby in case of sold-out fights. One-way tickets from New York to Boston were $12 and from New York to Washington, DC were $14 dollars. In 1989 Eastern sold the shuttle to Donald Trump who attempted to make it more of a luxury experience. Following a series of bankruptcies and mergers, the original Eastern Shuttle now belongs to American Airlines. In the 1980s Pan Am had its own competing shuttle service which now belongs to Delta Air Lines. Source: CBS Sunday Morning Almanac (https://www.youtube.com/watch?v=HzcWsP6Rmwo)

Case study questions 1 What market segment(s) were the shuttles designed to serve? 2 Research online the Delta Shuttle and American Shuttle and describe the markets, schedules, and services ofered today. Are there any signifcant diferences between them? 3 Te Northeast United States is not the only place in the world with shuttle service. For instance, Iberia and Vueling ofer a shuttle service between Barcelona and Madrid in Spain and multiple carriers ofer air shuttle service between São Paulo and Rio de Janeiro in Brazil. Research and describe one of these shuttle services or investigate other high-profle cities that you suspect may also have shuttle services and report on them.

References Airbus. (2019). Global Market Forecast for Aviation, Cities Airports & Aircraf 2019–2038. https:// www.airbus.com/aircraf/market/global-market-forecast.html Amadeus. (2019). Future Traveler Tribes 2030 Building a more rewarding journey. Retrieved from https://amadeus.com/documents/en/blog/pdf/2015/07/amadeus-traveller-tribes-2030-airline-it. pdf Backer, E., Leisch, F., and Dolnicar, S. (2017). Visiting friends or relatives? Tourism Management, 60, 56–64. Carty, Meghan (2019), Millennial and Gen Z traveler survey 2019: A multi-country comparison report. Skif. Retrieved from: https://research.skif.com/report/millennial-and-gen-ztraveler-survey-2019-a-multi-country-comparison-report/ CBS Sunday Morning. (2017, April 30). Almanac: Te Eastern Shuttle [Video File]. Retrieved from https://www.youtube.com/watch?v=HzcWsP6Rmwo

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AIRLINE MARKET SEGMENTATION Efhymiou, M., and Papatheodorou, A. (2018). Evolving airline and airport business models. In Te Routledge companion to air transport management, pp. 122–135. Edited by Nigel Halpern and Anne Graham. London: Routledge. Ford, H., and Crowther, S. (1922). My life and work: In collaboration with Samuel Crowther (pp. 72). Sydney: Cornstalk Publishing. Godin, S. (2018). Tis is marketing: You can’t be seen until you learn to see. London: Penguin. Kane, P. (2018). Achieving better business results: Insights from U.S. road warriors. Airlines Reporting Corporation. https://www2.arccorp.com/globalassets/Email/AchievingBetterBusinessResults-RoadWarriors-2018-10.pdf Koetsier, J. (2018). Why every Amazon meeting has at least 1 empty chair. Inc. Magazine. Retrieved from https://www.inc.com/john-koetsier/why-every-amazon-meeting-has-at-least-one-emptychair.html McCartney, S. (2014, April 2). A world where fights aren’t canceled; inside Delta’s new strategies to avoid stranding fiers. Wall Street Journal. Retrieved from http://search.proquest.com.ezproxy. libproxy.db.erau.edu/docview/1512044423?accountid=27203 McCartney, S. (2018, April 5). Te middle seat: Te basic economy blackout. Wall Street Journal. Retrieved from http://search.proquest.com.ezproxy.libproxy.db.erau.edu/docview/ 2021868812?accountid=27203 NPR. (Producer). (2019, February 4). How I built this [Audio podcast]. Retrieved from https://www. npr.org/2019/02/01/690686584/jetblue-airways-david-neeleman Petzinger, T. (1996). Hard Landing: Te epic contest for power and profts that plunged the airlines into chaos. New York: Tree River Press. Reed, D. (2018, July). Te percentage of women traveling for business is rising but so are their unique travel safety risks. Forbes Magazine. Retrieved from https://www.forbes.com/sites/danielreed/2018/07/11/the-percentage-of-women-traveling-for-business-is-rising-but-so-are-theirunique-travel-safety-risks/#3aad83ed3ab5 Rosen, E. (2019, August). Tese are the airline routes that make the most money. Forbes Magazine. Retrieved from https://www.forbes.com/sites/ericrosen/2019/08/13/these-are-the-airline-routesthat-make-the-most-money/#700c5d027008 Savadelis, L. (2018). Delta gives moms their own ad campaign to persuade their adult children in Seattle to visit home [Video fle]. News Hub Delta. Retrieved from https://news.delta.com/video-deltagives-moms-their-own-ad-campaign-persuade-their-adult-children-seattle-visit-home Shaw, S. (2016). Airline marketing and management. New York: Routledge. Sutherland, R. (2019). Alchemy: Te dark art and curious science of creating magic in brands, business, and life. London: HarperCollins. Tedlow, R. S. (1996). New and improved: Te story of mass marketing in America. Boston: Harvard Business School Press.

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CHAPTER 5

Product The expanded view of passenger air travel CHAPTER OUTCOMES At the end of this chapter, you will be able to .˜.˜.  Describe the enhanced approach to defning a product  Identify the major categories of an airline product and how they interrelate  Identify trends that are enhancing the scope and complexity of airline products  Distinguish between core and ancillary airline products  Use your understanding of chapter content to discuss a case study on Allegiant Air’s foray into hotel resorts

Introduction In this section, we shif to a classical 4Ps approach to examine airline marketing. If an interviewer ever wants to know what you have learned in marketing class, lead with the 4Ps—product, place (e.g., distribution), promotion, and price. Tis is easily one of the most recognizable frameworks in all of business and perhaps the single best organizing framework that encapsulates decision making for marketers. If you stop and think, it is very challenging to come up with a decision that marketers make, or any business executive for that matter, that does not relate either directly or indirectly to one or more of the 4Ps. Product is the natural place to start because without having a product none of the other Ps matter. A product is needed in order to have a clear sense of what frms are actually trying to price, distribute,

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PRODUCT and promote to existing and potential customers. At the same time, while all of the 4Ps are closely interrelated, they are not disconnected from the other topics already covered. In fact, they represent the decisions that are made once the marketer understands the airline’s overall business strategy, the environmental dynamics, technology available, and the customer segments that the airline is best positioned to serve. As such, this chapter will start by theoretically explaining what constitutes a product followed by its application to commercial airlines. Along the way, we will explore just how far airlines have stretched traditional product categories and how they are likely to continue doing so in the future.

What is a product? Te term product ofen conjures up something physical like a bar of soap or a box of detergent—things that are tangible and have physical properties. Marketers have long realized that products extend beyond the tangible, but as mentioned earlier, the framework is simply too easy to remember to bother changing it. Using a leading marketing textbook, products can generally be categorized along three lines: Goods—tangible physical entities Services—intangible help one receives as result of human or mechanical eforts Ideas—concepts and philosophies (Pride and Ferrell, 2017) Most products involve some combination of at least two of these categories. For instance, this book is a tangible physical entity but can probably be best categorized as a collection of ideas. Meanwhile, the bulk of products encompass both goods and services and this is where some of the confusion lies even when classifying economies. Across the industrialized world, for example, more young people are choosing to work at establishments like Starbucks than factories. (e.g., the rise of the service economy). Yet, nobody patrons a Starbucks without getting a tangible product. Said another way, the service means very little without the lure of getting one’s favorite concoction—the actual product. The service, however, may be a differentiating factor that causes the customer to choose Starbucks over another coffee provider. Further still, the experience as determined by how the customer feels about purchasing coffee at Starbucks may be the determining factor in their loyalty. And, this experience usually goes well beyond the tangible product or even the pleasantness and attentiveness of the service extended by workers at Starbucks. Airlines are a service product because they primarily involve services with some tangible aspects such as the chosen passenger seat. As defined in a recent air transport management text, airlines “represent an intangible product, requiring a mix of service personnel and automation, in conjunction with tangible assets, the aircraft and airport, to deliver to the customer” (Waguespack, 2018). Key differences between services marketing and product marketing will be further explicated in Chapters 9 and 10.

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PRODUCT

Core Product

Supplemental Features

Symbolic and experiential benefits

Figure 5.1 Total product considerations Source: Pride and Ferrell (2018)

Te total product as depicted in Figure 5.1 above is a useful framework to help capture this expanded view of a product and the associated complexity and interrelationships. Te core product addresses the most fundamental customer need and essential beneft, without it, the product is essentially rendered useless. For instance, the core product of sunglasses is a pair of lenses with the essential beneft of shielding one’s eyes from the glare of sunlight. Sunglasses that are not able to accomplish this basic task are useless to customers. Simply delivering the essential beneft, however, is rarely enough for frms to be successful in today’s hyper-competitive marketplace. Customers are ofen looking for supplemental features that add value to the core product’s utility. In the market for sunglasses, for instance, people ofen seek certain additional features in their lenses such as polarization that further reduces glare. Tey may also desire a certain type of case to protect them, a special cloth to clean them with, or even a replacement warranty if their sunglasses should break. Tese are all supplemental features that may be desired by certain customers. Teir absence will not render the sunglasses useless, but their presence can bring added utility and sway purchase intent. Te third element of a total product is ofen the most overlooked. People will make purchases based on the symbolic and experiential benefts that a product ofers. Customers derive benefts based on their experiences and other meanings associated with the product. Te symbolic aspect can even defy conventional wisdom as many people make purchases not so much for functional beneft, but as a means of self-expression. Case in point, the person who buys a Rolex watch is not doing so because it is better at keeping time than other watches. Instead, the person is signaling to others that they have achieved success in life—refected by the status and prestige that having a Rolex watch conveys. In the market for sunglasses, brands like Oakley and Ray-Ban realize that people ofen consider the symbolic meaning and opportunity for self-expression in their choice of sunglasses. Hence, as marquee brands, Oakley and Ray-Ban ofen prominently display their names and logos on the glasses so that customers can convey to others that they only wear the best. Te experiential aspect in this case has to do with how the customer feels when wearing the sunglasses. For example, the subconscious motivation of a sports enthusiast who buys a pair of Oakley’s could be for the experience of feeling like the professional athletes they see wearing them on TV. As the chapter’s opening quote suggests, providing defnitives for what actually constitutes the airline product is challenging and, setting boundary conditions for its breadth—even

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PRODUCT Core Product

Get from point A to point B safely

Symbolic and experiential benefits

• Network Scope • Frequency Scope

Supplemental Features

Seat

• • •

Loyalty Program Ticket Flexibility Travel Insurance

• • •

Food/Beverage Entertainment Shopping

• •

Aesthetics Customer Experience

Figure 5.2 Total product considerations—commercial airlines example

more so. Given the exponential growth in various products peddled by airlines over the last decade—growth measured in the billions—the only true product limitations for airlines seem to be the limits of their imaginations. Figure 5.2 depicts common airline product attributes and their placement within the total product framework. Tese placements will be discussed further as the enhanced airline product model is elaborated upon. Tey are theoretical, and hence subject to debate and further scrutiny. Said another way, if a group of people were asked to place the airline product attributes on a blank copy of the total product framework, it is highly likely that no two placements would be exactly the same. Nevertheless, this exercise is useful as the rigor of the analysis forces the marketer to consider the lens of the customer and how the attribute can enhance or detract from the customer’s overall product satisfaction. Te core product for airlines will always be to get passengers from point A to point B safely. Airlines that underinvest in the safety aspect of the core product eventually fnd themselves in dire straits. Going back to 2013, for instance, all Nepali airlines have been banned from fying in Europe due to non-compliance with safety regulations. While ICAO removed the country from its signifcant safety concerns (SSC list) in 2017, the European Aviation Safety Agency (EASA) continues to ban Nepali airlines pending further audit (ICAO, 2018). Te issue of safety has taken on added purpose in recent months as it now encapsulates infectious disease and how to get passengers to their destinations without contracting a virus in the process. Beyond simply getting passengers from point A to point B safely, airlines have long competed by adding supplemental features, ofen called “frills,” in hopes of distinguishing themselves from rivals. For example, in pursuit of gaining some measure of brand loyalty from customers, American Airlines is credited with being the frst airline in the Unites States to ofer a frequent fyer program in 1981 (Petzinger, 1996). It was so successful that these days many airlines around the world ofer some sort of loyalty reward program.

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PRODUCT Te last few decades have seen airlines compete ever more vigorously in the realm of symbolic and experiential benefts. Te way that airlines furnish their airplanes and customer lounges, for example, are important aesthetics that contribute to the symbolic and experiential aspects of a customer’s journey. US airlines learned the hard way in the early 2000s that delaying cabin refurbishments when money is tight only worsens the customer experience and related perception of the airline. Attention will now shif to categorizing various airline product attributes according to a specifc model—the enhanced airline product model. Meanwhile, references to all three of the overlapping elements depicted in Figure 5.2 will be made along the way.

The enhanced airline product model As previously noted, there are several potential ways to organize the airline product and the sheer volume of attributes will cause any efort to fully inventory them to fall short. Most attributes, however, can be organized according to three broad areas: an airline’s network of route oferings, service experiences, and extended products. Te remainder of the chapter will be organized according to these three broad areas.

The route network From a marketer’s perspective the most basic core product that an airline can ofer a customer is the means by which to reach a destination (e.g., get from point A to point B). A fundamental decision for airlines is whether they are going to link destinations through point-to-point fights, connections via a hub, or some combination of these. Te choices made help to establish an airline’s fundamental business model as described in Chapter 1. In airline speak, the fight(s) that connect destinations are called routes. Te agglomeration of routes that an airline serves is referred to as the network. In fact, one of the most crucial marketing areas within airlines is ofen called network planning. Te job of a network planner involves extensive market research to determine which routes an airline will fy and how these routes ft within an airline’s network and—more broadly—the networks of an airline’s various partners. Some argue that an airline’s network of routes is the only thing in commercial aviation that cannot be fully copied by rivals. Due to airport constraints and historical choices, an airline’s route network serves as its DNA of sorts, with no two airline networks looking exactly alike. As Figure 5.2 depicts, an airline’s route network has overlap with the supplemental elements of a product as well. Te scope of routes that an airline ofers coupled with the frequency of fights on each route are ofen determining factors for customers in making airline choices—especially for business passengers as discussed in Chapter 4. Taken collectively, this network of routes and frequencies with associated timings represent an airline’s schedule to customers. Tis schedule helps to fulfll the core product of getting customers from point A to point B along with ofering a supplemental feature in the form of “choice” through its potential to provide customers with conveniently timed fights both now and to additional destinations in the future. Tis supplemental aspect can sway customer choice as evidenced in the limited success of all-business class airlines. Referring to the business model discussion in Chapter 1, historically speaking, business customers have tended to prefer airlines with more robust networks that are subsidized by serving both business and leisure passengers.

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Did You Know? Turkish Airlines fies to more international destinations and countries than any airline in the world. A member of Star Alliance, Turkish Airlines fies to over 300 destinations in nearly 120 countries (Olmstead, 2018). The airline capitalized on this “product” distinction of having the largest global route network by launching a marketing campaign in 2013 called “Widen Your World.” The campaign featured global sports superstars Lionel Messi and Kobe Bryant in a viral YouTube video in which the superstars raced around the world capturing selfes in various exotic destinations that Turkish Airlines served. The selfe challenge was just one video, among many, that have elevated the airline’s brand recognition in recent years— winning Turkish Airlines several marketing awards along the way.

Service experiences Te second broad area of the enhanced airline product model focuses on the customer travel experience—whether onboard, at the airport, or beyond. As previously indicated, the airline industry is considered a service product and much of the value or ire that customers perceive is related to the service aspects of their experience. As Shashank Nigam points out in his book Soar, the customer engagement associated with airlines is truly unique. As he notes, the entire process can stretch anywhere from two to 24 hours and is fraught with the potential for disruption (e.g., bad weather) that is ofen beyond the airline’s control, yet can dramatically impact the customer’s experience (Nigam, 2016). Few industries have so many touchpoints that create opportunities to delight customers or disappoint them when handled poorly.

Onboard Te onboard experience is of crucial importance for any airline’s success. Passengers are all seated side-by-side in the same metal tube fying at speeds over 500 mph and thousands of feet in the air. Hence, it is important for airlines to carefully consider all of the factors that contribute to this unique onboard experience. For starters, the aircraf itself can have an impact on the customer experience. Traditionally speaking, most people—about 70 percent according to a survey—do not know or care what aircraf type that they are on (Sheivachman, 2019). What they do care about is the experience, both tangible and intangible, that the aircraf renders. However, with the tragic accidents of the two Boeing 737 MAX aircraf recently—unprecedented in the airline industry—it is likely that travelers will pay more attention to the type of aircraf that they are fying—at least in the near term. Regardless, the physical attributes of an aircraf can have an impact on a customer’s experience. Anyone seated in the af portion of an MD-80, for instance, senses a less peaceful fying experience because of noise attributed to the fuselage-mounted engines. Noise reduction and overall fight smoothness are areas in which modern jets have made tremendous advancements. While ofen done merely to reduce supply-side fuel burn and operational costs, these

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PRODUCT technological advancements as described in Chapters 2 and 3 have also been one of the most signifcant factors in improving the in-fight customer experience. Other aspects of the physical aircraf will impact the customer experience in the way that cabins are confgured, which is a combination of physical aircraf limitations and the way in which the airline has chosen confgurations. In this regard, airlines have done much more in the last several years to consider the atmospherics of their cabins and the impact certain efects can have on a passenger’s overall mood. Trends include creating a sense of spaciousness even when seating confgurations are tight such as having more headroom in newer versions of Boeing and Airbus aircraf. Even the ambient lighting and smells can impact a passenger’s satisfaction with the experience and subsequent loyalty (Karp, 2007). Many airlines have incorporated transitional LED lighting in their aircraf cabins in order to enhance passenger moods, to align with their circadian rhythm, and to reduce jet lag. Cabin ambience is a way for airlines to accentuate their branding. Case in point, Finnair has received praise for its cabin lighting that mimics the “Northern Lights” that envelope the airlines home region for a certain portion of the year. In fact, Finnair’s careful consideration of all aesthetic design elements has served as a source of distinction and competitive advantage in the marketplace (Nigam, 2016). Also, a key component of cabin ambience is the customer perception of cleanliness. Tis has been taken to a whole new level in recent months as airlines seek to market their newly enhanced cleaning procedures in the wake of COVID-19. Airlines are presently evaluating a host of measures to increase social distancing and minimize human contact that will be very difficult to achieve within the confnes of an airplane. What usually gets the most attention within the aircraf is the seat itself. It is the most tangible aspect of the onboard customer experience and an examination of Figure 5.2 illustrates that the “seat” straddles all three elements of total product consideration. A seat is part of the core product, for without it the aircraf for passenger travel is rendered useless. However, while sounding far-fetched for now, some have noted that even seats may be taken out at some point on short-haul fights. Contraptions in which people stand much like an amusement park ride could be used to pack even more people onto a plane (Godfrey, 2018). However, it should be noted that packing more people on a plane would draw more ire in a post COVID-19 world. For the time being, at least, seats go beyond the core product to contain supplemental features such as seat-back trays and storage elements—once again, features that may be reconsidered in the new landscape. Moreover, airline seats contribute heavily to experiential aspects such as comfort and even convey symbolic meaning with respect to their size and cabin designation. FSNCs typically ofer three or four classes of service. Te seats may be arranged according to the traditional cabin alignment of frst, business, and coach or one of the more recent arrangements that contains a bifurcated coach cabin containing both premium and basic seating options. Some airlines have eliminated their frst-class cabin in order to expand business class, while many ULCCs and LCCS only ofer one class of service with a standard seat size throughout the cabin. Others, including certain hybrid airlines, have marketed a two-class seating arrangement including limited premium seating upfront and ample basic seating in the back. Speaking of complexity, Table 5.1 details three diferent airlines with three diferent cabin confgurations on the same exact aircraf type. Returning to the symbolic aspect for a moment, the various seating cabins are a physical manifestation of social

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PRODUCT Table 5.1 Airbus A321 Airline

Version

Class

American Airlines

1

First

38

21

16 recliner seats

Main Cabin Extra

34–35

18

38 standard seats

Main Cabin

31–32

18

127 standard seats

First

36

21

16 recliner seats

Main Cabin Extra

34

17–18.1

18 standard seats 153 standard seats

2

3

British Airways

Width

Seating Details

Main Cabin

31–32

17–18.1

Flagship First

62/82.5

21

10 open suites

Flagship Business

58/75

19

20 fat-bed seats

Main Cabin Extra

35

17.3–17.7

36 standard seats

Main Cabin

31

17.3–17.7

36 standard seats

1

UK Domestic

31–34

17

205 standard seats

2

Club Europe

30

17

54 standard seats

Euro Traveller

30

17

123 standard seats

Club World

45/78

26

23 fat-bed seats

Economy

31

17.5

3 Air Canada

Pitch/Bed Length

1 2 3

131 standard seats

Business

37–38

21.1

14 recliner seats

Economy

31–32

17.8

169 standard seats

Business

37–38

21.1

16 recliner seats

Economy

31–32

17.8

169 standard seats

Premium Rouge

37

21

16 recliner seats

Rouge Plus

34

18

21 standard seats

Economy

29

18

163 standard seats

stratifcation. Much like other luxury purchases, the frst-class traveler is signaling to others their success in the social pecking order. With respect to the seats themselves, it has been a tale of two cities with ever more luxury ofered at the front of the plane and seating conditions in the back that have become ever more draconian. As documented in a popular journal article aptly named “Seat Wars,” airlines have been in an arms race to ofer ever more extravagant seating toward the front of the plane, especially on long-haul fying (Karp, 2007). Starting with the frst lie-fat seats ofered by British Airways in 2000, airlines have continued to add extravagance including private suites in some cases. In the back of the plane, meanwhile, many airlines have pursued a seat densifcation strategy. Tis entails ftting more seats on existing aircraf. Considering that many of the larger costs including crew and fuel are largely fxed in the immediate term,

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PRODUCT by ftting more seats on a plane an airline has more opportunity to capture revenues with little escalation in incremental cost. Airlines can add seats by reducing seat pitch—the space between one seat and the same spot on the seat in front or behind. It seems that the minimum seat pitch that customers have been willing to tolerate is 28 inches even with several LCCs not willing to go this low. Many airlines have been able to squeeze more seats on their planes not by reducing seat pitch but by using the latest in seat technology that ofers a comparable level of comfort using, lighter, thinner, and more durable materials ofen referred to as a slimline seats (Waguespack, 2018). A host of new companies specializing in this slimline seat technology have been able to coax airlines into outftting their new planes and retroftting their old planes not only for the densifcation benefts, but also because the lighter and more durable seating material reduces fuel burn and maintenance costs. In the last few years many airlines have also discovered a middle ground, incorporating premium economy seats that have more comfort than basic economy seats—for a price of course—but still lower than the price of business or frst-class seating. Premium economy has become popular for business travelers who have seen their budgets tighten, but even for leisure passengers who ofen choose to upgrade during the purchase process. As of yet, however, there is no standard as to what premium economy means. In some cases the seat is no diferent—simply amounting to more legroom along with added in-fight amenities such as complementary snacks and beverages (Waguespack, 2018). It is important to conclude this section with a note that seating materials and cabin densifcation practices will receive added scrutiny moving forward for their role in either facilitating or mitigating the spread of infectious disease.

5.1

Marketing in practice

Who says coach passengers can’t enjoy seating comfort? After years of testing different designs in a secret warehouse, Air New Zealand unveiled the SkyCouch in 2010, designed for customers traveling in coach class seeking more comfort on long-haul fights. Primarily meant for couples or parents traveling with small children, a special leg rest was created allowing three sideby-side coach seats to convert to a lie-fat couch. Dubbed “Cuddle Class” by Scott McCartney of the Wall Street Journal’s “Middle Seat Column,” Air New Zealand designers were able to create product innovation in coach that had been neglected by airlines for years. How did they do it? Well, they did what most marketers fail to do and simply “observed” people. In marketing terms, this is called ethnographic research—observing people in their natural settings. Working in conjunction with legendary product design frm IDEO of Palo Alto, California, the researchers saw families and couples twisting and contorting their bodies in all manner of ways when they had an open seat next to them in order to get more comfortable. Having a healthy dose of empathy for the customer and a willingness to view things from

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their perspective, Air New Zealand was able to create a unique and award-winning product. The SkyCouch is so unique, in fact, Air New Zealand was able to gain a patent on the foot rest design. Hence, you may see a variant of the SkyCouch on other airlines too, but if so, it is because they bought the licensing rights to do so from Air New Zealand. As long as the airline does not compete directly on routes, Air New Zealand has been willing to sell SkyCouch. Azul of Brazil is one such airline that markets the SkySofa. Who says airlines can’t innovate new products that actually improve the seating conditions in coach? Sources: McCartney (2011); Nigam (2016); Warne (2011)

Another area of the service experience that has received considerable media attention over the years is food and beverages, or lack thereof. Unlike the seat, food/beverages is not part of the core product, except perhaps on the longest of fights. In fact, as the original LCC, Southwest Airlines realized this from the outset. Given their focus on short-haul markets, people were more than willing to forgo a meal if it resulted in a cheaper ticket. During the early to mid-2000s several airlines did away with complimentary meals and even snacks in many cases. Treating them instead as a source of ancillary revenue, passengers were forced to pay if they wanted in-fight service causing quite an uproar at the time. While done by many airlines as a means of survival, the ancillary revenues proved to be quite lucrative and the practice became normalized. Given the unprecedented run of success in recent years, however, many carriers have reintroduced complimentary beverages and snacks at least. Much like seats, in the area of premium meal service airlines have increasingly seen it as either a source of potential diferentiation or as a means of simply keeping pace with escalating competition. Te world’s prestige airlines ofen dish out meals inspired by Michelin-star chefs with options that have become hyper-local in some cases. While once the butt of jokes, thanks to advances in food science research, airlines have found ways to deliver fve-star quality meals even at 30,000 feet (Mariano, 2019). Coupled with advances in technology, food/beverages options have become more personalized. Customers already have the ability to pre-order their meals on several airlines and some have even allowed customers to specify exactly when they want their meal, thus eliminating customer fear of being passed over if they are sleeping during routine meal service. Airlines increasingly view food/beverages options as experiential elements; moreover, since food and drink are manifestations of culture, having more localized options can signify to customers a more authentic travel experience. However, at the time of this writing it is unknown the extent to which COVID-19 will impact onboard food and beverages options for passengers moving forward. It seems likely that these services will be signifcantly curtailed for a time similar to the late 2000s as airlines seek ways to save costs and mitigate disease transmission. Te last area of coverage related to the onboard experience is in-fight entertainment and shopping. Similar to food/beverages, these aspects are also not part of the core product; yet, they can be viewed as supplemental features that are also experiential in nature. Some airlines, mainly of the LCC and ULCC variety, ofer no in-fight entertainment. While others,

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PRODUCT mainly of the FSNC variety, ofer ultra-sophisticated in-fight systems—each signaling to customers their respective value propositions. In the world of in-fight entertainment the only certainty is that it now occurs at the individual seat level. Te days of everyone watching the same movie on overhead projectors are largely over. Carriers are making competing bets on whether to provide embedded seatback in-fight entertainment systems or simply allowing passengers to connect their own devices to in-fight content. Tere are benefts and drawbacks to both approaches. However, the 2018 IATA global passenger survey indicated that 54 percent of passengers would prefer to watch digital content on a seatback device versus only 34 percent preferring their own device. (IATA, 2018). It is important to note that this survey was done prior to the COVID-19 outbreak and it is likely that customers will seek to reduce their interaction with surfaces that could spread germs moving forward which may include in-fight entertainment touchscreens. Regardless of the approach taken, the sophistication of in-fight entertainment has come a long way.

Did You Know? Did you know that you can play a game of chess against the world chess champion at 30,000 feet? No, seriously, all you have to do is book a fight on Scandinavian Airlines (SAS). In 2015 SAS partnered with reigning chess champion and arguably the best player in history, Magnus Carlsen of Norway. The partnership offered Magnus an opportunity to broaden the reach of the game he loves, while gaining SAS a unique in-fight entertainment option. Through an onboard Wi-Fi connection on long-haul fights customers having purchased premium tickets could use the “Play Magnus App.” In-fight entertainment partnerships such as this are becoming more creative and customers are reaping the benefts. Source: SAS Airlines (2015)

Airport Te customer experience is also heavily infuenced by their experience at the airport. Afer all, for short-haul fights, or in the case of delays, airline customers are likely to spend more time at the airport than on the fight itself. Unfortunately, a good portion the airport experience is beyond the airline’s direct control. Yet, airlines have used advances in technology to reduce travel friction at the airport and to free up their own human resources to be used for more pressing matters. From automated baggage-drop kiosks, online check-in, and paperless boarding passes generated by mobile applications, in many cases passengers can now proceed to the security checkpoint without any human service interaction needed. Meanwhile, heightened security procedures—though necessary—have certainly caused a number of would-be fiers to seek alternate modes of transportation. Yet, new technologies are constantly being introduced including biometric identifcation that may help. Realizing that passengers spend a heavy amount of time at the airport, airlines have provided customer

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PRODUCT lounges for decades now, allowing their most loyal customers to work or relax away from the hustle and bustle of the concourses and gate areas. Premium airline brands go to great lengths to ensure that their customer lounges match the prestige and image of their brands. For instance, the Qatar Airways frst-class lounge in Doha ofers amenities such as a bufet, spa, kids’ room, business center, and even a small museum displaying historic artifacts (Genter, 2017). Airlines have also researched and experimented to great lengths with various methods of boarding the aircraf in order to increase efficiency and reduce customer anxiety. Lastly, airlines have spent considerably on display panels and various technologies to constantly update customers with the latest information during the travel process. Once again, according to the IATA global passenger study, customers generally prefer self-serve automated services like baggage-drop kiosks, but still want human responsiveness when disruptions occur (IATA, 2018). As an indicator of this, several airlines have introduced highly popular baggage-tracking technology so that customers can know where their luggage is at all times via the airline’s mobile application. In fact, the top three things customers want the most real-time information on related to their journey are, not surprisingly, fight status, baggage tracking, and wait time at security/border control. While text messaging is still the preferred method of receiving notifcations overall, smartphone apps are quickly gaining momentum (IATA, 2018). Airports and airlines will undoubtedly face a new wave of security procedures designed to mitigate the spread of disease that are likely to be more onerous than the ones following 9/11. It will be critical for airlines to adapt and seek new ways to minimize travel friction for customers.

Beyond Airlines would be naïve to assume that the customer experience begins at the airport and ends with the fight—and they are not. Te experience of an airline’s digital footprint from the website to social media to mobile applications as described in Chapter 3 goes a long way in setting initial expectations for the customer experience and beyond. Te pre- and post-fight communications are also important. Airlines have sought to fnd the sweet spot between providing too many pre-fight reminders that annoy customers to not providing enough—leaving customers misinformed and frustrated as they have to seek out their own information. Some airlines have even sought to provide human services beyond the airport and fight. For their elite paying customers, for instance, a few airlines ofer chaufeur service to and from the airport. Certain airlines provide enhanced park-and-fy services while others even operate city lounges for their elite passengers. As such, Scandinavian Airlines (SAS) ofers lounges in large cities such as Copenhagen, Helsinki, Chicago, and New York where elite-level members can fnd a refuge to relax or work in between business meetings.

Extended products Te third category of the enhanced airline product model encompasses the plethora of products airlines market that are not directly part of the core product or customer experience. Tese supplemental features of an airline are ofen referred to in industry speak as ancillary

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PRODUCT revenues for an airline or more generally as retailing. Te defnition of ancillary revenues as put forth by a travel consultancy and generally accepted as the industry standard is as follows: “Revenue beyond the sale of tickets that is generated by direct sales to passengers, or indirectly as a part of the travel experience” (IdeaWorks, 2018). We have touched on ancillaries in previous chapters and we have already covered some ancillary products in this chapter, in fact. Charges for baggage, onboard purchases of food/beverages, and duty-free shopping represent some of the largest sources of ancillary revenues. Moreover, anything that is assigned a separate monetary value such as assigned seating, priority boarding, and extra legroom—even when purchased as part of a fare bundle—is considered ancillary revenue. However, in this particular section we are referring to extended products—ancillaries that sometimes have little, if anything, to do with the actual air travel portion of the experience. While ticket prices have waxed and waned over the years, ancillary sales have witnessed tremendous growth (IdeaWorks, 2019). One of the largest sources of airline revenues are co-branded credit cards tied to their frequent fyer programs (FFPs). Credit cards that award travel points for purchases have proven to be among the most popular choices for customers. Hence, credit card companies such as Visa and American Express have awarded airlines handsomely by purchasing miles or points in their FFP throughout the years. Other sources of ancillary revenues have included travel commissions from cross-promotions involving referrals and bundled purchases of hotels and rental cars. Tis has primarily been driven by airlines using their websites ever more aggressively to retail various travel-related products ofered by other companies through which they receive commissions. In fact, IATAs global passenger survey indicated that females overwhelmingly prefer to book a hotel together with the purchase of a fight ticket (IATA, 2018). Airlines also market travel insurance, mainly as an optional product during the booking process as they attempt to upsell customers once they are in the purchase process—ofen referred to as the “funnel” by marketers.

5.2

Marketing in practice

Delta Air Lines and American Express—a lucrative partnership Stretching all the way back to 1996, Delta Air Lines has had an exclusive partnership with American Express to be the sole provider of their co-branded SkyMiles credit card. These FFP arrangements have been very lucrative for airlines over the years and none more so than the relationship between Delta and Amex. The credit card company even served as a key source of fnancing as Delta went through its bankruptcy in the mid-2000s. The two companies recently renewed their long-term contract extending the partnership to 2029. In 2018 the deal was worth 3.4 billion dollars to Delta and it is projected to climb to 7 billion by 2023. Co-branded credit cards have indeed become a huge source of ancillary revenues for savvy airline marketers. Source: The Points Guy (2019)

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PRODUCT In the last several years airlines have marketed all manner of retail products and innovative programs. For instance, several airlines operate online retail stores in which customers can purchase anything from socks to cofee mugs with the airline’s logo on them. A few, such as Delta, even have museums that capture the nostalgia of the jet age in which the public can learn about the airline’s history—all for a fee of course. Similar to a theme park, patrons close out their tour in the gif shop where they can purchase all manner of merchandise and memorabilia. Qantas has even launched a health program called Qantas Assure in which customers can earn frequent fyer points by downloading a mobile application that tracks their steps pushing them to achieve higher levels of ftness and, hopefully, associating Qantas as a lifestyle brand in the process. While these sources of ancillary products have all focused on the end customer; it should be noted that airlines for decades now have also sold services to other businesses including other airlines. Classified as business-to-business (B2B) product offerings, airlines will often sell products and services even to direct competitors. As a case in point, carriers who specialize in maintenance services routinely outsource their services to other airlines. The ability of Delta Air Lines to offer maintenance services to other airlines, for example, has made it an attractive partner for joint ventures. Airlines have even sold advertising space to third parties via digital properties, in-flight magazines, and on company-owned property such as jet-ways in the airport. Ancillary revenues will be focused on further in Chapter 8 as they relate closely to airline pricing strategies and tactics. In light of the global COVID-19 pandemic two things are certain. Airlines will be re-evaluating most of the products that they offer as they first seek to get passengers more comfortable with flying again. For instance, several airlines have already announced the removal of their in-flight magazines from seatbacks as a source of potential disease transmission. Secondly, ancillary sales will not grow nearly as much as they have in the recent past.

Conclusion As one can see, defning what constitutes the “product” when it comes to the airline industry is no easy task. Tis chapter has surveyed the wide array of products according to the enhanced airline product model. It has also examined the complex nature of products and the inter-relationships between core, supplemental, and symbolic/experiential elements. Te principal airline products are schedules and seats; yet, these core products exist within a wider ecosystem that encapsulates the customer experience and extended product options—both travel and otherwise. Tis expanded view of passenger air travel has unlocked tremendous value for airlines and represents some of the best marketing opportunities for future revenue growth. As technology continues to progress, airlines are likely to seek ever more sophisticated ways to retail products to customers and related services to other businesses—even competing airlines. More importantly, a steadfast focus on the expanded view of passenger air travel will aid airlines in creating and keeping customers—the fundamental purpose of a business for which Peter Drucker would be proud. Attention will now shif to the other “Ps” in the 4Ps model of marketing: place, promotion, and price.

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Chapter review questions 1 Re-draw Figure 5.2 based on your own interpretation of the airline product. Would you place the product attributes into diferent locations based on your own understanding of core, supplemental, and symbolic/experiential product elements? What would you add, move, or take away in light of the COVID-19 pandemic? Defend your choices. 2 Research online and report on the latest innovations in airline ancillary revenues. Can any of the latest innovations be placed on the fgure you drew related to the question above? 3 Pick your favorite airline and report on their latest product innovations according to the enhanced airline product model outlined in this chapter (e.g., route network, service experiences and beyond). 4 Research and describe some of the latest innovations that airlines are introducing in airports. Are they designed to help with the core airline product of getting people from point A to point B safely, related to supplemental features, or more geared to experiential/symbolic aspects? Explain. 5 Each year a company called IdeaWorks publishes a top ten airline ancillary revenue rankings report. In the latest report identify the airline with the largest percentage of ancillaries as part of their overall revenues. Describe how the airline achieves this percentage (e.g., baggage fees, co-branded credit cards).

CASE STUDY

ALLEGIANT AIR: EXPANDING ITS HORIZONS? In 2018 US-based Allegiant Air announced that they are building a resort in Florida. Allegiant is an ULCC airline that specializes in taking leisure-based travelers to sunny destinations. Allegiant has been among the most proftable airlines in the world for several years running. The resort, called Sunseeker, is slated to open in 2021, including a 277-room hotel along with several condo towers featuring one, two, and three-bedroom units. The airline considers this a natural extension of their business model which connects people to vacation destinations like sunny Florida. As such, Allegiant sees this as an opportunity to create more of an end-to-end experience with its customers. Nevertheless, some analysts are nervous that such an expansion will cause Allegiant to lose focus on their core airline product—something that they have been very successful with thus far. In fact, the 2021 opening is now in jeopardy as the airline halted construction shortly after the COVID-19 pandemic began and offered no immediate timetable to resume. Allegiant is not the frst airline to vertically integrate the travel experience. In the 1980s the parent company of United Airlines made a push to control more of the travel experience by purchasing hotel chains and a car rental company. The parent company subsequently retreated to once again focus on their core product—running an airline. Airlines have often avoided getting into other travel-related businesses such as owning hotels because these types of businesses are subject to the same downswings that airlines face when the economy sours. Source: Arnot (2018)

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Case study questions 1 Do you think that Allegiant Air is making a good business decision? Research their latest progress in light of the COVID-19 pandemic and defend your choice. 2 What is diferent about Allegiant’s resort project compared to United’s attempt to expand into hotels? 3 With the collapse of Tomas Cook in Europe, EasyJet has expanded into the vacation package market. Research and report on how this has turned out for them thus far. 4 In light of the global pandemic do you think that airlines are more likely to retreat to their core business of passenger transport or spread into other businesses as a way of diversifying risk? Defend your choice.

References Arnot, M. (2018, August). Allegiant Air is building an airline resort in Florida. Te Points Guy. Retrieved from https://thepointsguy.com/news/allegiant-embraces-the-sun-airline-to-launch-resort-inforida/ Genter, J. T. (2017, May). Review: Qatar frst class check-in and the AI Safwa frst lounge in Doha (DOH). Te Points Guy. Retrieved from https://thepointsguy.com/2017/05/qatar-frst-classexperience-doha/ Godfrey, K. (2018, April). New plane seats could make passengers stand for the entire fight journey. Express. Retrieved from https://www.express.co.uk/travel/articles/947825/plane-seats-standingpassengers-fight IATA (International Air Transport Association). (2018). 2018 IATA global passenger survey highlights. Retrieved from https://www.iata.org/publications/store/Documents/GPS-2018%20 Highlights.pdf ICAO. (2018). Safety report. Retrieved from https://www.icao.int/safety/Documents/ICAO_ SR_2018_30082018.pdf IdeaWorks. (2018). Ancillary revenue defned. Retrieved from https://www.ideaworkscompany.com/ ancillary-revenue-defned IdeaWorks. (2019). Airline ancillary revenue projected to leap to $109.5 billion worldwide in 2019. Retrieved from https://www.ideaworkscompany.com/wp-content/uploads/2019/11/Press-Release142-Global-Estimate-2019.pdf Jones, P. (2012). Flight catering. London: Routledge. Karp, A. (2007). Seat Wars: Like nearly all other aspects of commercial aviation, designing and developing cabin interior products has become a fast moving business. ATW: Air Transport World, 44(4), 40–43. Mariano, K. (2019, March). Bon appetit: transforming in-fight meals into bespoke experiences. Travel Daily Media. Retrieved from https://www.traveldailymedia.com/in-fight-meals-bespokeexperiences/ McCartney, S. (2011, December 15). To remedy the squeeze in coach, new ‘cuddle class’ seats. Wall Street Journal. Retrieved from http://search.proquest.com.ezproxy.libproxy.db.erau.edu/docview/ 910862162?accountid=27203

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PRODUCT Mutzabaugh, B. (2019, April). Delta Air Lines, American Express extend partnership through 2029. Te Points Guy. Retrieved from https://thepointsguy.com/news/delta-air-lines-americanexpress-extend-partnership-through-2029/ Nigam, S. (2016). SOAR: How the best airline brands delight customers and inspire employees. Washington, DC: Ideapress. Olmsted, L. (2018, February). Why Turkish Airlines is a great choice for your travels – business or leisure. Forbes Magazine. Retrieved from https://www.forbes.com/sites/larryolmsted/2018/02/05/ why-turkish-airlines-is-great-choice-for-your-travels-business-or-leisure/#63d34e172363 Petzinger, T. (1996). Hard landing: Te epic contest for power and profts that plunged the airlines into chaos. New York: Tree River Press. Pride, W. M., and Ferrell, O. C. (2018). Foundations of marketing, 8th edition. Andover: Cengage Learning. SAS Airlines. (2015). SAS partners with world chess champion Magnus Carlsen. Retrieved from https:// www.sasgroup.net/en/sas-partners-with-world-chess-champion-magnus-carlsen/ Sheivachman, A. (2019, March 29). Airplane crashes, Boeing and the age of permanxiety. Skif. Retrieved from https://skif.com/2019/03/29/airplane-crashes-boeing-and-the-age-of-permanxiety/? utm_campaign=Daily%20Newsletter&utm_source=hs_email&utm_medium=email&utm_ content=71277137&_hsenc=p2ANqtz-8U660VIvmNi0-n03tU7dNUk9h6tBY3NGpk0PBeO7 q7UDlmlKtMFHv_zEcqITEM84sWA2SXdCrjgr6EuoT-gPly2MHIQw&_hsmi=71277137 Waguespack, B. (2018). Airline marketing. In Te Routledge companion to air transport management, pp. 206–219. Edited by Nigel Halpern and Anne Graham. London: Routledge. Warne, D. (2011, September). Air New Zealand to sell SkyCouch to other airlines. Executive traveler. Retrieved from https://www.ausbt.com.au/air-new-zealand-to-sell-skycouch-to-other-airlines

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CHAPTER 6

Place Airline channels of distribution CHAPTER OUTCOMES At the end of this chapter, you will be able to …  Describe what is meant by a channel of distribution and a frm’s path to market  Discuss the difference between a direct channel and an indirect channel  Explain the reasons intermediaries are helpful in the travel marketplace  Illustrate a simplifed structure of airline distribution channels  Differentiate between an OTA, TMC, and Metasearch  Use your understanding of chapter content to discuss a case study on travel distribution startups

Introduction Tis chapter presents an overview of the structures, processes, and functions of distribution channels used for selling airline services. To accomplish this task a review of marketing responsibilities while selling a service product and the history of airline distribution is required. Distribution falls under the “place” designation within the 4Ps framework. It is common across the airline industry and in the aviation press to read and hear a focus on the “selling of tickets” as the task to be accomplished as airlines determine the various outlets used to provide customers the means by which to purchase a fight. However, as a service industry the customer is purchasing more than just a piece of paper or an emailed confrmation reserving a seat on a plane. Te customer at this exchange point is purchasing a means to visit friends and relatives, travel to

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Distribution: task and decision factors A distribution channel is the means by which a frm ofers its products and services to the markets and customer groups the frm has selected to serve. As such, it is not uncommon in the business world for the channels selected to be referred to as the frm’s “path to market.” As there exist many diferent routes to accomplish a trip, there are numerous paths airlines may utilize to ofer their services to the market. Across the business world channels can be one of the most traditional of business processes, with frms having very specifc functions and roles in the operation of a channel (Moretti, 2019). However, there is no doubt technological advances are infuencing the role, functions, and processes in many channels. Airlines formulating distribution tactics fnd themselves having to manage systems established in the past, while responding to the changing digital world that is impacting marketing processes and customer behavior. Channel decisions are critical to the success of the airline. Some of the considerations managers have to account for in making channel decisions are (Dent and White, 2018): Market access—will the channel selected reach and cover the target segments? Does the airline need diferent channels to reach diferent segments? Where and how customers prefer to buy—understanding the habits of customers buying air service. How well the channel communicates and fulflls your brand promise—as airlines attempt to fnd a way to not have their product sold as a commodity, does the channel assist? Te complexity of the offering—how many interactions are needed with customers, and how do purchasing diferences between segments impact channel needs? Te loyalty of the channel to your brand—what is the brand switching that may occur in the channel? Cost—what compensation does the channel expect to fulfll the role being asked? What additional costs in training, monitoring and co-marketing may be incurred in managing the channel? With changing business needs and customer lifestyles, the fragmentation of media and rapid digital and technological advances, the idea of establishing a channel and then only needing to maintain channel operations has disappeared. Managing channels now requires coordination and communication among channel members to lessen confict and assure the channel meets the need of the airline.

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Channel structure Ofen the frst means of describing channel structure is whether the channel is a direct or indirect. Direct channels are the frm’s own go-to market resources. Included are the airlines direct to customer marketing activities, e-commerce and websites, telephone call centers, sales force for corporate sales, sales outlets and ticket shops, airport ticket counters, service desks, social media networks, and the airline’s mobile application (Hanke, 2019; Dent and White, 2018). While making the needed investment in people and technological systems to maintain the various options in the direct channel are costly, the beneft of having direct customer contact in the sales process—along with the associated data gathering capabilities—is highly valued by airlines. Moreover, while the direct channel can be costly, the costs associated with other channel structures are ofen higher. Indirect channels are those channels that make use of intermediaries to create the path to market for the product or service. Te term intermediaries can refer to a large number of frms, platforms, and networks that exist as links between producers and ultimate consumers or business passengers who are the airline’s customers. For indirect channels payment may be needed for either access to the channel and/or as incentive to motivate channel members. Ofen the various intermediaries may be referred to as “middlemen” that exist in the channel structure because they reside in between the service provider and the customer. Moreover, it is not uncommon for indirect channels to be referred to by the number of tiers within the channel. One-tier distribution, for instance, is a channel with one intermediary—a structure represented by supplier (airline) to intermediary (travel agent) to customer. Tier-two distribution has a structure represented by supplier–agent–retailer–customer, denoting the existence of two middlemen between the airline and customer. Lastly, there can exist multi-tiered distribution which, depending upon the marketplace, may have various tiers of middlemen in the channel structure (Moretti, 2019). Although uncommon in the airline industry, multi-tier distribution may be found across the wider hospitality and tourism industries.

Did You Know? The existence of middlemen and intermediaries are often misunderstood. To many consumers not familiar with the roles and tasks the middlemen carry out, the various intermediaries can be seen as just adding costs to the system and are not recognized for the services provided in the purchase situation. Among the reasons for the existence of intermediaries within the travel marketplace and why the intermediary may be used by customers are: 1

The assistance provided as consumers build a travel experience. As a leisure traveler builds a travel experience requiring air travel, hotel, cruise, and other tour or vacation activities together the use of a travel agent/travel consultant relieves the consumer of dealing directly with each of the various frms.

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2

The expertise provided by the travel agent/travel consultant can assist in the search and decision-making process. While online boards and websites are valuable information-gathering tools, the knowledge dispensed by an agent/ consultant is still critical to many inexperienced travelers.

3

Online platforms allow comparison shopping across multiple airlines and itineraries that consumers cannot do at individual airline websites.

4

The demands from some customer groups, especially business and corporate travel buyers, for the use of specialists to meet both the needs of the traveler and the frm paying for the travel.

5

The ability of intermediaries to serve non-home, geographically dispersed markets. Airlines do not have or want to bear the costs of distribution at the many destinations the airline may serve and may seek intermediaries in these locales to fulfll this function.

Channel flows Another concept that deals directly with the functions and processes within the channel is the concept of the fows within a channel. In many marketing textbooks, with a focus on consumer goods marketing, this may be presented as an overview of the physical fow and information fow that has to occur for a channel to be functional (Grewal and Levy, 2020). Te information fow focuses on the needed communications between the channel members for order processing and fulfllment. Te physical fow focuses on the logistical issues needed to be coordinated as products are manufactured and then transported through the various channel members and other facilitating agencies (e.g., airline cargo and logistical frms) before getting to the fnal consumer. However, in many large service frms there are no physical fows. When consumers purchase air-transport services, while ofen described by consumers as “I bought a seat on a fight to …” the passenger is not receiving a physical item, but the promise of a future service. As such, for many service products three interrelated fows that play a vital role in addressing what is being distributed include the following (Wirtz and Lovelock, 2018).

Information and promotion flow Being a service product, airlines will need to provide information to potential passengers on the services the airline ofers. A key aspect in the selection of many channel members may be the capability to provide the information expected of the channel member and ability to promote the airline’s service. Many airlines have unbundled the service product for purchase. A FSNC now ofers multiple service products across the various classes of service the airline has, among the airline’s various aircraf types. Te ability to inform and promote these different service products are a key aspect demanded of the channel structure and members within the channel.

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Negotiation flow This involves reaching an agreement on the service features and configuration. Such details as the itinerary to be purchased and terms of the service being bought need to be communicated. Across the airline industry the terms and conditions that often accompany a ticket must be communicated; for example, what is the ticket reuse or refundability criteria, is the ticket being bought upgradable, and does the service bought qualify for frequent flier benefits? These are important considerations that accompany the purchase process.

Product flow Airline services involve a large number of people and possession processing. Due to the unique nature of the industry, much of this processing occurs at an airport, which provides the physical facilities needed for service delivery. For many airlines, the airport’s facilities for meeting passenger needs are key factors in the selection of a city to serve. Much of the airline service processing today is by means of electronic channels such as customer self-service via digital means and kiosks. However, some passenger interactions with service staf still occur and airport infrastructure and capabilities play a vital role. While not recognized as a channel member in the structure of airline channels, these key facilitating partners provide a needed link in the service ofering process.

Channel structure in the airline industry Within the airline industry over time and as technology has developed, channel structures have evolved. Possible channel structures for an airline are largely determined by the strategy of the carrier and the importance of a key customer segment to the airline, namely, the business traveler. What follows is an historical overview of airline distribution development with simplifed models of the various structures provided along the way.

The direct channels Te direct channel (see Figure 6.1) is how airline distribution began and for many LCCs and ULCCs is the channel where the majority of sales occur. In the early years of aviation, airlines would sell tickets directly via means of the airline ticket office (ATO), the city ticket office (CTO), or the airline call center (CC). As airfares were regulated, and with no price shopping occurring, the transaction was fairly simple to conclude. Airlines would have the sales offices in the major cities the carrier served and a sales desk at the airport opened throughout the day. It was not uncommon for someone who had made a reservation through a call center to make the fnal payment for a fight on the day the passenger traveled. One reason airlines have had a history of underutilization and overbooking goes back to these days and the diffculty carriers had with tracking these reservations and being able to properly forecast fight demand as much of this was a paper and teletype process across the cities the airline served (Copeland and McKenney, 1988).

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PLACE Te technological advancement of mainframe computer technology in the late 1950s and early 1960s would lead to the development of the frst airline computer reservation system (CRS). American Airlines, in partnership with IBM, would create the frst CRS that became known as SABRE for the name of the system “Semi-Automated Business Research Environment” (Copeland and McKenney, 1988). At frst, the CRS was used exclusively within the airline and by 1964 the system allowed 1,500 terminals across the US and Canada to be connected to the IBM mainframe that ran the system (Habtemariam, 2018). American agents could now search for American’s schedule of fights, make reservations, and receive confrmation in seconds as the system allowed the creation of the passenger name record (PNR) with the details. Te development of the CRS by American began a period of technological upgrading across all of the major US airlines. Many of the major carriers at the time developed their own reservation systems. Tese systems were released from internal-only usage in the 1970s and provided to external travel agents for use. Tis began a process which ultimately led to the four independent global distribution systems (GDS) that exist today, having evolved from the earlier airline CRS (Borko, 2018; Habtemariam, 2018). Te release of the CRS systems also led to the eventual closing of the airline ticket office in the US, although in some international locales “home airlines” may maintain offices for direct selling opportunities. While call centers still exist, many have been surpassed by webbased and newer digital technologies and applications. More importantly, the release of the CRS systems from only internal airline reservation agents to usage by external independent travel agencies would spur the growth of the indirect channel system (see Figure 6.3) to eventually surpass the direct channel for volume of tickets sold. In the mid-1990s the technological development of the internet and the World Wide Web, along with the deregulation and liberalization of the airline marketplace in the US and EU, would lead to airlines re-focusing on the direct channel. With deregulation and liberalization, the economic freedom brought about new entrant carriers. Many of the new airlines attempted to follow a low-cost model that strove to control distribution costs that had grown in the indirect channel structure (Altexsof, 2019a). As these carriers were starting up, the birth of the internet gave these carriers a new means to bypass the indirect channel and sell directly to

Airline Reservation System

(ATO, CC, CTO, Airline Web, Airline App)

Customer

Figure 6.1 The direct channels

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PLACE consumers through their respective websites. Not only did LCCs realize the benefts, the major carriers soon realized the cost advantages of this direct channel as well (Pilling, 2009). With the subsequent growth of digital technologies, airlines have more recently sought to get customers to download and use the airlines’ respective mobile applications. Te apps allow potential passengers to connect with the airlines across various digital devices. Tey also provide a range of mobile-friendly services such as booking, baggage tracking, electronic boarding passes, instant messaging capabilities, fight tracking, and other sales-related options as airlines pursue ancillary revenue. Airlines have begun to invest in technologies that allow direct communication with their mobile applications, while integrating the use of chatbots and voice commands, to enable conversations that will drive engagement (Salesforce + Skif, 2019). Te difficulties airlines face in the adoption and use of their apps is the competition from current online platforms developing their own apps and the potential for any travel “super-app” ofering the opportunity to search and engage multiple travel options in one platform (Fox, 2020). Additionally, while such technology may be even more wanted in the post COVID-19 world, with airlines having to slash the budget on many technology projects for survival, how far eforts proceed in the near future to ofer the seamless booking and communication capability passengers overwhelmingly want from an airline app is uncertain (SITA, 2019).

The indirect channels Te ongoing focus on the direct channel occurs as airlines try to get customers to use the various direct means available as a strategy to save costs, build a long-term relationship with customers and get the data needed to provide personalized service customers want (SITA, 2019). With the technological advances noted that have occurred and the growth of the LCC and ULCC air-carrier model, more tickets are sold via the direct channel. However, for many reasons ofen the most valuable of airline customers—business travelers—are reached through the various indirect channels that have developed over time. While the concept of disintermediation—the removal of channel intermediaries—is ofen discussed, there appears to be little consensus that this process will occur anytime soon in the airline marketplace (Borko, 2018). Te longest-running indirect channel in existence is from the airline to the travel agent to the customer (see Figure 6.2). Travel agencies provide the geographical coverage airlines Airline Reservation System (ATO, CC, CTO)

Travel Agent

Customer

Figure 6.2 The frst indirect channel

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PLACE could not across the country and provide needed guidance for many passengers—tasks the travel agents still provide today. For many of the years through the regulated air service period until the 1970s, independent agencies still used telephone lines to call into the nearest airline ticket office to make reservations and buy tickets for the airline passenger in a process that could take up to one and a half hours (Altexsof, 2019b). Some variations of the channel existed in the form of tour operators who would buy blocks of seats for pre-packaged tours and consolidators, who airlines ofen sold blocks of seats to for sales through the consolidators’ sales outlets. Tese sales were low cost for the airline and provided desired revenue, but did not meet the volume of sales through the travel agents. Te travel agent channel was the frst major indirect channel for most of the early history of the airline industry.

The dominant channel (1976–1995) As noted, in the 1950s into the 1960s, the US airlines began the development of the airline-owned and controlled CRS. Te early systems quickly proved their ability to handle the large transaction volumes as the airlines entered a growth period in a timely and efficient manner. However, as originally deployed in the 1960s, the travel agent still had to call the airline reservation staf who had access to the system, not the travel agent. Tis changed in the late 1970s as American and United started providing travel agents terminals the agents could use to access their respective systems. SABRE from American and Apollo from United were deployed beginning in 1976 (Habtemariam, 2018; Altexsof, 2019b). Te impact of the move was signifcant as over a short time period travel agents became the dominant seller of domestic air service in the US. Travel agents sold 38 percent of domestic airline revenue in 1977, 53 percent in 1978, and 60–65 percent by 1982. By 1989 the percentage of sales travel agents accounted for was estimated at about 75 percent of airline ticket revenues, while over 95 percent of agents relied on a CRS (Department of Justice, 2003). In a short period this indirect channel (see Figure 6.3) came to dominate airline distribution until the 1990s.

Airline Reservation System

CRS evolves to GDS

Travel Agent

Customer

Figure 6.3 The dominant channel (1976–1995)

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PLACE With the airlines moving the terminals from airline control into the offices of the travel agents there began a process of opening the systems beyond one air carrier. Additionally, with the systems now accessed through the travel agencies and opened to allow the agencies the ability to search multiple airlines for its customers, airlines started closing ticket offices to relieve the airline of the costs involved. Due to the arrangements in the contracts between the CRS and travel agencies, and the costs for CRS access and use, most agencies would only have one system in place. Te airline, owner of the CRS, would provide and install the needed reservation terminal along with training for a monthly subscription fee based on usage. With the structure that evolved, eventually the major systems began to allow, and charge, other airlines to cross-list their inventory across reservation systems (Borko, 2018). Tis did not occur without controversy and the need for government regulations on how the systems would display the airline inventory. Airline owners were found introducing bias into the systems to favor their own airline over the competing airlines using the system (Altexsof, 2019b). Troughout the period of the 1980s and the early 1990s, the Department of Transportation investigated and created a series of rules for CRS operations in an attempt to promote competition among the systems and provide consumer protection against bias (Department of Justice, 2003; Habtemariam, 2018). Afer the Airline Deregulation Act was signed in 1978, airlines found themselves dealing with an open and competitive marketplace. As some airlines were lost due to bankruptcy and others had difficulties adjusting to the new marketplace, throughout the 1980s and early 1990s, the carriers began the process of merging or divesting their computer reservation systems to create independent standalone frms now recognized as global distribution systems (GDS). Te modern GDS has grown beyond just airlines to ofer systems that cover a wide range of travel and hospitality products. While the process would take a few years and sometimes occurred as bankruptcy closed airlines such as Eastern and Pan Am, it resulted in four frms being recognized as the leading GDS frms in the marketplace. Tis channel structure was the major means of selling tickets until the internet brought forth new options. However, the basic structure of the airline’s inventory being shared from the airline reservation system to the GDS continues to be a key factor in airline distribution today.

6.1 Marketing in practice The leading global distribution system firms Starting as internal airline computer reservation systems in the 1960s, through the years of airline deregulation and liberalization, the creation of the internet and online e-commerce, and the current digital marketplace, four frms have emerged as the leaders in the area of global distribution systems. Over the years, the frms have expanded beyond their CRS roots into a wide range of aviation operational and consulting services. Amadeus began in 1987 when formed by four major European air carriers: Air France, Iberia, Lufthansa, and SAS. The GDS gained a strong US presence when

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Amadeus acquired SystemOne and its 9,000 agencies from Continental Airlines in 1995. Recognized as the largest of the four GDSs at this time, Amadeus has more airline and hotel participants than its nearest rival. Amadeus has expanded operations across a wide range of hotel and transport services. Amadeus acquired Navitaire, a leading provider of e-commerce platforms and reservation systems for the low-cost airline segment in 2016. (Amadeus, 2019) SABRE was developed by American Airlines and often recognized as the frst CRS in the US airline industry that spurred the development of the industry. As one of the frst systems to enter the marketplace in the US, SABRE became a leader in the North American market. SABRE remained a subsidiary of American Airlines until 1996 when the frm’s initial stock offering occurred, with a fnal divesture completed in 2000. In the frm’s history, SABRE has been recognized as a leader diversifying into other airline e-commerce, operational and information technology systems. Much like Amadeus, growth has been aided by acquisitions, but recently SABRE had a setback in an attempt to acquire Farelogix, a smaller competitor with expertise in ancillary revenue systems. (Sabre, 2017) Travelport was created as a service provider to the global travel business in 2006. The frm can trace its origins back to the United Airlines CRS Apollo, which became independent after an investment by European partners and was renamed Galileo. Cendant acquired Galileo in 2001 but through a corporate divesture created Travelport in 2006. Soon afterward Travelport acquired the Worldspan CRS. Worldpsan itself was created by a merger of the former Trans World Airlines PARS system and the Delta Air Lines DATAS II systems. Through the systems Travelport acquired, the group has been a major provider of distribution services to many online travel agencies. (Travelport, 2018) TravelSky earns its mention not so much for its history, but its location, China. This state-owned GDS began in 2001 and usage of the GDS is required of the major Chinese airlines. As such, the GDS provides technical support and local services for nearly 40 domestic airlines, over 20 regional and overseas airlines, at domestic and overseas airports, and is used by over 8,000 ticket agents. By some measures of transactions in the system, TravleSky is the third largest GDS in the world. (TravelSky, 2019)

The internet adds channel options (1995–today) Being a service product with no physical inventory to be shipped and stored, the airline industry was one of the frst that could see the potential for the ability to sell online using the internet. At the same time the recognition of the use of the internet for e-commerce activities was occurring, other technological advancements were bringing forth the use of e-tickets.

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Airline Reservation System Airline Web

GDS

Travel Agent

OTA

Customer

Figure 6.4 The internet adds channel options (1995–today)

No longer would a passenger require a paper ticket voucher and need a travel agent to issue such a document (Wade, 1997). Te internet and its ability to allow consumers to directly interact with an airline website and issue an e-ticket provided a new direct channel for the airlines to sell tickets to passengers (Figure 6.4). Te beneft of such a channel, bypassing GDS and travel agent fees/commissions, for selling tickets quickly led to airlines creating websites with internet booking engines. Meanwhile, LCCs and newly structured ULCCs did not need this channel to reach the marketplace and sell tickets.

The online travel agency (OTA) is created Airlines were not the only frms though to recognize the benefts of the internet. Other groups realized that as price had become a dominant feature for potential passengers when searching for tickets, a site that allowed shoppers the ability to compare across airline oferings could save the shopper time. As airline websites still today mostly only display their own fares, a site that allowed comparison shopping would be for many shoppers the frst place to go when searching for fght information. Additionally, realizing that the direct airline channel would potentially take ticket volume away from the current structure, creating an e-commerce site would be a way to maintain transaction volume for the GDS system. Seeing the opportunity, SABRE created what is considered the frst online travel agency (OTA) called Travelocity in 1996 (Altexsof, 2019b; Habbtemariam, 2018). However, SABRE only had a short time advantage. Other technology- oriented frms, seeing the opportunities in the airline, hotel, and travel marketplace worked to create their own OTA platforms. Among the frst of the technology frms to do so was Microsof which created Expedia Travel Service and the Expedia.com website in 1996 (Schall, 2016). For access to the needed inventory for the website, Expedia signed an agreement with the Worldspan GDS, now part of Travelport.

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PLACE In the next few years afer the introduction of the two OTAs there came other frms with their own unique selling propositions to form OTAs and airline competitive responses. Priceline.com was founded in 2000 with the main selling point of the site being the ability to “Name Your Own Price” as someone shopped for a fight. Utilizing an opaque auction method, where shoppers bid for a fight not knowing the carrier or exact fight itinerary, but only paid if the bid was accepted, provided a competitive advantage as the site launched (Schall, 2016). While the major airlines were at frst hesitant to allow Priceline access to their inventory, the difficult economics of the airline industry at the time did lead some carriers to provide inventory. Delta became a valuable early partner as the carrier recognized Priceline as a means for the airlines looking to sell distressed inventory—seats not selling in the existing sales channels, in a method where the airline providing the seat was not known until afer the sale had been closed (Brannigan and Molenkamp, 1999). Te major airlines, seeing the success of Travelocity, Expedia, and Priceline, wanted to create competition in the OTA market and gain some of the economic benefts of the internet e-commerce sites. Airline owners were directly involved in the formation of two new OTAs. United, Northwest, Continental, and Delta, with American eventually joining these founding carriers, launched Orbitz.com as a competitor to Travelocity and Expedia. By the time Orbitz went online, 23 airlines had signed on for a stake in the frm (Schall, 2016). Te key positioning of Orbitz into the OTA marketplace was that the airlines guaranteed access to all of their publicly available (including Web-only) fares. Additionally, Orbitz launched the frst “price matrix” that displayed competing airlines fares at the top of the display, which is common across websites today. Delayed afer an investigation into antitrust concerns, the site quickly grew to become the third largest OTA behind Travelocity and Expedia (Hansell, 2002). The other major OTA started by the airlines was Hotwire.com. Hotwire utilized the opaque bidding process and was positioned as a competitor to Priceline. The site’s founding airlines were American, Northwest, Continental, America West, United, and US Airways, along with the investment group Texas Pacific (Schall, 2016). A unique aspect of the Hotwire story is that Delta did not participate because at that time Delta was a major provider of seats to Priceline and had made an investment in Priceline that for a brief moment was worth billions (Brannigan and Molenkamp, 1999). The airline owners of both Orbitz and Hotwire would divest their share of the OTAs as the carriers addressed the difficult operating environment in the post 9/11 years and were looking to trim expenses. Te creation of the OTA altered the competitive landscape of the travel market. Some industry estimates have OTAs now accounting for half of the online travel bookings worldwide (OAG, 2019). While that volume varies across global markets, OTAs ofen lead in markets that have more airlines fying and a wider mix of hotel properties available. OTAs have positioned themselves as a one-stop-shopping platform being able to assist the consumer create comprehensive travel plans across not only their desktop origins, but the apps the OTAs have developed for the digital market. As occurred in the GDS market, over time through mergers and acquisitions, three major frms have come to control many of the leading OTAs in the marketplace.

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6.2 Marketing in practice Online travel agencies—growth, evolution, and expansion Since the start of the OTA market, competition, new entrants, and a willingness to adapt to change has driven growth in the channel. While recognized for the competition and disruption the OTA brought to the travel marketplace, like many mature industries there have developed large multinational frms that dominate the landscape. The three main groups are: Expedia Group: recognized for being one of the founding OTAs, over the years Expedia has acquired a portfolio of OTAs across the travel industry. Besides the original Expedia.com site, among the OTAs the group now owns are Travelocity, Orbitz, and CheapTickets. In addition to the multiple product platforms including air, hotel, and car, Expedia has expanded into businessoriented TMCs Egencia and Traveldoo; hospitality platforms Hotels.com and Trivago; and other travel specialist platforms focusing on cruises, vacation rentals, and rail service among others. Booking.com B.V.: based in the Netherlands, the origins of the frm goes back to Priceline.com for the airline product and the hotel platform Booking.com. Among the platforms the group has acquired are Agoda.com and Rentalcars. com. Operating across 225 countries and in more than 40 languages, the group has also expanded into the TMC space with Booking for Business, and affliate programs for travel agents, restaurant reservations with the OpenTable app, and metasearch with ownership of Kayak.com. Trip.com Group: while the domain name Trip.com has long been used throughout the 20-plus years OTAs have existed, the current status of the group begins recently when the domain was acquired by what was then known as Ctrip.com International. Ctrip.com is the largest OTA in the Chinese market and bought control of Trip.com as part of a global expansion strategy. Additionally, the group acquired the metasearch engine Skyscanner, originally popular in the EU and with younger travelers. Sources: Booking.com (2020), Expedia Group (2020), Schall (2019)

The travel agents respond and the corporate channel evolves (1995–today) Te other major channel group, the travel agents, at frst had members who had difficulty adjusting to the disruption of their long-held business model and felt under attack from airlines demanding lower costs and technology taking customers away. Realizing the need to adjust to the changing marketplace, many agents evolved into travel specialists across

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Airline Reservation System Airline Web

GDS

TMC

Travel Agent

OTA

Customer

Figure 6.5 The corporate channel responds (1995–today)

two broad categories: leisure specialist or corporate travel specialist (Merlino, Sullivan, and Unger, 2019). Tose agencies that became corporate travel specialists have become commonly known as travel management companies (TMCs) (see Figure 6.5). Te TMC marketplace encompasses a very wide and broad collection of frms. TMCs span smaller travel agencies who serve local business clients in their communities, to multinational frms such as American Express Global Travel with a network of 17,000 travel professions in more than 140 countries and revenues of more than $30 billion (Sorrells, 2019b). Among the TMCs the use of the GDS to book travel is nearly complete as 85 percent usually book air travel on a GDS (Merlino, Sullivan, and Unger, 2019). Travel is an expense frms attempt to control and minimize, while at the same time trying to provide the employee the best experience possible (Sorrells, 2019b). At many frms travel policies require the use of the selected TMC if the employee expects the travel to be approved or trip expenses to be reimbursed by the frm. Larger corporations may have pricing discount programs with suppliers such as airlines that are based on meeting a target volume of purchases and the TMC becomes the travel department for the frm to assure employees are following travel policies and discounts are reached. Te TMC is ofen compensated by the frm using its service on a transaction basis, as airlines quit paying base commissions nearly two decades ago, although other segments in the hospitality and rental car industry still pay commissions (Parsons, 2020; Schall, 2019). TMCs may still earn payments from airlines as incentive plans are still common. For example, a TMC travel agency might have an incentive agreement with the airline that provides a payout of 2 percent of sales and access to marketing support if the overall revenue target of $5 million in tickets is achieved over the course of a calendar year (Avian + Skif, 2020). Te importance of the TMC is due to the volume of spending and customers that are in the channel. Te Global Business Travel Association estimates that business travel has reached a volume of $1.4 trillion (Sorrells, 2019a). As the TMC serves the business marketplace, the volume and value of sales are key factors in the strategies of the FSNCs that have traditionally served the business customer. In addition to the sales volume, the buying behavior of the business traveler, known for booking closer to departure time, ofen means

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PLACE the business traveler is buying higher priced tickets. In turn, this drives higher yields for the airline (Ferguson, 2015). Due to the volume and higher value of the air service that TMCs have purchasing tickets, LCCs over the past few years have reached agreements with the GDS frms to access these potential passengers. In an efort to target business fiers, JetBlue was one of the frst US low-cost carriers to make the move, not surprisingly due to its home market of New York and eforts to grow traffic in Boston and other business-centric cities. Meanwhile in the EU, EasyJet was one of early movers to enter into an agreement for GDS connectivity as the airline changed from its original ultra-low-cost model to more of a hybrid strategy to attract business passengers (Field, 2008). Even the longest and largest holdouts to joining the GDS for access to the TMC marketplace have reversed course joining with a GDS to increase business traffic. Ryanair, seeing the success of EasyJet, entered into GDS agreements and began ofering inventory through the systems in 2014. Moreover, Southwest, which over the years had only minimal connectivity, announced a move to join Amadeus and Travelport for the expressed intention to form relationships with TMCs and attract more business travelers going forward (Sheivachman, 2019).

Metasearch, NDC, APIs, direct connect, and channel management Te changes that were introduced into the distribution process by the internet in the mid1990s only continued once the digital transformation began to impact the world in the mid2000s. Along the way these technological changes and advancements led to a new form of searching for air travel, a new communication standard expanding the options for suppliers and consumers and new entrants into the distribution framework. As these systems increase in importance and use, how much the channel structure begun by the GDS and refned by the OTAs will be impacted is still a question of debate.

Metasearch Metasearch can be defned as search engines that aggregate data from leading airline websites and OTAs and provide the information to users so they can view and compare itineraries and pricing in one place (Tnsinc.com, 2019). Due to the way the systems work, the platforms have also been called screen scrapers or web scraping (Altexsof, 2019a). Te practice can be a questionable and sometimes illegal method of extracting data from a website and some LCCs have taken legal steps to stop some metasearch sites from accessing the carriers’ websites in the past. Scraping can be done via a program that searches for fare information on the website, collecting and extracting the fight data in the process. Web scraping had been the main method for some metasearch sites to get LCC fight information before the LCCs joined an OTA or granted site access. Leading metasearch sites include Google Flights, Kayak, Skyscanner, and Momondo. Te role of metasearch has grown over the years and today nearly three-quarters of travelers are believed to use metasearch engines in their search process (Delgado, 2019). Metasearch was once strictly a search process as a user still had to leave the metasearch site to go to the selected airline or travel platform to buy the desired fight. Now some of the leading metasearch sites allow ticket buying at the site and have become a new distribution outlet. Tis

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PLACE occurred as some of the leading metasearch sites have been acquired by OTA groups, Kayak by Booking.com and Skyscanner by Trip.com. Additionally, one entrant into the metasearch market, Google Flights, is generating concern for everyone involved. In only a short time frame the site has become the leading referral site for many airlines (Gavira, 2020). Recently Google Flights efectively eliminated charges for referrals from the site and now equates OTA listings to airline listings when presenting results. As Google addresses possible antitrust regulators around the globe investigating the search engine and its dominance in online key word advertising, the actions are not seen as having a major impact on Google’s revenue, but as a move to only strengthen Google Flight’s reputation as the location to frst search for travel.

NDC NDC is the airline industry term for new distribution capability. NDC began as an IATA-led initiative to update and create a modern communication standard across the distribution marketspace. Going back to the days of the GDS development another communication standard known as EDIFACT had been in place. As airlines began to unbundle their product and look for a way to create merchandising and retail opportunities for ancillary revenue in the distribution market, the EDIFACT standard was not suitable for the selling tasks desired by airlines (Baker, 2018; Hammond, Twawfk, and Fahmy, 2018). Based on a modern program language, XML, the NDC eforts are one means being pursued by the airlines to get to a customized and personalized ofer to airline customers. As NDC was launched some argued that it would be the new technology standard that would allow disintermediation as airlines would be able to establish NDC communication and sales channels to bypass the GDS (Hammond, Twawfk, and Fahmy, 2018). However, this is unlikely to occur as no airline has completely moved to the standard. Airlines are adopting slightly diferent systems even though IATA strives for commonality. Moreover, the three major GDS frms of Amadeus, Sabre, and Travelport have created sales and communication systems in the NDC standard as well (Baker, 2018; Der Arslanian, 2019). What the NDC standard has brought about are a collection of new frms creating NDC programs and platforms for distribution frms and airlines who may not have the resources, both fnancial and technological, to develop their own NDC platforms. Across the various distribution channels, from the OTA to the TMC to the airlines, new startups are emerging in the distribution market with updated digital technologies, utilizing the NDC standard to ofer programs and products addressing needs across the various channel structures. Examining how the standard is being adopted, there exist 25 aggregators, 51 IT providers, 22 sellers, and 68 airlines as certifed or NDC capable (Der Arslanian, 2019). While the old EDIFACT systems are phased out, due to the development of NDC and adoption of NDC by the GDS, OTA, and TMC frms, disintermediation is not likely soon to occur.

APIs and direct connect Ofen discussed in conjunction with NDC and XML messaging is the term application programming interface (API). An API is a set of programing code that enable data transmission between one sofware product and another that contains the terms of the data exchange

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PLACE (Altexsof, 2019c). In essence, an API allows sofware programs and platforms to connect with each other. NDC-related APIs will be one means by which the airline and channel member systems communicate the ofers between each other. A key part of this is that the use of XML and APIs also means the customer data involved in the ofer is shared with the airline. Meanwhile, under the OTA and TMC channels through the GDS system, much of the data stayed with the GDS and was not shared with the airline (Altexsof, 2019a; Hammond, Twawfk, and Fahmy, 2018). With the change to the NDC standard it was projected that airlines would create multiple APIs to allow direct connections to the OTA and TMC frms and bypass the GDS (Altexsof, 2020). Tis has not come to pass as the GDS frms moved to create new suites of APIs that utilize the NDC communication standard. Besides the GDS frms, a number of tech providers across the airline distribution and pricing networks have built APIs such as ATPCO, SITA, and Farelogix that aid connectivity in the current channel structure. Some airlines, mostly EU carriers, have created the needed APIs to move to ofer direct connections between the airlines and their OTAs and TMCs. Among the airlines in this group are Lufhansa, Air France-KLM, IAG (i.e., owner of British Airways), and Singapore Airlines (Harper, 2019). While Lufhansa has been the leader in the move to the NDC standard in an attempt to drive direct bookings, they have also been the most aggressive airline in pushing to shed GDS infuence. No major US carrier has yet implemented a GDS fee as Lufhansa has as part of their distribution strategy.

Did You Know? Lufthansa is seen as the leader in achieving a direct connect strategy. Since beginning in 2015 with corporations and TMCs that buy a high volume of tickets, the Lufthansa Group has executed a strategy of moving to direct connections and attempts at disintermediation. Two tactics to implement the strategy drove the change. First, Lufthansa pushed the frms to adopt the NDC standard and upgrade the technology of their systems to allow direct connections. To assist this Lufthansa made investments and entered other collaborative agreements with over 25 frms across the airline distribution and pricing market to create the systems and APIs needed (Lufthansa Group, ND). Secondly, the carrier began charging an $18 (16 euro) fee on all tickets bought through a GDS channel to recoup the costs of using the GDS channel. For the overall Lufthansa Group, which includes not only Lufthansa, but additional airlines Austrian and Swiss, when reporting 2018 earnings sales across all direct channels accounted for 45 percent of its bookings, up from only 30 percent in 2015. While consumer adoption of the carrier’s apps and use of online websites accounted for some of the growth, the group credited the direct connect efforts with corporations and TMCs for much of the growth. Sources: (Lufthansa, n.d.); O’Neill (2017, 2019)

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Conclusion Tis chapter has covered “place”—the second “P” in our 4Ps framework. However, unlike retail establishments that have a physical “place,” within the context of airlines place primarily refers to the distribution channels that serve as their relative paths to market for airline services. Much like other frms that have limited or no storefronts, airlines focus on various channels of distribution in order to make their services available for customer purchase. In the process, the chapter outlined the historical nature and evolution of both direct and indirect channels of distribution. Tis included coverage of the roles and relative importance of various intermediaries such as travel agents, GDS, OTAs, and TMCs that are part of indirect channel structures. Te chapter concluded with coverage of the dizzying array of digital innovations such as metasearch and advancements in the last several years involving NDC, APIs, and the many frms seeking to carve out their own niche within travel distribution space. Now that we have covered distribution attention will shif to the next “P” in the framework, namely promotion. Tis involves how airlines go about communicating what they have to ofer to the various customer groups that they are best positioned to serve.

Chapter review questions 1 Diferentiate between a GDS, OTA, and TMC. Where are the frms found in a distribution channel? Where do the frms get the content they sell from? Who tends to be the customers the frms sell to? 2 Pick your favorite airline and assess their mobile application. What platforms can it be downloaded from? When was the last update to the app? How do users rate the app? Is the app reviewed on one of the major frequent flier sites such as FlyerTalk or Webflyer? Are there any features not in the app you believe travelers want? 3 Research one of the three major GDS frms, Amadeus, Sabre, or Travelport. From press releases, blogs, and any investor relation reports, what are the leading distribution products the frm is ofering? How has the frm reacted to the NDC initiative? 4 Based on your reading of the chapter what is metasearch in your own words? How are the metasearch frms presented in the chapter positioned against GoogleFlights? 5 In your own words what is NDC? What is the relationship between NDC and direct connect channels some airlines and other channel members are forming? 6 What is disintermediation? Could a major airline serving multiple market segments ever get to complete disintermediation? Why would they choose this path?

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DISTRIBUTION STARTUPS: DISRUPTORS WITH LIFE, ACQUISITION TARGETS, OR STRUGGLING TO FIND A MARKET? Phocuswire.com is a daily news website that reports on areas of distribution, technology, startups, and other critical topics infuencing and shaping the global travel market. A feature on the website reported on the “Hot 25 Startups for 2020.” A review of these startups identifed the ones in the table below with ties to the airline travel market and the distribution channels utilized. Select a frm from the list and report on their current state of operations. Has the frm grown or received another round of funding, been acquired by a current channel member or other technology frm, or has the startup closed down? Company

Sypnosis

Founded/Investment

AirGateway

Planning to solve the GDS-to-NDC transition for small/medium independent travel management companies, mostly in the European market where the GDS surcharge is putting more pressure on the corporate travel spectrum.

Founded:

2016

Team size:

10

Funds Raised:

600,000 euros

Bacarai has s a digital marketplace for group airfare, which enables airlines to manage the life cycle of a group contract with ease, while simultaneously optimizing the customer journey.

Founded:

2018

Team size:

8

Funds Raised:

$0

Emadri’s B2B2C platform, with its proprietary algorithms, simplifes one of the most stressful parts of the travel journey—creating a packing list (by including shopping and sharing purchase recommendations). Goals for 2020 include growing partnerships in airline market segments.

Founded:

2018

Team size:

11

Funds raised:

$350,000

Groupdesk streamlines the booking and payments processes so that travelers can easily service themselves, which allows businesses to focus on marketing and achieving long-term proftability.

Founded:

2016

Team size:

13

Funds raised:

$1 million

Hotailors automates the booking process in corporate travel and can handle a request within fve minutes. Its AI-powered travel platform has access to accommodation providers and airlines worldwide.

Founded:

2016

Team size:

44

Funds raised:

$2.5 million

Baccarai

Emadri

CASE STUDY

Groupdesk

Hotailors

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Company

Sypnosis

Founded/Investment

Journera

Journera enables travel companies to leverage their data to create a more seamless experience. The technology platform uses a secure GXR (Global Experience Record) and a unique data permissions architecture that allows for a more accurate depiction of the traveler’s journey in real time.

Founded:

2016

Team size:

25

Funds raised:

$15 million

Flight disruptions often derail business travel plans. Pilota’s machine learning technology has the capabilities to accurately predict disruptions and automatically rebook a client on a back-up fight if there is a severe delay or cancellation.

Founded:

2019

Team size:

4

Funds raised:

$150,000

Its modern all-in-one solution to business travel is growing rapidly. Over 20,000 organizations leverage TravelBank to simplify the employee booking experience, automate expenses and track spending. TravelBank’s combination of a user-friendly platform and 24/7 agent support has enabled further growth.

Founded:

2015

CASE STUDY

Pilota

TravelBank

Team size:

65

Funds raised:

$35 million

https://www.phocuswire.com/Hot-25-Startups-2020-introduction (November 18, 2019).

References Altexsof. (2019a, March) Low-cost airline distribution channels: Direct distribution, NDC, GDSs, and low-cost airline consolidators. Altexsof.com. Retrieved from: https://www.altexsof.com/ blog/travel/low-cost-airline-distribution-channels-direct-distribution-ndc-gdss-and-low-costairline-consolidators/ Altexsof. (2019b, April). History of fight booking: CRSs, GDS distribution, travel agencies, and online reservations. Altexsof.com. Retrieved from: https://www.altexsof.com/blog/travel/ history-of-fight-booking-crss-gds-distribution-travel-agencies-and-online-reservations Altexsof. (2019c, June). What is API: Defnition, types, specifcations, documentation. Altexsof. com. Retrieved from: https://www.altexsof.com/blog/engineering/what-is-api-defnition-typesspecifcations-documentation/ Altexsof. (2020, February). Travel and booking APIs for online travel and tourism service providers. Altexsof.com. Retrieved from: https://www.altexsof.com/blog/engineering/travel-andbooking-apis-for-online-travel-and-tourism-service-providers/ Avian + Skif. (2020, January). How travel agencies can maximize commissions and boost proftability in a new era of airfare retailing. Skif. Retrieved from: https://skif.com/2020/01/21/how-travelagencies-can-maximize-commissions-and-boost-proftability-in-a-new-era-of-airfare-retailing/

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PLACE Baker, M. (2018, October). Catching up to NDC: A primer & an update. Business Travel News. Retrieved from: https://www.businesstravelnews.com/Research/Distribution/Catching-Up-toNDC-A-Primer-and-an-Update Borko, S. (2018). Te state of airlines distribution 2018. Skif. Retrieved from: https://research.skif. com/report/the-state-of-airline-distribution-2018/ Brannigan, M., and Mollenkamp, C. (1999, June 14). Delta’s stake in Priceline.com presents some new challenges. Wall Street Journal. Retrieved from: https://www.wsj.com/articles/ SB929311017970408400 Copeland, D. G., and McKenney, J. L. (1988). Airline reservation systems: Lesons from history. MIS Quarterly, 12(3), 353–370. Delgado, P. (2019, July 10). How metasearch became the most important marketing channel in travel. PhocusWire.com. Retrieved from: https://www.phocuswire.com/Metasearch-travelmarketing-channel-growing Dent, J., and White, M. (2018). Sales and marketing channels: How to build and manage distribution strategy. London: Kogan Page. Department of Justice (2003, June). Reply comments of the Department of Justice. At: https://www. justice.gov/atr/reply-comments-department-justice-0 Der Areslanian, P. (2019, July). NDC check, part 1: Is next-gen airline distribution taxiing or taking of? PhocusWire. Retrieved from: https://www.phocuswire.com/NDC-airline-check-taxiingor-take-of-part-one Ferguson, M. (2015, March). Route to market. Airline Business, pp. 42–43. Field, D. (2008, March). Turning the tap. Airline Business, pp. 54–57. Fox, L. (2020, February). Where travel brand loyalty sits in a super app world. Phocuswire. Retrieved from: https://www.phocuswire.com/travel-brands-super-apps-loyalty Gavira, M. (2020). How Google Flights is shaking up the travel industry. Phocuswire. Retrieved from: https://www.phocuswire.com/Google-Flights-impact-on-travel-industry Grewal, D., and Levy, M. (2020). Marketing, 7th edition. New York: McGraw-Hill Education. Habtemariam, D. (2018, October 28). A brief history of air travel distrbution. Business Travel News, pp. 6–12. Hanke, M. (2019). Distribution trends. In Air Transport—A tourism perspective. Edited by A. Graham and F. Dobruszkes. Amsterdam: Elsevier. Hansell, S. (2002, October 27). Fare idea returns to haunt airlines. New York Times, pp. B1, B13. Harper, L. (2019, March). Easy as NDC? Airline Business, pp. 36–38. Lufhansa Group (N.D.). NDC technology partner of the Lufhansa Group airlines. Retrieved from: https://www.lufhansa.com/content/dAt: am/lh/documents/discover-lufhansa/partners/directconnect/Tech_Provider_EN.pdf Merlino, D., Sullivan, M.P., and Unger, C. (2019). Air sales and the travel agency distribution channel. Phocuswright. Retrieved from: https://www.phocuswright.com/Free-Travel-Research/Air-Sales-andthe-Travel-Agency-Distribution-Channel Moretti, L. (2019). Distribution strategy. Cham: Springer International Publishing. OAG (2019). Te agent of change. OAG. Retrieved from: https://www.oag.com/reports/how-onlinetravel-agencies-revolutionized-air-distribution O’Neill, S. (2017, March 17). Lufhansa calls direct booking a success as British Airways is poised to copy it. Skif. Retrieved from: https://skif.com/2017/03/17/lufhansa-calls-direct-bookinga-success-as-british-airways-is-poised-to-copy-it/ O’Neill, S. (2019, March 14). Lufhansa now drives more than half its bookings directly. Skif. Retrieved from: https://skif.com/2019/03/14/lufhansa-now-drives-more-than-half-its-bookings-directly/

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CHAPTER 7

Promotion Building airline brand loyalty CHAPTER OUTCOMES At the end of this chapter, you will be able to .˛.˛.  Describe fundamental concepts related to successful branding  Identify common branding strategies that are pursued by commercial airlines  Determine ways in which airlines develop unique market positions  Identify ways in which airlines foster awareness, associations, and brand loyalty  Differentiate the various methods of traditional promotion used by airlines  Use your understanding of chapter content to discuss a case study related to airline branding and promotion of safety

Introduction Branding has long been a core tenet of successful marketing practice. Each year various media groups create rankings of the most valuable brands in the world. Tese valuations stretch into the hundreds of billions of dollars—leading managers to consider brand equity as the most important intangible asset that a frm can have. Barring human injury, of course, executives of top brands would rather have a manufacturing plant burn to the ground than to see the reputation of their beloved brands tarnished. Said another way by legendary investor Warren Bufett: “It takes 20 years to build a reputation and fve minutes to ruin it.

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PROMOTION If you think about that, you’ll do things diferently.” In essence, building successful brands requires sustained nurturing and care on behalf of capable managers. For these same brands to matter to consumers requires trust, which in turn takes time to develop and can easily be undone. Building successful brands in the airline industry has proven to be especially challenging. Given the importance placed on price alone, sometimes one wonders how much anything else really matters for airlines in luring customers. However, one must ask, can promoting a low price be a source of signifcant brand value in its own right? Tis question will be addressed knowing that it is vital for airlines to consider unique ways to position their brands and it is just as vital for airline marketers to seek efective ways to communicate this unique positioning to their chosen customer segments. Te chapter opens with a section on core branding fundamentals and demonstrates ways in which airlines can evaluate various branding positions. Branding architecture— the way in which companies represent their strategic business units—will be discussed along with common promotion methods that airlines use to communicate their value proposition. Te chapter concludes with a provocative case study related to the promotion of airline safety.

Branding fundamentals A brand can be defned as anything that identifes a marketer’s product as distinguished from the products of others (Pride and Ferrell, 2017). It can involve a unique name, term, design, symbol, or just about any unique feature or combination of features—even a jingle. Tese outward symbols are ofen referred to as branding iconography. More importantly, however, a brand represents a “promise kept” (Blackett, 2009). As such, having fancy logos or clever taglines are meaningless unless there is actual substance behind them. Tere are countless examples of branding campaigns in which companies roll out new logos, names, and promises; and yet, the substance of the experience is no diferent and customers are not fooled. Branding principles, however, serve several important functions that beneft both buyer and seller when implemented properly—even the iconography aspects. Hence, these fundamentals will be described hereafer using classic examples from some of the most recognizable brands in the world. The oldest registered trademark is the iconic “red triangle” of Bass ale—a high-quality beer known around the world (Blackett, 2009). The executives at Bass were first in line to register their brand under new British trademark law in 1786. This demonstrates a basic, and often overlooked, core tenet of branding, namely, legal protection. By having the ability to register their trademarks, firms are provided the means to capitalize on the value of their brands and, depending on the strength of the legal system, consumers are shielded from imposters in the process. The unique shape of the Coca-Cola bottle is an excellent example of this. In the early 1900s knockoff producers would routinely copy the design of the Coke bottle. The paper identification sleeves would fall off of the bottles after being submerged for several hours in a tub of ice leaving consumers not knowing whether they held an actual Coke or an imposter. Having grown frustrated by this, executives at Coke wanted a bottle so distinctive that customers could be blindfolded and know from feel alone that they were holding the real thing. Hence, they came up

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PROMOTION with the unique curved design of the Coke bottle, an iconic shape that has been legally protected ever since (Hays, 2005). Brands are hardly the creation of corporate marketers though. Tey have existed in principle going back several thousands of years. Ancient Romans were known for putting their thumbprints on the bottoms of their clay pots—serving as an early manufacturer’s identifcation of sorts (Blackett, 2009). And, farmers have been branding their cattle for centuries. Te word branding means “to burn,” in fact. Tese examples highlight two closely related fundamentals of branding, identifcation and quality, which beneft both sellers and buyers. For starters, having a means for product identifcation helps consumers to reduce search costs. Just think about how much time would be wasted if you could not easily identify your preferred products on store shelves. Closely related, brands denote quality and value. Te early practice of branding cattle illustrates this. A farmer with a particularly good reputation for the quality of his animals would fnd his brand much sought afer, while the brands of farmers with a lesser reputation were to be avoided or treated with caution. Tus, the utility of brands as a guide to choice was established, a role that has remained unchanged to the present day. (Blackett, 2009) In other words, if brands are not beholden to standards of quality and consistency they have little chance of building the highly coveted brand equity described in the chapter opening. Meanwhile, branding fundamentals are predicated on the foundation of market segmentation which takes us back to the subject of Chapter 4. Using the various segmentation categories (e.g., geographic, demographic, psychographic, and behavioral) firms develop customer segment profiles. Through the marketing process of targeting, firms determine which customer segments they want to prioritize and pursue. This requires an assessment of both how desirable a customer segment is and how feasible it is to reach them with an effective marketing mix. In turn, using the process of positioning, firms determine how to shape their market offerings and subsequently communicate in a manner that best appeals to their chosen market segments. Many consider the iterative nature of this process involving segmentation, targeting, and positioning (STP) to be the essence of marketing strategy. It is part science and part art that not only requires consideration of customers, but the competitive dynamics and costs associated (Kiechel, 2010). A useful tool in the process of positioning brands is called perceptual mapping. It allows frms to get a better sense of how customers perceive various market oferings along certain dimensions (Grewal and Levy, 2018). Figure 7.1 ofers an example of a perceptual map for a group of airlines (1–5) that may have many overlapping markets; hence, they ofen compete vigorously to win customers. Te format of a perceptual map is ofen referred to as a bubble chart. Te strength of this format is that it allows for three data points to be projected in a two-dimensional space. In this case, the horizontal axis represents customer service and the vertical axis represents price. Meanwhile, the size of the bubble ofers the third data point which is the size of an airline as measured by revenues. In this particular case, airline 1 is

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PROMOTION High Ticket Price

2 4 3

5

Poor Customer Service

Good Customer Service

1

Low Ticket Price

Figure 7.1 Customer perceptions of airlines

the biggest as measured by revenues. Beyond this ability to depict three data points, bubble charts are generally easy to interpret and visually appealing which explains their wide-scale usage in business. It is important to note that in this exercise what matters is not an objective measure of the dimensions. Instead, the only thing that matters is customer perception, meaning your positioning ultimately resides in the minds of your customers. Marketers use perceptual maps as a means of monitoring the perceptions of their brands and in determining opportunities in the marketplace to occupy unique positions. Tis is where the “art” comes in as there is no limit to the various dimensions that can be plotted and tested. With respect to airlines, it is important to consider that the tangible product characteristics can almost always be copied. As such, for brands to truly be distinctive relies, at least partially, on psychological aspects. People do not buy Apple products merely because they consider the product attributes to be superior. Tey buy Apple products as means of self-expression because they ofen have an emotional connection to the brand. Hence, branding expert Seth Godin recommends that marketers be as creative as possible in analyzing various dimensions, both tangible and intangible, as they seek unique positions. Some possible dimensions to name a few include: price, edginess, safety, purity, ingredients, and performance (Godin, 2018). For example, if one were to map airlines along an intangible dimension they might use “fun” on one end and “formal” on the other. A survey of customers would likely show airlines such as Southwest on the fun side of the grid and British Airways and Lufhansa on the formal side. Tese visual representations help marketers determine how well their positioning strategies are resonating with customers.

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Airline branding Branding principles have long been used by airlines seeking to create distinctive market positions. As Chapter 4 indicates, some airlines focus primarily on business passengers—others focus primarily on leisure passengers—while many airlines seek to serve both. Airlines have even sought to make psychological connections with customers—having their brands associated with sentiments that go beyond the airlines themselves. For example, since the beginning, certain airlines—called fag carriers—have sought to represent the pride of their respective nations. Carriers such as British Airways, American Airlines, and Air France, to name a few, still have the nation as part of their brand identity. Over the years their branding iconography has evolved as they survey perceptions not only of their airlines but the nations that they represent.

7.1

Marketing in practice

American Airlines—implementing a brand refresh American Airlines instituted a brand refresh in 2013 after having the same visual identity for over 40 years. The purpose was two-fold: On the practical side, American was taking delivery of new aircraft made of composite materials that no longer allowed for their customary polished aluminum fnish. On the symbolic side, American was about to emerge from bankruptcy and was hoping for an image reboot of sorts. For added complexity, American Airlines has long had branding associations with the United States itself. Hence, the advertising agency working with American on the initiative Futurebrand performed market research around the world to determine positive associations with America and to avoid negative ones. The culmination of this effort is a new logo design of the eagle that has long stood to represent American Airlines. Go to the internet to compare the old eagle to the new one. You will notice the new eagle is more abstract and pointing forward to reinforce “progress”, a more endearing American trait than the traditional downward swooping eagle that could be viewed as too aggressive. The new tailfn design on American’s livery is an abstract depiction of the American fag which reinforces American’s heritage while seeking to avoid evoking a jingoistic reaction. The brand refresh was carried out across American’s platforms including the planes, airport signage, and even digital properties including their website. Once again, it should be stressed that superfcial branding representations ultimately mean nothing without substance behind them. Nevertheless, this example highlights the lengths that airlines go to in managing their brands. Sources: Davies (2013); Grewal & Levy (2018)

Branding is ofen framed by economists as distinctly separate from commodities such as wheat and corn in which frms compete exclusively on price. As such, markets in which the lowest price always wins are dubbed commodities; while those in which frms are able

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PROMOTION to command signifcantly higher prices than rivals (e.g., Apple) are considered brands. Yet, considering “brand” as merely a refection of pricing power defnes the concept too narrowly. A case in point, as of this writing, is Ryanair which has been among the most profitable and successful airlines in the world for the last several years. It is hard to argue that Ryanair does not have signifcant brand equity. Yet, Ryanair is certainly categorized by most as an ULCC in which ofering a low price is extremely important for attracting its customers. In fact, Ryanair’s colorful CEO Michael O’Leary once echoed the LCC sentiment “price is the brand.” Te translation being that all airline customers really care about is getting the lowest price. Yet, by his own admission, O’Leary’s views about branding were too narrow. Ryanair learned that customers do indeed care about aspects that go beyond merely getting the cheapest ticket price from point A to point B. Under the program name “Always Getting Better” frst launched in 2014, Ryanair has made considerable efort toward improving the customer experience. O’Leary even remarked, “If only I’d known being nice to customers was so good for business I’d have done it much earlier!” (Cooper, 2018). Hence, what people really see as the value of Ryanair—its core brand strength—is value for the money. If they did not consider Ryanair to be a safe, reliable, and a worthy “brand” they would not continue choosing the airline with their wallets. Further distinctions between commodities and markets in which diferentiation and branding thrive are addressed in Chapter 8 focused on pricing. Once airlines determine the markets they wish to serve and the positions they hope to occupy, they must determine the branding strategy and associated structure that fts best. Ofen referred to by marketers as branding architecture, a one-size-fts-all approach does not work and the choices that frms make are once again part science and part art. Firms that seek to serve a narrow range of customer segments ofen have one brand that represents the entire company. As covered in Chapter 1, the airline La Compagnie only has a feet of two aircraf that serve the business routes of Paris–New York and Paris–London. Te aircraf maintain a uniform business-class confguration and travelers can get a reasonable price even when booking at the last minute, an attractive feature for the unpredictability of business travel (Kelly, 2015). Other airlines who serve multiple customer segments may use distinct sub-brands as a means of serving the diferent customer groups within the same company. Te consumer products giant Procter & Gamble is known for following such an approach. Tey have several diferent detergent brands—each positioned for a diferent customer segment. In fact, not many people outside of marketing are actually aware of the Procter & Gamble corporate name. Instead, they are aware of their marquee brands such as Tide, Crest, and Bounty, which is probably just how P&G wants it. Singapore and Qantas are airlines that follow a similar branding approach. Singapore’s brand architecture primarily consists of three brands that all have distinctly diferent visual identities. Scoot is the low-cost, long-haul operation targeting the leisure passenger segment operating on a tight budget. Singapore is the fagship brand, known the world over as a full-service premium airline. Meanwhile, SilkAir is a niche brand primarily serving holiday-goers and, as of this writing, appears to soon be absorbed back into the core Singapore brand. Tese distinct brands are intentional so that Singapore does not create confused positioning in the minds of their customer segments primarily for fear that an LCC of the same name could

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PROMOTION tarnish the premium positioning of their fagship Singapore brand. Tese three sub-units have diferent fight attendant uniforms, plane liveries, and are even separated between terminals at Changi airport in Singapore. As a full-service airline, Qantas follows a similar approach by having a completely separate sub-brand called JetStar as its low-cost subsidiary. Other companies follow a family branding approach in which all of the sub-brands operate with a clear link to the parent brand. Campbell’s soups and Heinz condiments are good examples of family branding as all variations of the products have the parent name on them with a similar package design. Exactly opposite of the distinct branding approach described above, the family branding approach is used when the frm is seeking to leverage the brand equity of the core product. Tis also tends to work best when the other products are in closely related categories. An example of the family branding approach in the airline industry is AirAsia. Operating in the same region of the world as Singapore and Qantas, AirAsia has separate sub-units all operating under the parent brand of AirAsia. Te visual identity for each is similar using the same shade of red and the same naming script of AirAsia. Tis works well for two reasons. First, AirAsia has strong brand equity in the region. More importantly, however, all of AirAsia’s sub-brands are meant to serve similar customer segments, primarily price-sensitive leisure travelers. Many airlines that serve multiple customer segments ofen seek to brand at the cabin level of service, or more recently, distinct fare classes even within the same cabin. For example, Delta Air Lines has several branded fares such as Delta One, Delta Premium Select, and Delta Comfort Plus to name a few. In order to ease the boarding process, and perhaps to reinforce these unique brand identities, Delta recently changed its boarding zones to match the naming of these branded fares (Gilbertson, 2018). A last area of branding architecture was briefy discussed in Chapter 1. It refers to the franchising of airline brands. For a fee, many regional airlines are permitted to use the visual identities of the network carriers that they feed traffic to as long as they maintain quality and consistency standards prescribed by the franchising airline brand. In essence, these regional carriers such as Endeavor Air have forgone their own branding eforts in order to assume the identities of the larger and more well-known airlines that they serve.

Traditional promotion It is important to frst note that the segmentation, targeting, and positioning (STP) process is an iterative one that does not typically follow a purely linear approach. At any given time an airline may be focused on each of the topics covered thus far, including overall branding strategy. However, none of these internal marketing activities matter much unless they are efectively communicated in the marketplace—the focus of the chapter hereafer. We refer to this communication process as promotion, an umbrella term that encompasses all manner in which frms communicate their value proposition to the outside world. As one of the “Ps” in the 4Ps framework, when asked what marketers do most people will instinctively turn to something under this promotion umbrella such as designing fancy commercial advertisements. Yet, the umbrella of promotion stretches much farther than this and we will cover this breadth of scope in turn.

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PROMOTION Like all frms, airlines have a dizzying array of media options available through which to promote their market oferings. We covered the burgeoning landscape of digital marketing in Chapter 3, yet more traditional forms of marketing are still very important for airlines and will persist for many years to come. Regardless of the media choice, airlines need to consider another core principle of promotion—that of integrated marketing communications (IMC). Tis simply means that a company considers its promotion options holistically and seeks to develop clear, consistent, and coordinated communications across all of its promotion channels (Armstrong et al., 2018). Integrated marketing communications are difficult to manage in practice given the fragmented nature of markets and the plethora of communication options available to companies. Te most common manifestation of IMC is a marketing campaign. It hinges on a “big idea” that companies want to communicate to customers, ofen over an extended period of time. In these cases, airlines are more likely to work with advertising agencies as efective marketing campaigns usually require signifcant customer research and creative capability. Airlines typically do not have the resources dedicated for such a big undertaking. Figure 7.2 contains an example branding campaign at Southwest Airlines.

7.2

Marketing in practice

Southwest Airlines—an integrated marketing campaign Even highly successful brands need constant nurturing. In 2014 Southwest Airlines implemented a brand refresh. As arguably one of the most successful airlines the world has ever known, Southwest decided to update its visual identity and become more consistent with its logo usage. The brand mark containing the plane was replaced by the heart and Southwest also dropped “airline” from its brand mark. Drawing inspiration from other well-known brands such as Starbucks who dropped “coffee,” and even the name Starbucks from its brand mark, Southwest sought to streamline and focus on the heart in all of its branding. The heart denotes the passion and love that Southwest has for its people and customers. In fact, Southwest’s three-letter stock trading symbol is LUV, which is also the three-letter airport code for Love Field in Dallas where Southwest originated.

Te sections that follow outline areas of traditional promotion that airlines routinely leverage. Tis coverage is not exhaustive; nevertheless, it provides the reader with a survey of the most prevalent forms of traditional promotion along with their major strengths and weaknesses.

Sales force Many airlines, especially traditional FSNCs, ofen have a business-to-business (B2B) feld sales force. Tis promotion medium labelled by marketers as personal selling is important

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PROMOTION when the product on ofer is complex and the benefts cannot be easily communicated using traditional advertising. Tere are several advantages of personal selling, however; the two most important are the two-way nature of communication and the fostering of relationships. For instance, it would be silly to see Boeing or Airbus attempt to sell their planes online or through traditional advertising given the complex nature of their products. To properly promote their aircraf requires a tremendous amount of back-and-forth dialogue and signifcant input from potential customers even before creating the plane designs. Also, considering the large dollar amounts involved, these are not products that will be purchased without signifcant trust established between buyer and seller. In fact, to sell aircraf ofen requires years of relationship building between buyer and seller. Meanwhile, airlines ofen deploy their own sales representatives to call on a variety of businesses in order to promote their marketing ofers. Tese range from selling cargo, maintenance, catering, and even charter services to name a few. Te primary deployment of sales representatives usually relates to the marketing channels discussed in Chapter 6. Beyond calling on an array of agencies and travel management companies, some airlines even promote directly to large businesses. Tese are frms that typically generate large amounts of ticket purchases over an extended period of time. As we covered in Chapter 4, several business professions such as consulting and sales require extensive travel. Te value of their travel to airlines can be substantial. As such, airline sales representatives will ofen negotiate contracts for discounted tickets in exchange for target volumes of usage and seek to convince these businesses that they are the preferred carrier and best able to meet the needs of the business long term. Tere are also downsides to personal selling as a promotion tool. Perhaps the most signifcant is the cost associated with maintaining a feld sales force. In fact, companies that have a feld sales force know that it is ofen the single most expensive form of promotion within their entire company. It is quite expensive to employ sales representatives, including the associated training costs, expense-handling, and overall employment costs associated. Hence, such a strategy requires a long-term commitment focused on relationship building.

Advertising Defned as a paid form of non-personal promotion, advertising is another tool available to airlines in several forms (Armstrong et al., 2018). In fact, there is ofen no longer a clear line of distinction between traditional and digital advertising. Tis section will briefy cover traditional media for advertising that are still used by airlines and are likely to persist for some time to come. Unlike having a professional sales force, advertising does not typically allow for two-way communication and is not suitable for complex B2B settings. Yet, unlike personal selling, advertising allows for complete control of the message and it can ofen be an efective means of signaling. Airline advertising tends to have two main objectives: fostering immediate sales and brand building (Hanke, 2016). Not surprisingly, the vast majority of airline advertising is sales-focused—messages seeking to entice customers to purchase tickets sooner rather than later. However, savvy airline marketers recognize the value of brand building through advertising as well. Among the many choices of media, television advertising for airlines had its heyday in the decades leading up to the 1990s—prior to the arrival of the internet. Even though it is not used

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PROMOTION as frequently these days, TV can be an important brand-building media for airlines, especially when launching major marketing campaigns. For example, the Arabian Gulf carriers are known for purchasing TV advertising in major media markets and airing splashy commercials using celebrity brand ambassadors to highlight their premium in-fight products. In the process, these commercials are signaling to customers that these are globally recognized airline brands that have the resources to promote themselves as such using expensive TV media. To illustrate the integrated nature of marketing communications—and blurring of lines between traditional and digital—these commercials may start on TV with aspirations of subsequently being spread virally through social media channels such as YouTube. Conversely, the commercials may be seeded frst as videos on social media channels and later transitioned to television commercials in major markets. In some cases, even LCCs use expensive TV advertising as a major component of their marketing strategies. In the United States, for example, Southwest Airlines has used national TV advertising for decades now. Considering that Southwest mainly sells tickets to customers through direct channels as outlined in Chapter 6, it therefore seeks to develop awareness with customers directly through traditional advertising. Since the airline is not represented in online travel agencies yet such as Expedia, Southwest relies on advertising in hopes that customers will remember to visit them directly when searching for fights. At the time of this writing, however, there are indications that Southwest may seek more distribution agreements with third parties in the future. An even older media format than TV that is still used by airlines on occasion is radio advertising. It can still be quite efective for achieving wide reach in a particular geographical area that an airline wants to focus on. Radio has a cost advantage over TV and still has broad appeal. Radio provides an opportunity for airlines to broadcast their sponsorship of local events and even the sponsorship of valued radio programs themselves. As noted by Michael Hanke (2016) in his book on airline e-commerce, American Airlines sponsored a well-known jazz program on a radio station in Chicago in which it gave away a free trip each day. Tis was an arrangement that lasted over ten years and garnered American attention in a hotly contested hub market of theirs. Undoubtedly, a key part of this radio-based promotion strategy was to target a program that would appeal to older, more educated, and likely more affluent listeners—a customer segment that matches well with American’s market positioning. Sponsorship as a marketing concept will be further expanded upon in the upcoming section on public relations. Another media source that has long been used by airlines is print advertising. Tis can come in many forms, the most common of which include newspapers, magazines, and trade journals (Hanke, 2016). Once again, a large portion of this media spend has shifed online for airlines. Yet, in many cases airlines still fnd print advertising especially valuable for building their brands with existing and potential customers. For instance, certain airlines will ofen advertise in venerable periodicals such as the Financial Times or the Economist. Tese outlets have highly desirable subscriber bases for airlines seeking to target upmarket customers. Te expensive cost of advertising in such outlets once again subtly signals to this travel segment that these airlines not only have a premium product, but they have the resources to advertise in venerable business periodicals. A traditional form of print promotion that is ofen used by airlines is outdoor advertising. Mainly using billboards, this form of advertising is especially important to airlines for

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PROMOTION a number of reasons. First, outdoor advertising can be strategically located for maximum appeal. Many airlines will purchase billboard space on major interstates leading to/from airports and in major city centers (Hanke, 2016). Tese advertisements reach people that may already have traveling on their minds and in high business traffic areas—a coveted market segment for many airlines. It is even common to see airline advertising on mass transit such as buses and subways, especially those leading to the airport. Another advantage of billboard advertising for airlines is that it can generate word-of-mouth buzz when it is cleverly executed. Alaska Airlines, for example, purchased billboard space in key cities to promote its planned merger with Virgin America a few years ago. It used tongue-and-cheek humor to make its point about the value of the merger. One of the billboards read, “Bacon on a donut seemed like a weird combo, too.” In some cases, outdoor advertising will combine both traditional and digital formats as in the iconic British Airways message board in famed Piccadilly Circus that notifes a passersby of where planes are coming from as they pass overhead (Hanke, 2016). Certain outdoor advertisements can even become landmarks used by media broadcasters when talking about traffic or by commuters when providing directions. Airlines in the United States have sometimes rented the same billboard space for decades in their biggest hub cities. One may wonder why this is needed when an airline is so prevalent already in a particular location. Tis can ofen be justifed on two accounts. Firstly, it is important even for well-established brands to maintain a certain level of reminder advertising in key markets. Secondly, this approach also has the hidden beneft of evoking pride and morale among airline employees. Airlines are ofen among the largest local employers in their hub cities. When workers routinely pass by signage of their employer going to and from work it can instinctively reinforce their sense of working for a substantial organization in their city. Moreover, the largest canvas for outdoor advertising is the plane itself. In recent years airlines have more fully recognized the importance of their liveries as a means of promoting their brands. Beyond simply insuring that their planes are clean and updated, unique liveries such as those painted for specifc causes or sports teams can generate both customer and media attention. Tis takes us to the last focal area of print advertising, what is sometimes referred to as point-of-experience advertising. From the signage inside the airport, posters adorning the Jetways, in-fight magazines, and even clever in-fight videos, airlines have a captive audience through which to help solidify their brand appeal. Once again, savvy airlines take full advantage of these opportunities and fnd ways to promote their brands without annoying their customers at the same time. Considering that younger generations spend more time in cyberspace the airline industry can expect marketers to continue shifing traditional advertising into digital forms. Yet, as previously mentioned, these traditional forms will continue to have infuence in the years ahead, and in some cases, still serve as the most efective means of reaching certain customer groups.

Public relations Another broad area of traditional promotion that is important to any airline is public relations. Generally defned as managing a company’s reputation, public relations covers a wide array of initiatives (Armstrong et al., 2018). Some of the most common activities in this

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PROMOTION genre involve media relations, managing sponsorships, and hosting community events. Public relations involves not only eforts to promote a positive corporate image but also eforts to mitigate negative stories and rumors that can derail a company’s reputation. In the airline industry, executives play a key role in public relations by attending various industry-related conferences and maintaining speaking engagements. We have already established that airlines, by their high-profle nature, garner signifcant media attention and public interest. All airlines seek to leverage this industry intrigue for their betterment and some are more successful than others. For instance, airlines routinely issue press releases when they buy new airplanes, decide to fy new routes, and make enhancements to the products and services that they ofer. Te hope is that news outlets will help to proliferate these announcements, which they ofen do. Tis earns airlines free publicity to a certain extent, a situation marketers refer to as “earned” media attention described in Chapter 3. At the moment, airline executives around the world are making public announcements and writing letters to their loyal customers and internal employees about the steps their airlines are taking to ensure fying safety in the wake of COVID-19.

7.3

Marketing in practice

United Airlines—public relations nightmare United Airlines has certainly faced its share of bad publicity over the last several years. In April 2017 a video surfaced on the internet of someone being forcibly removed from a United Airlines fight. The optics were terrible and it became a public relations frestorm for executives literally overnight. The incident came on the heels of United relaunching its famous branding campaign “Fly the Friendly Skies” from decades earlier. Unfortunately, this latest passenger incident is not even close to the most viral video of United’s on the internet. Instead, an infamous video titled “United Breaks Guitars” holds that title. In it, singer Dave Carroll and his band Sons of Maxwell sing an ode to United for breaking his guitar on the tarmac and failing to reimburse him for it. His customer service travails with United were immortalized not only in the song but also in a Harvard Business Case Study and even a book that Carroll wrote. Some people point out that United has never really been known for its customer service, and it still fnished the year proftably, so what is the big deal? If nothing else, these public relations nightmares cause airlines to lose branding momentum. United was forced to scale back its “Fly the Friendly Skies” initiative and it is now promoting a new branding effort, “Connecting the Globe, Uniting the World”. United has even launched a branding website explaining the airline’s recommitment to passengers and how its iconography symbolizes this. It is showing some signs of initial success and time will tell if the airline gains further positive momentum. The executives at United understand better than anyone that their brand ultimately represents a “promise kept” and the true experience they deliver to their customers will ultimately determine their long-term success.

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PROMOTION An area of public relations that has grown tremendously, and is anything but free, is sponsorship. Many airlines pay for the rights to associate themselves with various events and organizations that are important in the community. Te reason why marketers generally classify sponsorship as public relations is that it reaches beyond the airline itself to help separate entities that are important to communities. Tese sponsorships most ofen involve the arts and sports, the latter of which has become the single most important marketing avenue for certain airlines. Many of the most recognized soccer clubs in the world, for example, have airlines among their principal sponsors. Tese multi-million dollar sponsorship contracts ofen include a certain amount of advertising such as having airline names and logos on the athletic attire, signage in stadiums, and in some cases, premium slots for related advertising on TV, in print, and on digital properties. However, gaining the sponsorship rights is typically just the starting point for spending money. An ofen-cited rule-of-thumb among sports marketers is that every dollar spent in rights fees should be matched by at least the same amount activating the sponsorship (Fullerton, 2010). Tis term loosely refers to promotions paid for by the sponsor above and beyond the rights fees in order to strengthen the brand association. Airline executives that pursue sponsorships believe that such practices help to foster deeper associations between their brand and entities in the community that people hold closely and are passionate about. As with some of the other premium forms of promotion that may seem particularly well suited for airlines, depending on ft, sports sponsorship may confer similar benefts. For starters, major sporting events whether the Olympics, Formula One, or even a major tennis tournament, to name a few, are ofen attended by a portion of the crowd that has traveled by air to get there. Hence, these travelers are likely to have the resources to fy more ofen than the general public. From a branding perspective, sports are also considered to be an international language of sorts. While countries may focus on diferent sports, there is a universal understanding of the passions associated. While difficult to measure, airlines seeking to build global brands can signal these aspirations by linking their brands to high-profle sports properties. Not all airlines have the marketing budgets to sponsor global events of course; yet they may still seek promotion and recognition through sponsoring regional sporting events, arts festivals, and other cause-related endeavors in markets that are strategically important.

Did You Know? Emirates Airline rules the sky when it comes to the sports sponsorship game. The airline sponsors more sports properties across the globe than any other airline and pays hundreds of millions yearly in rights fees to associate its brand with iconic sports teams such as the Arsenal Football Club and Los Angeles Dodgers baseball team. More importantly, Emirates has developed true expertise in activating its sports sponsorships using clever marketing tactics to strengthen these brand associations. For instance, check out the iconic Emirates fight attendants throwing out the frst pitch at a Dodgers baseball game on YouTube. As Emirates founding CEO Sir

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Maurice Flanagan once said, “advertising never produces the same exposure for the money as the rights sponsorship, especially on TV.” This assertion is certainly debatable, but it is hard to argue with Emirates success in building a powerful global brand through sponsorship. Source: Ambrose (2018)

Conclusion Efective branding and promotion are essential for any industry—especially so for the highly competitive global landscape of airlines. As we learned in this chapter, branding is not just something that benefts FSNCs. Indeed, several LCCs are among the most proftable airlines in the world and have brands that deliver high levels of value that garner customer loyalty. Tus, it is important that airlines build and manage their brands within an architecture that best fts the various customer groups they seek to serve. As such, airlines try to position their brands in the minds of customers in distinctive ways that are valued. In order to solidify this positioning, airlines must communicate efectively using an array of integrated marketing communications in a highly fragmented marketplace. Tese communications can be delivered using a mix of both traditional and digital media platforms with a goal of being clear, consistent, and compelling. Chapter 3 highlighted the various digital platforms available to airlines. With respect to traditional sources, the most prevalent promotion vehicle for airline marketing to other businesses (B2B) involves personal selling using a feld sales force. Meanwhile, the most common forms of traditional promotion to end consumers include TV, print, outdoor, and point-of-experience advertisements—each having its benefts and drawbacks. Lastly, public relations is another crucial way that airlines promote and manage their reputation within a larger context. Now that we have covered promotion we will delve into the complex nature of pricing. Airlines that seek to promote their brands efectively in the minds of customers realize that pricing is a signifcant part of such eforts.

Chapter review questions 1 Pick your favorite airline and report on their latest marketing campaign. What is the big idea of the campaign? What types of traditional and digital media does the airline use to communicate this big idea? Does the campaign meet the criteria of an IMC (e.g., is the messaging clear, consistent, coordinated, and compelling)? 2 Draw a perceptual map including your favorite airline and include what you deem to be the airline’s four biggest competitors. Determine what you want the axes to represent and defend your favorite airline’s positioning vis-à-vis its competitors. 3 Search online for the liveries of British Airways and Air France. Compare them to what you learned about American Airlines in Box 7.1. For instance, do these airlines seek to promote national pride in their brand iconography?

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PROMOTION 4 Search online for an advertisement of your favorite airline that is sales focused. Find another advertisement that is brand focused. What media source was used for the advertisement and do you think it is efective? 5 Research and report on your favorite airline’s public relations initiatives. What types of events, activities, or organizations in the community do they sponsor? Do you think that these sponsorships are a good ft for the airline? How have they handled the COVID-19 pandemic in their advertising and public relations?

CASE STUDY

SHOULD AIRLINES MARKET SAFETY? Airline branding and promotion of safety has long been a delicate subject. An unwritten industry rule of sorts is for airlines not to overtly promote their safety track records. For starters, some feel that it is bad luck to boast of safety and perhaps distasteful as you are in some ways highlighting the misfortune of other airlines and perhaps inviting calamity to befall on your own doorstep. Yet, some airlines have impeccable safety records, so why not highlight this? After all, the luxury auto maker Volvo has historically crafted almost all of its brand positioning around safety. Airlines do, in fact, address safety in their advertising in very indirect ways using terms such as “experience,” “dependability,” and “quality.” However, safety is very rarely, if ever, addressed directly. Upon further scrutiny, some may say safety is a non-issue as it is simply expected in all airline activities, is beyond compromise, and therefore should not be seen as a differentiating factor for any airline. After all, passengers expect to make it safely from point A to point B without fail every time, don’t they? Others may indicate concern about marketing safety because how much control do airlines really have over all aspects of safety in an age of terrorism? Marketers, after all, are there to highlight people’s dreams and not remind them of their fears, right? Yet, even knowing statistically that fying is much safer than driving, there remains a large segment of the population that has an irrational fear of fying. After decades of achieving new quality standards of safety, the likes of which the industry has never seen before, the recent high-profle accidents involving the 737 MAX have resurfaced fear and controversy that is not likely to abate any time soon.

Case study questions 1 Should airlines market their safety records more directly? 2 Should industry trade groups such as IATA do more to highlight industry safety? 3 What are the pros/cons of including messages of safety in airline promotion? 4 Many airlines are, in fact, promoting safety these days not in the traditional sense but related to the COVID-19 pandemic. Do you think this will become a core area of airline marketing moving forward or will marketers seek to deemphasize it once the virus has abated and people are more comfortable fying again? Explain.

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References Ambrose, S. (2018, May). Op-ed: Emirates rules the sports sponsoring arena. Airways Magazine. Retrieved from https://airwaysmag.com/industry/op-ed-emirates-rules-the-sports-sponsoring-arena/ Armstrong, G. M., Kotler, P., Harker, M. J., and Brennan, R. (2018). Marketing: An introduction. Harlow: Pearson. Blackett, T. (2009). Brands and branding  (Vol. 43). Edited by Rita Clifon. Princeton, NJ: John Wiley & Sons. Cooper, M. (2018, September 22). Inside Ryanair: Michael O’Leary’s making of a ‘nicer’ airlines. Te Irish Times. Retrieved from https://www.irishtimes.com/culture/books/inside-ryanair-michaelo-leary-s-making-of-a-nicer-airline-1.3634667 Davies, A. (2013, January). Here’s why American Airlines is changing the look of its planes. Business Insider. Retrieved from https://www.businessinsider.com/why-american-airlines-changed-itslogo-2013-1 Fullerton, S. (2010). Sports marketing. Boston, MA: McGraw-Hill Irwin. Gilbertson, D. (2018, December). Delta Air Lines to ditch zone boarding in 2019. USA Today. Retrieved from https://www.usatoday.com/story/travel/fights/2018/12/11/delta-air-lines-newboarding-system-january-2019/2267416002/ Godin, S. (2018). Tis is marketing: You can’t be seen until you learn to see. New York: Penguin. Grewal, D. and Levy, M. (2018) Marketing, 6th edition. New York: McGraw-Hill Education. Hanke, M. (2016). Airline e-commerce: Log on, take off. London: Routledge. Hays, C. L. (2005). Te real thing: Truth and power at the Coca-Cola Company. New York: Random House. Kelly, B. (2015, May). Flight review: La Compagnie business class, Newark to Paris. Te Points Guy. Retrieved from https://thepointsguy.com/2015/05/la-compagnie-business-class-review/ Kiechel, W. (2010). Lords of strategy: Te secret intellectual history of the new corporate world. Boston, MA: Harvard Business Press. Pride, W. M., and Ferrell, O. C. (2017). Foundations of marketing. Andover: Cengage Learning. Sutherland, R. (2019). Alchemy: Te dark art and curious science of creating magic in brands, business, and life. London: HarperCollins.

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CHAPTER 8

Price Airline revenue generation and˜management CHAPTER OUTCOMES At the end of this chapter, you will be able to .˛.˛.  Describe pricing fundamentals and the unit metrics that determine airline proftability  Discuss the history and evolution of airline pricing practices  Identify key differences between cost-based, competition-based, and customer value-based pricing approaches  Describe ancillary revenues and discuss their impact on airline pricing practices  Identify illegal and unethical airline pricing practices  Use your understanding of chapter content to discuss a case study on customized airline market offerings

Introduction As we move along in our coverage of the 4Ps we will now address airline pricing. It is perhaps the most unique “P” within the framework because it is the only mechanism by which companies can capture a portion of the overall value that they create. Te other Ps previously covered: product, place, and promotion all represent costs to a company (Kotler and Armstrong, 2018). Trough setting prices, however, companies earn the revenues needed to continue the cycle of creating and keeping customers. Hence, setting the right

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PRICE price is critical for companies and even more so for airlines. Te pricing function is so important, in fact, that most airlines have a small army of workers dedicated to it. Price is also the most fexible of the 4Ps to change—airlines can literally alter prices on a minute-by-minute basis if desired. Tis small army of workers monitors all sorts of indicators for initiating price changes in a function generally described as revenue management. Given the perishable nature of an airline seat that goes unflled, it is not surprising that airlines seek to price in a manner that efectively utilizes their seat inventory while maximizing overall revenues across their route network. It is imperative that price is considered in conjunction with the other 3Ps already covered. Te prices charged need to align properly with the airline products on ofer, the distribution channels that the airline uses, and, most importantly, with the brand positioning that the airline seeks to promote in the minds of customers. Tis chapter will start by describing the foundational building blocks of airline pricing and their connection to economic principles. Te focus will then shif to cost-based, competition-based, and value-based pricing—three general approaches to pricing strategy all of which have relevance to airlines. All along, the myriad factors that impact pricing strategy and tactics by which airlines dynamically set prices as part of their revenue management practices will be discussed. Te chapter concludes with a focus on ancillary revenues and the importance of legal and ethical pricing practices.

Pricing fundamentals In general, it is helpful for frms to think of pricing as fnding the optimal point between foor and ceiling. Te pricing foor represents the minimum that a company needs to charge just to cover their operating costs. Said another way, if frms price below the foor of operating costs they have no chance of making a proft. Tis does not mean that airlines will not price below the foor, as will be touched upon at multiple points during this chapter; however, these situations need to be part of a larger strategy of capturing value. Meanwhile, taking the customer view, there exists a price ceiling above which the customer is unwilling to pay. Beyond a certain point the airline will have no customer demand—the price is simply too high. Yet, to use the terms “price” and “customer” is too narrow as we learned in Chapter 4 there are many types of customers and, correspondingly, airlines ofer many types of prices. Terefore, chapter coverage will include the many infuences and ways that airlines develop and implement pricing practices that operate between both foor and ceiling and match with the airlines’ brand positioning. First, we need to discuss some economic principles that in some cases are universal and in other cases uniquely apply to airlines. Firms across all industries seek to match customer demand with product supply in an efficient manner that also ensures proftability. As such, frms need to know how revenues generated through customer demand align with costs incurred through product supply at the unit level and in aggregate. Each industry, therefore, calculates a host of related metrics and airlines are no diferent in this regard.

Airline pricing metrics Unit measures for airlines usually refer to the passenger seats and the distances these seats fy. Distance is incorporated into the calculations for normalizing purposes (Vasigh, Fleming,

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PRICE and Tacker, 2018). A passenger, for example, that fies 366 miles from Atlanta, Georgia to Daytona Beach, Florida is not as valuable to an airline as the passenger that fies 1956 miles from Atlanta, Georgia to Los Angeles, California. Hence, available seat miles (ASMs) is an important measure because it speaks to the product supply (e.g., capacity or inventory) that an airline has on ofer to customers and is measured as the number of seats available multiplied by the number of miles fown. Meanwhile, revenue passenger miles (RPMs), or what is ofen called traffic in the media, refers to the number of paying passengers multiplied by the number of miles fown because not all seats may be flled and/or some of the seats may be flled by non-paying passengers such as airline crew members. As such, load factor is calculated by dividing RPM by ASM. In essence, you can consider load factor as an airline’s occupancy rate in a similar manner as hotels or hospitals discuss their occupancy rates. By itself, load factor it is not a telling metric. When paired with unit revenues and unit costs, however, load factor can help shed light on an airline’s strategy, efficiency, and overall profitability. Another important concept on the revenue side is referred to as yield—passenger revenue divided by RPMs. Yield, in essence, gives a measure of what the average passenger paid per mile and is a good indicator of pricing strength. Revenue per available seat mile (RASM) is the preeminent unit revenue measure that encompasses all of the building blocks above. In fact, Figure 8.1 illustrates these relationships and serves as a common training tool used within airline pricing departments. RASM constitutes the total revenue that an airline generates from paying passengers divided by ASMs. It can also be calculated as Figure 8.1 depicts by multiplying yield with load factor. If you read an article that claims an airline’s traffic increased 5 percent yearover-year this metric is less meaningful without knowing how much the airline’s capacity (i.e., ASMs) changed during the same time period. Te beneft of RASM as a guide is that it incorporates factors of both demand and supply. Tus, if an airline’s revenues grew by 5 percent year-over-year while ASMs grew by 10 percent during the same time period, RASM would actually go down indicating that the airline is not as efficient at the unit level as it previously was.

RASM

Load Factor

Yield

Revenue

Fare

RPM

Passengers

ASM

Miles Flown

Capacity

Figure 8.1 Airline RASM pyramid

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PRICE On the cost side, the preeminent unit measure is cost per available seat mile (CASM). It refects an airline’s total operating costs divided by ASMs. Operating costs include such things as fuel burn, pilot and cabin crew expenses, airport landing fees, and so on. It is ofen sub-divided in industry reports to show more granular comparisons between airlines such as CASM ex-fuel (i.e., CASM excluding fuel costs). In sum, to ensure that an airline maximizes operating proftability it needs to maximize the diference between RASM and CASM (Doganis, 2019). Said another way, if CASM exceeds RASM the airline will lose money. It is important to note that these calculations can be performed at the individual fight, route, or system-wide levels. Moreover, for airlines based in countries that have adopted the metric system these measures that incorporate distance fown are expressed in kilometers and not miles (e.g., ASK, RPK, RASK, and CASK). Let us now turn to a case study of these fundamentals.

Did You Know? Have you ever been on a packed fight and said to yourself, how could this airline be losing money? It is quite easy, in fact. Suppose an airline fies between two destinations that are 500 miles apart and the capacity on its aircraft for this route is 150 seats. The airline was disappointed with its previous load factor on this fight that was hovering around 70 percent so it has been running a special promotion of $170 dollars for a round trip-ticket between these destinations. Therefore, the average revenue for each passenger booked on this particular fight of the roundtrip is $85 and the airline was able to book 135 revenue generating passengers thanks to the promotion. The plane is almost completely full but there are some crew members taking the fight to position for their next active duty and some other airline employees onboard as well. The CASM for the fight is this airline’s average which is roughly 16 cents per ASM. As such, here are the calculations representative of the pricing fundamentals: ASM: 150 seats × 500 miles = 75,000 RPM: 135 paying passengers × 500 miles = 67,500 Load Factor: 67,500/75,000 = 90% Yield: (135 X $85)/67,500 = 17 cents RASM (135 X $85)/75,000 = 15.3 cents (e.g., 90% × 17 cents) CASM = 16 cents

In this particular case the airline is losing money on this fight because CASM exceeds RASM. Remember, the goal for proftability is to maximize the diference between RASM and CASM with RASM being the larger of the two of course. Tis case also illustrates that

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PRICE load factor by itself does not tell the tale. On the one hand, the airline is thrilled because the load factor went from 70 percent to 90 percent which is a dramatic increase. Yet, we know that the airline ran a sales promotion with a discount in order to boost sales and fll more seats. Let’s assume that the previous average fare on the roundtrip was $220 thus $110 one way. Since, the airline dropped its price to fll the seats it took a hit on yield which is now only 17 cents from what would have been 22 cents previously. Yet, it is also important to consider RASM as this accounts for potential diferences in capacity. In this particular case the airline used the same capacity aircraf previously so the RASM was previously (105 × $110) / 75,000 = 15.4 cents or (e.g., .22 × .70 = 15.4 cents if using the pyramid approach). Terefore, in this scenario the added load factor was not worth it because RASM actually fell from 15.4 to 15.3 cents. In fact, it is likely that CASM would have to be adjusted upward on this particular fight too, because the fuel burn would be higher with more passengers onboard, not to mention other passenger service expenses that would likely rise—albeit marginally. Tis case study provides a sense of how important it is to set the right prices for an airline. In this particular case the airline’s average CASM of 16 cents is high for airlines and this may be the best place to start—illustrating that it is not just one unit measure that matters but how these measures interrelate that will determine proftability. It is also uncommon for an airline to charge all customers the same exact price. Hence, this airline can beneft from revenue management practices involving segmented pricing that will be subsequently described in this chapter. We will now turn to three general pricing strategies with some considerable overlap between them: cost-based pricing, competitive-based pricing, and value-based pricing. And, we will demonstrate how these pricing strategies apply to airlines and how the focus has shifed over the years among them.

Cost-based pricing By defnition, cost-based pricing involves setting prices based on the costs of producing, distributing, and selling the product plus a fair rate of return for the company’s efort and risk. (Kotler and Armstrong, 2018). Some of the most prevalent examples are in the professional services such as consulting and legal services in which ofen the frms track their expenses on an hourly basis, determine a preferred markup, and bill clients accordingly. Airlines around the world long operated with primarily a cost-based focus because they were heavily regulated. Up until 1978 the Civil Aeronautics Board (CAB) in the US in conjunction with the airlines set prices that were largely driven by costs. Anytime an airline could not make a suitable proft they simply appealed to the CAB to raise prices (Petzinger, 1996). Tus, airlines had little incentive to manage their costs and, in turn, only a small percentage of American consumers could aford to fy. In fact, this inability to broaden the consumer base was the primary reason that the US dissolved the CAB and moved to a market-based system for setting prices. Liberalization subsequently occurred in Europe and other parts of the world freeing up airlines to compete more vigorously on price. It would be wrong to assume, however, that costs are not a signifcant factor in airline pricing today. Yet, there are other considerations beyond an airline’s costs that determine its pricing policies in this day and age. Market forces simply dictate that this is the case as our attention will now shif to these external forces.

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Competition-based pricing Under competitive-based pricing the primary factor is setting prices based on competitors’ strategies, prices, costs, and market oferings (Kotler and Armstrong, 2018). By their very nature, industries face diferent circumstances with respect to competition based on price. It is frst helpful to cover four types of pricing environments that economists have classifed: pure monopoly, monopolistic competition, oligopolistic competition, and pure competition. Because these market environments were identifed and coined by economists, the marketing perspective will also be injected into the discussion. We start by covering pure monopoly in which the market is dominated by one seller. In market-based economies in many parts of the world regulators are on the lookout for monopolies to emerge, and enforce anti-trust legislation to keep monopolies from stifing competition. Even airlines in their quest to form joint ventures are ofen denied anti-trust immunity from their respective governments based on monopoly fears. Yet, there are also regulated monopolies, both public and private, that are legal in many parts of the world. In the United States the postal service is a public monopoly while the power companies in each area of the country operate as privately-regulated monopolies. One could argue that prior to deregulation in the US, airlines operated as regulated monopolies because prices were set and routes were awarded by the CAB in a manner that minimized competition. Te fear, of course, with monopolies is that without credible competition frms fail to manage their costs and fail to innovate. Instead, they achieve their profts mainly by price gouging customers— the exact circumstances that the US airlines found themselves in by the late 1970s. Te opposite end of the spectrum is a pricing environment called pure competition—a situation in which the product is a commodity and there are many buyers and sellers. Commodities such as wheat, copper, and sugar exhibit uniform properties, especially when traded at the business-to-business level. No single seller afects the market price and there is little need for traditional marketing functions such as market research, advertising, or sales promotion (Kotler and Armstrong, 2018). Since the market dictates prices and product differentiation is not a factor, frms seek to focus on the cost side and manage their operations as efficiently as possible in order to achieve acceptable returns. Tese days in consumer markets there are few pure commodities remaining as marketers have found successful ways to diferentiate their market oferings. Case in point, consider the consumer market for sugar. Tere are an array of branded sugars and sugar substitutes that consumers prefer and are willing to pay considerable markups for. Te next two pricing environments operate more toward the middle of the spectrum starting with oligopolistic competition. In this environment there are a few large sellers and they monitor each other’s prices closely. As opposed to pure competition, any one of these large sellers can signifcantly impact market prices because prices play a large role in buyer decision making. If this situation sounds familiar that is because it mirrors the airline industry in many parts of the world. Te only question is how to defne what constitutes a “few” sellers under an oligopoly. In the US leading up until the mid-2000s there were roughly eight large airlines and several small regional carriers—an environment that can best be described as a loose oligopoly. Under such conditions pricing can ofen be more volatile as each of the players try to react to each other’s pricing moves. Over the last several years, however,

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PRICE mergers and acquisitions have reduced the US market to four large carriers which control the lion’s share of the nation’s RPMs—creating an environment that can be considered a much tighter oligopoly. Yet, the US market also has multiple ULCCs that have been growing in recent years so it will be interesting to see how the landscape develops. An example of an even tighter oligopoly is the Brazilian aviation market with just three large carriers Gol, Latam, and Azul having over 90 percent of the nation’s domestic capacity (CAPA, 2020). Within oligopolies buyers ofen perceive little diferentiation between the market oferings of competitors and shop extensively based on price. While not easy of course, there is opportunity for diferentiation (e.g., branding) within oligopolistic environments and marketing can play a large role in helping to make this happen. Tis book is replete with examples of airlines that have broken free of the commodity trap to diferentiate themselves and earn attractive profts in the process. Te last pricing environment is classifed by economists as monopolistic competition—a market consisting of many buyers and sellers trading over a range of prices and product diferentiation. Since there are many sellers there is less ability for any one seller to impact overall market pricing in the same manner as oligopolistic competition. Moreover, because buyers consider a range of product attributes in their decision making there is ample opportunity for marketing innovation and brand building. In fact, marketers generally prefer monopolistic competition among the four pricing environments as such environments elevate the role of marketing. Strangely enough, a good example of monopolistic competition is the consumer market for bottled water. Traditionally considered to be a commodity, water has proven to be anything but a commodity in bottled form when looking at the store shelves

Revenue Passenger Miles (RPM) 2019 AE 2% HA 2% FR 3%

AA 20%

SP 5%

AA-American Airlines

JB 6%

DL-Delta Air Lines SW-Southwest Airlines UA-United Airlines

AL 7%

AL-Alaska Airlines JB-JetBlue Airlines DL 19%

SP-Spirit Airlines FR-Frontier Airlines

UA 17%

AE-Allegiant Air HW-Hawaiian Airlines SW 19%

Figure 8.2 Revenue passenger seat miles 2019—US airlines Source: Bureau of Transportation Statistics (2019)

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PRICE and range of options available. Tere are many store brands that compete almost exclusively on price. Further upstream, there are popular mass-market brands that operate in the middle of the pricing spectrum such as Aquafna and Dasani that have some measure of brand loyalty. And, there are even a host of premium brands ofered at higher price points such as Fiji which claims to be “earth’s fnest water” brought to you from the artesian aquifer. In some respects, the European aviation market more closely resembles monopolistic competition not having consolidated to the same level as the US market—at least not yet. Stepping back to an historical account of the airline industry’s evolution, following deregulation and liberalization, competitive-based pricing began to play a much larger role. To cope with this new world order, the industry witnessed the rise of revenue management that has taken on ever growing importance within airlines around the world ever since. According to Altexsof (2019) “the primary goal of revenue management is to sell the right product to the interested customers, at a reasonable cost at the right time and via the right channel, which applies to businesses with fxed, reservable inventory like fights or hotel rooms.” As such, through revenue management airlines have taken advantage of another unique aspect of price among the four 4Ps—it is the easiest to change. Te case study of People Express illustrates the early rise in importance of revenue management principles for competing efectively and the associated systems and analytics have only gotten more sophisticated as the years have unfolded.

8.1

Marketing in practice

The death of People Express Following deregulation in the US a host of discount airlines emerged in the 1980s to compete vigorously with the majors on price during a period that is often referred to as the “Wild West.” One such airline that showed tremendous promise was People Express. Espousing the principles of its founder, Donald Burr, People Express believed in putting people frst. There is a lot about People Express for marketers to appreciate. Unfortunately, the airline did not appreciate the power of segmented pricing and the principles of revenue management nearly enough and it cost them dearly. As with so many things, American Airlines was a pioneer in segmented pricing and early revenue management practices. In the mid-1970s during the waning days of regulation, having been granted approval by the CAB, American began experimenting with discounted pricing on some of their seats in order compete with the rock-bottom prices of charter operators at the time. American then spent the early part of the 1980s gathering data and perfecting their approach to discounting. In January of 1985 they shocked the airline world with “Ultimate Super Saver” fares discounting their prices by over 70 percent in one fell swoop on routes across their system and matching the lowest prices of People Express in the process. The difference was that American was able to manage its revenue on these discounted seats. Unlike People Express whose systems only allowed them

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to offer a uniform price, American was able to dynamically allocate a certain number of seats with advanced purchase restrictions that helped to target only the most price sensitive customer segments for the super-saver discounts. This allowed American to keep other seats open for more price inelastic travelers and to optimize the mix of high-paying passengers with low-paying passengers on each fight. No longer having a clear price advantage over American and no ability to subsidize lower-paying passengers with higher-paying passengers, People Express saw its load factors plummet and the airline was gone within two years. The era of revenue management had begun in earnest sounding the alarm to all airlines that if you ignored its principles, you did so at your own peril. Sources: Petzinger (1996); Vasigh, Fleming, & Tacker (2018)

Revenue management principles manifest in what marketers call segmented pricing—selling a product or service at two or more prices, where the diference in prices is not based on diference in costs (Kotler and Armstrong, 2018). Tis is ofen referred to by aviation economists as market pricing (Doganis, 2019), price discrimination (Vasigh, Fleming, and Tacker, 2018) or diferential pricing (Belobaba, 1998) with slight variations in meaning and is contrasted with uniform pricing in which everyone in the same cabin pays the same price. Belobaba (1998) explains convincingly the merits of diferential (e.g., segmented) pricing even for those having to pay more and there is little debate that segmented pricing is the preferred way in which airlines maximize RASM as evidenced by its overwhelming usage around the world. Segmented pricing is predicated on a foundational economic concept called price elasticity of demand—a measure of the sensitivity of demand to changes in price (Kotler and Armstrong, 2018). Many goods that we purchase have relatively low price elasticities of demand meaning that we deem them to be essential and we will still purchase them, ofen begrudgingly, even when their prices rise. Electricity, gas, oil, and water are all goods that have rather inelastic demand. If the price of gas at the pump suddenly spikes many will still pay for it over the short run because automobile transportation may be the only means by which they can get to work. Said another way, substitutes may simply be unavailable—at least in the short term. Airline travel, however, has always had a rather high degree of price elasticity of demand, generally speaking. As discussed in Chapter 2 there are ofen plenty of substitutes for air travel when prices are considered too high. Even during the COVID-19 pandemic, when high prices are not the issue, people are still fnding substitutes for travel such as having meetings online. Nevertheless, even during more mundane times diferent market segments will exhibit diferent sensitivities to ticket prices. Generally speaking, market segments that are traveling for business purposes will exhibit greater price inelasticity. A business executive may consider airline travel to be essential in order to close a last-minute deal with a client face-to-face. Moreover, a person traveling for business is ofen less sensitive to price because the company is picking up the tab. Certain leisure travel segments, meanwhile, will exhibit high price elasticities of demand, meaning travelers will gladly rearrange their travel plans if they cannot fnd airfares that are low enough to their liking.

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PRICE Segmented pricing, however, considers a whole host of factors that can determine a customer’s willingness to pay more or less for essentially the same product—a seat to a destination. Location and time-based factors, in particular, impact airline pricing. For instance, passengers who have to connect over a hub to get to their destination will generally pay less than passengers who have a direct fight. Generally speaking, those who book fights further in advance—usually leisure demand—will pay less than those who book fights closer in because they have more fexibility in their travel plans and are willing to shop extensively for the lowest prices. Ticket prices also vary by time of day, day of week, and time of season as all of these infuence customer demand. In fact, airline pricing has become more refective of dynamic pricing—a situation in which prices are adjusted continually in order to meet the characteristics and needs of individual customers and situations (Kotler and Armstrong, 2018). Airlines frequently adjust prices based on competitor’s moves, changes in operational costs, changes in the economy that impact demand and, to a certain extent, personal factors that airlines have about individual customers such as their status in the airline’s frequent fyer program and previous purchase history. While not there yet, airlines are on the path to pricing strategies that are more refective of online retailer Amazon which is able to customize ofers continuously in real time. Tis will be expanded upon further in the next section as the focus shifs to customer value-based pricing.

Customer value-based pricing Like all other areas of airline marketing, efective pricing starts with customers and their perceptions of value. Ofen pricing strategies such as cost-based approaches fall victim to the production mindset as discussed in Chapter 4—the focus is on product design without frst carefully considering customer needs and wants. Knowing that price is ofen a key part of these needs and wants, customer value-based pricing means setting price based on buyers’ perceptions of value rather than on the seller’s cost (Kotler and Armstrong, 2018). Conversely, this does not mean that seller costs are ignored but customers should come frst. Companies ofen eschew value-based pricing because it is more subjective and challenging to implement. Afer all, it is much easier to simply assess a product’s costs and determine an acceptable rate of return or to simply match a competitor’s prices. Yet, companies that embrace value-based pricing will be better of in the long run. It is ofen said in the airline industry that all customers care about beyond getting to their destination safely is a cheap price; however, this is simply not true. Even those who say price is the brand have it wrong—at least to a certain extent. What customers really care about is value. An ultra-low price is certainly a large part of the value equation for many airline customers but the benefts of the product have to meet or exceed customer expectations for the price paid or customer loyalty will be lost. Following deregulation there were plenty of airlines that sought to provide customers with value through lower prices. Tese airlines, however, ofen became mired in protracted prices wars with their only rationale being to outdo competitors. Value-based pricing does not mean simply having a low price. Instead, it means having a deep understanding of customers’ perceptions of value and setting a price that matches those value perceptions accordingly. Apple charges considerably higher than

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PRICE rivals for its phones, laptops, and tablets because it understands that the benefts customers derive from its products—both functional and emotional—exceed the higher prices. Te third wave of airline pricing evolution happened around the mid-2000s. By this juncture low-cost airlines had gained a foothold in several markets around the world. Not tethered to legacy pricing systems, and with the proliferation of the internet, these airlines such as EasyJet in Europe, AirAsia in Southeast Asia, WestJet of Canada, and GOL in Brazil ofered simplifed fares to customers (e.g., less complexity and restrictions). At the same time, the pricing strategies of these upstarts were ofen more responsive to changing demand conditions than their legacy counterparts. In order to keep higher-value market segments from trading down to buy cheaper tickets, a situation called diversion, FSNCs had amassed an array of onerous and cumbersome fare restrictions over the years such as the Saturday night stay rule discussed in Chapter 4. Te early attempts of these FSNCs to simplify fares and ofer more customer-value-based pricing were ofen unsuccessful (Shabat and Kaplan, 2015). Nevertheless, revenue management systems have continued to advance over the last 15 years. Tere are now sophisticated algorithms that seek to maximize revenues for origins and destinations (e.g., ofen referred to as O&Ds) instead of just individual fight segments (Hind and Kitching, 2016). Te ability for pricing analysis to consider revenues across the network for carriers that have substantial hubs can be quite complex. It is not just the customer’s value on any particular fight segment that needs to be considered but the customer’s contribution to the system.

Ancillary revenues Te great innovation of the last l5–20 years—one that would change the airline pricing landscape more than anything else since the advent of revenue management practices—has been the proliferation of ancillaries. Chapter 5 briefy touched upon ancillaries, but the defnition of them will be reiterated here along with their origins, categorization, and evolution. Ofen referred to as ancillary revenues, a leading consultancy in this area coined the prevailing defnition as: “revenue beyond the sale of tickets that is generated by direct sales to passengers, or indirectly as a part of the travel experience” (IdeaWorks, 2018). In 2001, Tango, the low-cost ofshoot of Air Canada, became the frst airline to charge for seat assignments. However, the ancillary movement began in earnest in December of 2005 when the now defunct LCC Flybe began charging for baggage (Doganis, 2019). It was a mere $2 dollars at the time, but this ushered in the age of ancillaries and the continuing controversy surrounding what has become known as unbundled pricing. It is important to frst talk about ancillary revenues from a perspective of marketing theory and then we can better understand why having baggage fees can actually be considered part of the customer-value-based pricing movement. Marketers have long considered various pricing tactics that incorporate customer perceptions of not just one product but a host of interrelated products. Fast-food restaurants such as McDonald’s, for example, popularized the concept of bundled pricing in which products such as burgers, drinks, and fries— traditionally sold à la carte—are combined and sold at one all-inclusive price with a small discount to encourage consumers to purchase the bundle. For consumers there is an obvious beneft of receiving a discount for products that naturally go together to form a meal. For

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PRICE the seller such as McDonald’s there is also a beneft because it increases their sales of more items. Consumers can still purchase the items à la carte, of course, but now they have more options (e.g., more value). Airlines had long sold certain ancillary items such as duty-free merchandise onboard and had fees for extra-large baggage. However, up until the mid-2000s most airline fares had always been ofered all-inclusively, meaning that the fare price included an allotment of checked and carry-on baggage, assigned seating and so on. Hence, airlines did the opposite and began unbundling their oferings and selling them in à la carte form. Te seat is not an optional item, of course, but separate pricing for such things as baggage handling drew tremendous backlash from customers initially. How could airlines start charging for things that were once considered part of the core product ofering? Yet, perhaps unwittingly, airlines unleashed a basic principle of consumer behavior and market segmentation that was touched upon in Chapter 4. Diferent buyers ofen seek diferent benefts in the same products. For instance, some customers frequent Starbucks to get what they perceive as the best cofee for their money. Meanwhile, other customers frequent Starbucks for a pleasant atmosphere to get work done—an entirely diferent beneft. Te cup of cofee purchased is simply their down payment for the beneft of time, space, and the connectivity to get their work accomplished. From a customer perspective, a family of four traveling on holiday may really need to check baggage and they are willing to pay for this beneft whereas a college student traveling to see a friend over the weekend might prefer to simply pack a small carry-on and avoid the baggage fee. To a certain degree, the unbundling of the product has allowed customers to vote with their wallets for airline product attributes that they care most about. Tis is market segmentation at a micro-level. Table 8.1 contains a list of the common ancillary items by category. As previously alluded to, it is not clear whether airlines realized at the time that they were unlocking customer value from a strategic intent perspective or if they stumbled upon it by accident. Tere is ample evidence that it was ofen the latter. American Airlines, for instance, became the frst major US network airline to charge baggage fees in May of 2009 and the other majors quickly followed suit. On the heels of a historically challenging early part of the decade beginning with 9/11, the US economy was now facing a fnancial crisis while fuel costs were spiking at the same time. Hence, the adoption of baggage fees by the US majors can be viewed as much as an act of desperation to remain viable than a source of innovation. Predictably, it was met with an outcry of public criticism. Yet, the unbundling of the product fnally allowed the legacy airlines to compete with the LCCs on the basis of price. Online travel agencies and GDS systems described in Chapter 6 have always looked for the lowest base fares when presenting the oferings to customers and now the FSNCs had a way to make their base fares more attractive. As late as 2011 there was still a belief that customers were unwilling to pay for anything beyond ticket fexibility (Porter, 2011). Tis has proven not to be the case, however, as ancillaries have been by far the fastest-growing area of airline revenues in recent years. Globally in 2018 ancillary revenues reached $92.9 billion dollars, almost a fve-fold increase from $22.6 in 2010 and, as of this writing, the fgure is projected to top $100 billion for 2019 (Reed, 2019). As outlined in Chapter 3, advances in data science and internet technology paired with advances in customer analytics and behavioral economics have unleashed a dizzying array of

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PRICE Table 8.1 Ancillary revenue categories Category

Components

A la Carte Features

Revenues earned from onboard sales of food and beverages, checking of baggage and excess baggage, assigned seats or better seats within the same cabin, call center support for reservations, fees charged for purchases made with credit cards, priority check-in and screening, early boarding benefts, onboard entertainment systems, and wireless internet access.

Commission-Based Products

Revenues earned from commissions on the sale of hotel accommodations, car rentals, and travel insurance. The commission-based category primarily involves the airline’s website, but it can include the sale of duty-free and consumer products onboard aircraft.

Frequent-Flier Programs

Revenues earned from the sale of miles or points to program partners such as hotel chains and car rental companies, co-branded credit cards, online malls, retailers, and communication services. Sales of miles or points made directly to program members also qualify.

Advertising Sold by the Airline

Revenues earned from the sale of advertising linked to passenger travel. The following are typical activities: 1)˛revenue generated from the in-fight magazine; 2) advertising messages sold in or on aircraft, loading bridges, gate areas, and airport lounges; and 3) fee-based placement of consumer products and samples.

Fare or Product Bundle

Airlines may allocate a portion of the price associated with an economy class bundle or product bundle as ancillary revenue. This is determined by assigning a revenue value to the services included in the bundle, such as checked baggage, early boarding, and extra leg-room seating.

Source: IdeaWorks

pricing tactics that airlines now use to entice customers (Skif, 2018). Usually the approach follows various forms of optional product pricing—the pricing of optional or accessory products along with a main product (Kotler and Armstrong, 2018) and bundled pricing described earlier. Some ULCCs start with a rock-bottom base fare and then everything beyond the seat is ofered as an option for an additional fee. Considering that well over 40 percent of total revenues for some ULCCs come from ancillaries (Sorenson, 2019), it is clear that these airlines would not be viable entities if everyone purchased only the rock-bottom base fare. Said another way, these base fares are below the price foor described earlier in the chapter for such airlines. Other carriers ofer a series of branded fares that are essentially a bundle of product attributes. As the customer moves through the booking process they are presented with additional product attributes such as travel insurance that are ofered either in stand-alone fashion or as part of bundled options. Once the customer completes the booking

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PRICE process airlines still have time to market additional oferings such as a hotel stay or car rental service all the way through the customer’s journey. Some airlines have even begun to dynamically price ancillaries such as baggage fees based on a host of factors such as season, route, customer attributes, time before purchase, and so on (Sorenson, 2019). Several airlines have also begun to ofer ancillaries as part of a subscription pricing model (Waguespack, 2018). United Airlines, for example, ofers a whole host of subscriptions on their website ranging from yearly Wi-Fi access, baggage allowances, economy plus seating, or lounge access depending on customer preference. Such subscription approaches allow airlines to gain revenues upfront and are designed to augment loyalty within an airline’s customer base. Meanwhile, the initial outrage surrounding ancillaries has largely subsided as customers have become more accustomed to these practices and many see value in being able to pick and choose the product features that beneft them most as individuals. Time and again, both LCCs and FSNCs report a surprising percentage of customers that purchase various add-ons as they move through the booking process, ofen exceeding 50 percent. Tese fndings further support our assertion that customers do indeed care about value that goes beyond simply obtaining the cheapest airline ticket price. Tis phenomenal growth of ancillaries has led many to view airlines more as retail merchants than simply selling seats on a plane. Yet, the future for ancillaries now seems much more uncertain. As of this writing, airlines are simply trying to get customers more comfortable with fying again due to the COVID-19 pandemic. Even once customers feel more comfortable fying again it is highly unlikely that ancillary revenues will grow at nearly the same rate that they have over the last ten years. If nothing else, customers are much more likely to be resistant to punitive forms of ancillary revenue generation such as change fees and other forms of ticket infexibility (Sorensen, 2020). Other ancillaries such as priority boarding have lost their allure or are simply irrelevant as airlines experiment with boarding from the back of the plane frst in order to maximize social distancing. Frontier Airlines received immediate backlash and withdrew a plan to charge customers for the privilege of keeping a middle seat open illustrating that airlines will need to be much more cognizant of how their ancillary tactics are perceived by both lawmakers and the fying public amidst the pandemic (Andrew, Wallace, and Levitt, 2020). Time will tell how fast demand returns for fying but it is a safe bet that airlines will focus more on their core operations in the short run and growth in merchandising will have to wait. Once airlines do regain their footing, however, those that are best able to combine insights from revenue management, ancillaries, and customer analytics into cohesive marketing ofers will be poised for the most success.

8.2

Marketing in practice

Qantas excels at ancillaries Did you know that roughly 35 percent of all credit card spending in Australia earns Qantas frequent fier points? In fact, Qantas earns more ancillary revenue per passenger from its loyalty programs than any carrier in the world. Qantas is not

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the only airline, however, to excel at selling miles to banks that issue co-branded credit cards. Major network airlines around the world with long-standing loyalty programs have found this to be one of the most lucrative sources of revenues and fastest-growing areas of their business. There are more frequent fier miles earned on the ground than in the air these days. Banks have found that airline-branded credit cards are a very popular choice among customers who amass miles from everyday activities such as making purchases at the grocery store. Airlines are more than happy to sell these miles to the banks as it helps to diversify their revenue streams and it is one of the largest categories of ancillary revenues overall. Sources: Freed (2017); Sorensen (2019)

Legal and ethical pricing considerations Tere are a host of legal and ethical considerations related to airline pricing. Te focus will be on three of the most prevalent including deceptive pricing, price fxing, and predatory pricing. Like frms in many industries, airlines have run afoul of laws pertaining to deceptive pricing. Tis situation ofen occurs when prices or savings ofered by sellers to consumers are not actually available (Kotler and Armstrong, 2018). It can happen in any number of ways but the common link is misleading consumers. If an airline runs an advertising campaign claiming that a sale price is available and consumers learn that there are no seats available at the stated price airlines may be fned for deceptive advertising—something that has indeed occurred. Even the venerable Southwest Airlines was fned by the Department of Transportation in 2014 for running a TV commercial in the Atlanta market falsely claiming a $59 dollar fare to three diferent destinations. An investigation revealed that Southwest did not have any seats at the discounted price. Te airline claimed the audio portion of the commercial had a mistake in naming the three cities as part of the fare sale and Southwest pulled the advertisement as soon as they learned of the mistake (Carey, 2014). Meanwhile, some airlines have found themselves in the crosshairs of the legal system for what some consumer advocates consider to be deceptive business practices. Spirit Airlines, for instance, has faced multiple lawsuits claiming that its low fares are misleading. Plaintifs claim that its ultra-low fares are mere teasers meant to trick customers who are unaware that basic services such as baggage handling are not included until afer they have purchased the ticket. Even worse, the customers then feel duped when they are stuck having to pay for such basics as a bottle of water at prices that are ofen signifcantly higher than competing carriers. On the other side, proponents of Spirit claim that their practices are not deceptive and consumers can complete the journey at the stated price. Spirit’s “bare fares” are exactly as marketed and if customers want additional services they are available. Based on the oligopolistic nature of the industry, it was stated earlier in the chapter that airlines are predisposed to monitor closely and react to each other’s price adjustments. It is quite natural that airlines are worried about losing market share to competitors given customers’ price sensitivity. Yet, price fxing—setting prices through talking with competitors—is

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PRICE illegal. Airlines have been accused of price collusion at various points and in various parts of the world over the years. As recently as 2015 the four largest US airlines were under investigation not for fxing prices but for fxing capacity that would then drive up fares. Te airlines see it otherwise, of course. Regardless, it is good advice to never talk about prices with a competitor in any setting unless it has been legally authorized such as through anti-trust immunity in the case of an airline joint venture.

Did You Know? Did you know that Robert Crandall, the legendary CEO of American Airlines, was accused of price fxing? In the early 1980s, American Airlines was in a bitter price war with Braniff Airways in Texas. Having grown weary that both airlines were losing signifcant money, Mr. Crandall telephoned then CEO of Braniff Airways, Howard Putnam. On the expletive-laced phone call Mr. Crandall asked the Braniff CEO to raise his fares 20 percent and American would do the same the next morning. Unbeknown to Mr. Crandall the phone conversation was recorded by Braniff. The scandal played out in all of the major newspapers and became a stain on Mr. Crandall’s otherwise impeccable career. The moral of the story: do not discuss prices with a competitor. Sources: New York Times (1983); Petzinger (1996)

Lastly, airlines have also run afoul of another illegal tactic called predatory pricing when sellers price below their costs with the intention of putting a competitor out of business (Kotler and Armstrong, 2018). Tere is nothing inherently wrong with pricing aggressively to compete for market share with a rival. As Chapter 2 noted, aircraf are highly mobile capital assets and airlines are constantly under threat that carriers may enter their markets. One of the ways that airlines seek to defend their market share is to match competitors on price, even if it hurts their own margins. Courts have traditionally been somewhat reluctant to get involved in such cases because price wars favor consumers in the form of heavily discounted fares. Usually where airlines have run afoul of this law is with respect to young and fedgling upstarts. Established airlines that are entrenched in their markets typically have much deeper pockets than upstarts, and thus, have the ability to sustain longer in a price war. In such circumstances when an established airline prices below average variable costs on the routes that it competes with an upstart, and then immediately raises prices ofen higher than they were before immediately following the upstart’s failure, can serve as grounds for a predatory pricing investigation. Predatory pricing does not have to involve an upstart though. It can happen when one established carrier enters another established carrier’s markets. In the US in the mid-1990s Northwest Airlines settled a lawsuit from Spirit Airlines claiming that Northwest had used predatory pricing tactics to drive Spirit out of two markets from Northwest’s hub in Detroit—a location in which Northwest already had dominant market share. Predatory

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PRICE pricing is ofen difficult to prove, but the court determined that Northwest had indeed lowered prices below its average variable costs to compete directly with Spirit. It did not help Northwest’s argument either when the court noted that Northwest subsequently raised prices seven times higher afer Spirit exited the markets involved (Grisham, n.d.). In all of these situations—whether the airline is able to skirt legal implications or not— the broader ethical implications do matter. Te focus of this book has been on creating and keeping a customer—in essence putting the customer at the center. Hence, it is important for airlines to consider long and hard about how customers perceive their business practices. Airlines that want to build successful brands in the eyes of their customers over the long run should always compete in an ethical manner.

Conclusion Tis chapter has charted the course of airline pricing over the years as it has evolved from cost-based to competition-based to customer-value-based approaches. Tere is signifcant overlap among the approaches and airlines have to consider all three as they set prices in today’s marketplace. Ultimately, an airline’s success in pricing rests on understanding customer perceptions of value and setting a price that properly refects that value. Airlines must also understand the type of pricing environment that they operate within and the macro factors that can infuence this pricing environment. Airlines have developed sophisticated revenue management functions in order to optimize pricing for their perishable inventory. Over the last several years airlines have witnessed tremendous growth in ancillary revenues as the industry has branched out from merely selling airline tickets to retailing a host of travel-related products and services. Tis chapter concluded with discussion of legal and ethical pricing considerations that have important implications for airlines. Now that we have covered the 4Ps, the next chapter focuses on understanding airlines as a service industry and the related importance of human resources management and internal marketing in fulfllment of airline services.

Chapter review questions 1 In your own words, briefy describe the three overall pricing strategies and how they apply to airlines. 2 Pick your favorite airline and assess their pricing approach based on the three strategies. See if you can fnd their latest reported CASM, RASM, and load factors. How do these compare with what you deem to be their top competitor? 3 Use the RASM pyramid in Figure 8.1 to complete all of the pricing metrics for the following scenario: An ULCC maintains a single type of cabin over its feet of A-320 planes with 174 seats on the plane. For a typical fight, the average fare is $265 with 143 seats flled on a stage length of 1850 miles. Compute revenues, RPM, ASM, yield, load factor, and RASM for this fight. 4 Pick a city-pair (i.e., route) combination to investigate on your favorite airline’s website. As you investigate various dates and fight times pay careful attention to the

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PRICE prices. Does your favorite airline appear to price diferently based on the time of year (e.g., season) that you choose? Pick dates that are closer in vs. further out and report on the pricing diferences. 5 Investigate the same city-pair at exactly one month from today. Does there appear to be diferent prices for fights at diferent times of the day? Report on any pattern in the pricing that you notice? 6 How are the prices presented for your favorite airline? Are they ofered to you in a series of branded fare bundles or is everything a la carte? 7 Once you pick one of the fares how does it handle trying to sell you upgrades? Are they presented as options, bundles, or a combination of the two? 8 Research your favorite airline on the internet to see if it has been officially accused of deceptive pricing, price fxing/collusion, or predatory pricing. Report on the nature of the circumstances and if the airline was found liable.

CASE STUDY

MARKET OF ONE—IS THIS THE FUTURE OF AIRLINE PRICING?

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Airlines have been on the path toward more personalized price offerings for years now. Yet, the degree to which offerings are customized for individuals is up for debate with some suggesting that airlines’ technical capabilities are exaggerated while others worry that the mere manner in which they access airline pricing channels could impact the prices that they are offered. Even experts do not fully agree on what dynamic pricing means. Several years ago there was an uproar over Orbitz, an online travel agency discussed in Chapter 6 that was once owned by the airlines, showing pricier hotels to Mac vs. PC users based on the premise that Mac users earn higher incomes and prefer pricier hotels. To be clear, Orbitz was not charging different prices for the same hotel rooms based on this distinction, but they were showing pricier hotels upfront to Mac users. Proponents of personalized pricing advocate that such efforts are helpful to consumers as it saves time and hassle when companies customize offers that can meet individual needs and wants in a more targeted way. One article claims that United Airlines uses over 150 variables including prior purchase history in order to tailor-make offerings to customers in real time. Another article, meanwhile, notes that airlines are not nearly so far along and should be able to more seamlessly mix bundles of features in real time based on the search criteria that users enter. According to the article, if a user searches for fights to Orlando in March for a family of fve and three are under the age of 15 there is a better than good chance this family is heading to Disneyworld. As such, the market offering should better refect likely customer needs in this case such as having all fve seats next to each other. Meanwhile, only the airlines themselves know exactly how customized their offerings are and where they are headed next; yet, there are several important implications for airlines and customers alike. Sources: Feliu (2020); Reed (2019)

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Case study questions 1 Afer reading the case study, also read an article entitled “Dynamic pricing mechanisms for the airline industry: A defnitional framework” by noted airline pricing experts Michael Wittman and Peter Belobaba published in 2019. Is there a diference between dynamic pricing, personalized pricing, and personalized market oferings in your view? Explain. 2 Do you think airlines do a good job of providing meaningful market oferings to you based on your individual needs and wants? Explain. 3 Many consumers are surprised to learn that personalized pricing is not illegal. Research laws pertaining to pricing and explain what would make them illegal? What are your own thoughts on the matter? 4 If you are uncomfortable with personalized pricing, would having the ability to negotiate help to make you more comfortable? Explain.

References Altexsof (2019). Dynamic pricing explained: Machine learning in revenue management and pricing optimization. Retrieved from https://www.altexsof.com/blog/datascience/dynamic-pricingexplained-use-in-revenue-management-and-pricing-optimization/ Andrew, S., Wallace, G., and Levitt (2020) Frontier Airlines won’t charge passengers to keep the middle seat empty following backlash from lawmakers. CNN. Retrieved from https://www.cnn.com/ travel/article/frontier-airlines-rescinds-middle-seat-pay-trnd/index.html Belobaba, P. (1998). Airline diferential pricing for efective yield management. In Handbook of airline marketing, pp. 349–361. Edited by G. F. Butler and M. R. Keller. Washington, DC: Aviation Week Group. Bureau of Transportation Statistics. (2019). BTS Quick Links. Retrieved from https://www.bts.gov/ topics/airlines-and-airports/quick-links-popular-air-carrier-statistics Carey, Susan (2014). Southwest air fned for deceptive advertising; Carrier says it pulled ads in question afer realizing mistake. Wall Street Journal Online. Retrieved from: https://www.wsj.com/articles/ southwest-air-fned-for-deceptive-advertising-1401381481 Doganis, R. (2019). Flying off course: Airline economics and marketing (5th edition). New York: Routledge. Feliu, Carlita (2020). Databerg: Transforming hidden data into powerful business insights. https://blog. datumize.com/travel-agency-marketing-tips-for-a-top-notch-website Freed, J. (2017). Australia’s Qantas launches own credit card to help grow loyalty division, Reuters. Retrieved from https://www.reuters.com/article/qantas-loyalty/australias-qantas-launches-owncredit-card-to-help-grow-loyalty-division-idUSL3N1J20KN Grisham, J. G. (n.d.). Te dark side of fare wars: Te Sixth Circuit takes a fresh look at predatory pricing claims under section of the Sherman Antitrust Act. Engage, 8(3), 34–40. Hind and Kitching (2016). Airline pricing strategies. In Air transport management: An international perspective, pp. 125–138. Edited by Nigel Halpren and Anne Graham. London: Routledge. IdeaWorks. (2018). Ancillary revenue defned. Retrieved from https://www.ideaworkscompany.com/ ancillary-revenue-defned

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PRICE Kotler, P., and Armstrong, G. (2018). Principles of marketing. Harlow: Pearson. New York Times (1983). Blunt talk on the phone. New York Times. Retrieved from https://www. nytimes.com/1983/02/24/business/blunt-talk-on-the-phone.html Petzinger, T. (1996). Hard landing: Te epic contest for power and profts that plunged the Airlines into chaos. New York: Tree River Press. Porter, M. E.  (2011). Vision 2050 IATA Report. Retrieved from https://www.iata.org/contentassets/ bccae1c5a24e43759607a5fd8f44770b/vision-2050.pdf Reed, Dan (2019). Airlines are earning more than ever from extra fees but are causing travelers more frustration and dissatisfaction. Forbes. Retrieved from https://www.forbes.com/sites/ danielreed/2019/11/21/airlines-ancillary-revenues-are-going-through-the-roof-but-also-arecausing-travelers-more-frustration-and-dissatisfaction/#2ede2e6870f9 Shabat, J., and Kaplan, S. (2015). Glory lost and found: How Delta climbed from despair to dominance in the post 9/11 era. Fort Lauderdale, FL: Airline Weekly Corp. Skif (2018). A new formula for airline success: Why customized ofers are the future of airline marketing and revenue management; A report by Skif and Amadeus. https://amadeus.com/documents/ en/airlines/research-report/new-formula-for-airlines-success.pdf Sorensen, J. (2019). 2018 top 10 airline ancillary revenue rankings. IdeaWorks. Retrieved from https://ideaworkscompany.com/wp-content/uploads/2020/04/2018-Top-10-Airline-AncillaryRevenue-Rankings.pdf Sorensen, J. (2020). Flight plan 2020: 8 ways travel will be diferent a few months from now. https:// ideaworkscompany.com/wp-content/uploads/2020/04/Flight-Plan-2020-How-Travel-Will-BeDiferent.pdf Vasigh, B., Fleming, K., and Tacker, T. (2018). Introduction to air transport economics: From theory to applications. New York: Routledge. Waguespack, B. (2018). Airline marketing. In Te Routledge companion to air transport management, pp. 206–219. Edited by Nigel Halpern and Anne Graham. London: Routledge. Wittman, M. D., and Belobaba, P. P. (2019). Dynamic pricing mechanisms for the airline industry: A defnitional framework. Journal of Revenue and Pricing Management, 18(2), 100–106.

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CHAPTER 9

Airline services, internal marketing, and human resources management CHAPTER OUTCOMES At the end of this chapter, you will be able to .˛.˛.  Identify and discuss the fve I’s framework that encapsulates airline service  Describe how internal marketing and the service proft chain lead to effective customer service and a strong company culture  Discuss the unique role of labor unions in the airline industry  Outline how labor law impacts the relationship between airline unions and management  Use your understanding of chapter content to discuss a case study on employee culture at Delta Air Lines

Introduction Te airline industry has evolved from its early start as a mail delivery system to a modern transportation option for materials, goods, and people. Te focus of this text is obviously on the tasks involved in attracting people to utilize air transport over other alternative transportation options. Tis chapter reviews the role of the airline industry in a service marketing framework and the role of labor unions and human resource management in this process. While technology continues to drive many of the options being developed to attract and maintain customer relationships, the industry still requires a large, skilled, and talented workforce to deliver air service and meet the needs of passengers. However, due to the unique

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AIRLINE SERVICES

Intangibility

Inventory

Inconsistency

Perishability

Service Characteristics

Involvement

Inseparability

Figure 9.1 The fve I’s of airline service characteristics

structural relationships that exist with the air transportation labor force—in the form of union contracts and government regulations—these relationships afect the provision and marketing of air services. In turn, these circumstances create unique marketing and customer service challenges for airlines in today’s turbulent times. Recognizing that the airline’s physical products as discussed in Chapter 5 can be copied by rivals, the ability of an airline to develop a highly engaged workforce that is both efective and efficient in delivering superior customer service can be a key source of diferentiation and competitive advantage in the marketplace.

The five “I’s” of airlines services In the marketing literature, services marketing is noted for its diferences from traditional goods or product marketing. Te focus on this diference is due to the unique characteristics of services and the interactions that occur during the service creation, delivery, and consumption. Key to these diferences are the service characteristics of intangibility, inconsistency, inseparability, perishable inventory, and involvement. Each of these service characteristics will be covered in turn.

Intangibility Unlike a physical product that once purchased becomes the property of the buyer, and therefore can be possessed, many services are intangible. When purchasing many services the only tangible aspect may be a receipt for the service and a contract for future considerations (e.g., an insurance policy), or a set of recommendations for behavioral actions the customer should undertake (e.g., doctor’s orders). While much of airline marketing has, at times, focused on a tangible aspect of the service (e.g., the seats and cabins used during delivery of air service as discussed in Chapter 5), a customer does not purchase a physical seat to possess. While customers can certainly be possessive of their seat as many are purchasing

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AIRLINE SERVICES specifc seat assignments as part of today’s ancillary revenue environment, they are clearly not taking possession of their assigned seats beyond the fight. When purchasing air service the most a customer receives for proof of that purchase may be a receipt for the payment and a confrmation code for checking in at fight time. Moreover, while customers may speak in everyday terms of buying a ticket for a fight, paper tickets are very rare today. Hence, no physical inventory is exchanged in the purchase process. What the customer is purchasing is a promise of future air transport service to be delivered at an established time and place of the airline’s determination. Said another way, the customer is purchasing a future experience that the airline promises or, more ofen in reality, hopes to deliver.

Inconsistency Inconsistency is also referred to as the heterogeneity of service delivery that produces variability in the outcomes and perceptions of customers. Te number of factors that can infuence an individual fight are numerous—many of which are outside the control of the airline. However, many of the inconsistencies are of the airline’s own making. Internal factors such as maintenance or staffing issues may create disruptions in fight operations resulting in delays and cancellations. Additional impacts in other critical areas of passenger services can also lead to inconsistency even among passengers on the same fight. An example of this occurred during the 2019 Christmas holiday period. Alaska Airlines faced numerous baggage complaints and negative efects on airline operations in Seattle as a shortage of ramp personnel led to delayed fights and baggage not meeting passengers as they arrived at their destinations (Kamb, 2019). Passengers faced a “wait and see” predicament as the problem became known on social media and word spread. Passengers checking in for fights knew of the situation but, for many, making alternative travel arrangements at such an important and crowded time of the year were not feasible schedule-wise or fnancially. Only upon arrival at their destination airport did passengers learn if they would be facing the next few days without their belongings or not. Tis is only one example of many internal factors that can impact airline operations and cause inconsistency in service. Additionally, airlines face numerous external forces that can infuence airline operations and create inconsistency. Some of these were presented earlier in Chapter 2 when discussing external global forces airlines must monitor. On a daily basis airlines must forecast and proactively respond to weather and wind patterns. Across the globe, hurricanes, monsoons, snow storms, blizzards, or other local meteorological conditions impact fight operations in ways that may lead to delays and cancellations. Te operational difficulties and disruptions that weather and global climate change assert across airlines and airports are projected to increase in the future putting additional pressure on customer service systems for rebooking and complaint resolution (CAPA, 2019a). Another critical external factor is the role of fight navigation and air traffic control systems. With the forecasted expansion in air service across the globe there is concern that the needed air traffic systems will not be able to meet demands in many areas of the world (IATA, 2017). While the nature of these external infuences is ofen unpredictable, airlines know in their planning that they must be prepared for these occurrences which ofen trigger what is known as irregular operations or IROPS among the airlines. At such times, the customer is going to be looking to the airline

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AIRLINE SERVICES for assistance. Customer service communication methods such as press releases, emails, text messaging, and the use of social media channels must be prepared to respond to these events. At the time of this writing, the COVID-19 pandemic has delivered a shock to the global aviation system, the likes of which the industry has never witnessed before. Tose airlines that are able to navigate this extreme IROPs situation with the most consistency will win loyal customers in the long term.

Inseparability Inseparability of services refers to the fact that for many services the customer may be involved in the co-production of the service—that some form of people processing is ongoing during service delivery and consumption. While not as personally interactive or intrusive as services such as hairstyling or medical procedures, people processing is part of air transportation nonetheless. Due to security concerns, for instance, passengers must be able to prove who they are before accessing the service. Te actual air service event, the fight, is a people processing activity as the airline is physically transporting the customer by means of the aircraf provided. All through the fight purchase process, pre-fight, in-fight, and post-fight service activity is ongoing. As such, the passenger may be having contact with airline personnel and forming opinions of the service provided that go beyond the actual fight itself. People have become even more acutely aware of this inseparability aspect of air transport during the COVID-19 outbreak. More and more, airlines are using technology to manage many of these service touchpoints, which limits the human interaction. Use of the airline website or mobile application allows for customer self-service activities such as check-in, seat selection, or fight rebooking. Moreover, airlines in many airports have started to utilize self-boarding gates with facial recognition technologies freeing airline staf from such activities. Many customers welcome such technology, for they view such systems as reducing travel friction and allowing for more self-control over the fying experience (Dickinson, 2018). However, not all customers will be as technologically adept or able to access such systems. Despite the associated health concerns, airline service personnel are still needed in several circumstances and many customers still require the human interaction for assistance.

Inventory perishability Perishable inventory deals with the issue that many services cannot be inventoried. Unlike physical goods that can be manufactured and stored until wanted by the consumer, thereby becoming inventory, many services are produced upon demand for the customer due to the inseparability of the service. As production and consumption may be simultaneous, and in some marketing texts the term instantaneous production is used for this discussion, no pre-produced, of-the-shelf product for purchase is possible. Time therefore plays a critical role for many hospitality services as once a night passes with no one renting a hotel room, or a table sits empty in a restaurant, the chance for making a sale and earning revenue passes. Tis time orientation is recognized by two truisms in the airline industry: (1) an airplane only makes money when fying and (2) that once the door of the plane closes to start a fight,

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AIRLINE SERVICES the chance to sell an empty seat is gone. While recognizing these truisms, it will not be uncommon as one enters the world of airline revenue management to hear of seats discussed as inventory to be sold. As airlines need to use a tangible item for planning purposes, seats within an airplane are commonly referred to as inventory to be sold in airline distribution and pricing departments. A major aspect of feet assignment in the airline planning process is selecting the right airplane with the right number of seats to fy a particular route as the airline attempts to match customer demand with product supply (e.g., capacity). Te sophisticated revenue management and dynamic pricing practices discussed in Chapter 8 largely arose due to this perishable nature of airline services.

Involvement Involvement with services comes about due to the degree of inseparability of a service, and due to inconsistency, and ofen becomes a major customer service task for the airline to be prepared to handle. Normally discussed as a motivating factor in the consumer decision process, involvement focuses on the amount of efort in the decision-making process or importance of the purchase to the customer. In many travel situations, the airline purchase for customers is, in fact, not a very involved process as price and fight time drive the decision. Te fight is a means to an end; getting to a business meeting or convention, starting a family holiday, or other work or life events. As long as inconsistency is not present, the expectations have been met. However, it is when inconsistency is present, combined with the issue of inseparability that involvement will become a major factor in customer service. Now the possible service failure becomes very motivating for the customer and they come to feel the situation quite personally and state feelings of “how could you do this to me.” Review the situation passengers of Alaska Airlines felt as relayed earlier in the chapter while waiting for their baggage. For those whose bags appeared at the destination airport, while feeling a sense of relief, their focus quickly shifed to the remainder of their trip and holiday plans. For those whose bags did not appear, however, even with the airline recognizing the problem and increasing staffing and communications to address the situation, the inconsistency led to a very personal reaction those customers expressed both to the airline and online in social media posts. While many services communicate about the experience and customer engagement of the service to build consumer involvement, airlines fnd themselves in many situations of not wanting that to occur. As noted earlier, the fight is primarily a means to an end. For many passengers the best fight is the one that occurs as scheduled, with minimal disruptions. Te ofen noted “hassle factor” associated with fying is a feeling an airline strives to minimize. While no doubt an airline wants repeat business and loyal customers—having created a frequent fier program as evidence—ofen the best way for loyalty to occur is to simply limit the inconsistency (e.g., travel friction) to the best of the airline’s ability. Nevertheless, the airline industry is one where managers know inconsistencies occur. While technology has reduced the number of customer touchpoints in which inconsistency may occur, there are many situations in which customers still want personal interaction, and in such cases service representatives of the airline are viewed as “the airline” to the customer.

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Did You Know? Statistically speaking, it is harder to get into Southwest Airlines than it is to get into Harvard. Southwest believes that providing superior customer service – a hallmark of the airline – begins with hiring the right people and empowering them to deliver great service the Southwest way. As such, the airline takes the recruiting process very seriously and seeks to fnd employees that will ft the unique culture at Southwest. In this regard, Southwest truly embodies the service proft chain that you will read about next. Source: Nigam (2016)

Service profit chain Chapter 4 espouses the importance of customer centricity—providing a positive experience at every stage of the customer journey. Yet, even when frms place customers at the center of their business this does not necessarily mean that they will put customers frst in delivering superior service. Let us explain this seeming paradox. Te Service Proft Chain (Heskett et al., 1994) lays out a series of propositions that emphasizes the needs and desires of frontline service workers and the importance of management to focus on these needs and desires frst in order to drive service proftability. Te chain begins by concentrating on internal service quality factors that can drive employee satisfaction. As such, managers within service frms need to be deliberate in areas of workplace design, employee selection and development, employee communications, and employee rewards and recognition. Managers also need to provide the tools and support that can empower employees to deliver superior service—all of which can help to foster employee satisfaction. Having satisfed employees helps with human resource productivity and retention—both of which assist the frm in providing service value to customers and in controlling costs. In turn, having employees deliver service value leads to customer satisfaction, which then leads to customer loyalty and ultimately to revenue growth and proftability for the frm. Te service proft chain does not specifcally state that employee satisfaction causes customer satisfaction as there are many forces that can impact the service situation and customer satisfaction. Te external factors discussed earlier in the chapter—ofen outside of the airline’s control—can have a greater impact on customer satisfaction in many situations. What the research into the propositions on the service proft chain does support are that the two critical factors—employee satisfaction and customer satisfaction—are highly interrelated and should be a guiding philosophy for any service frm’s management team. Within the frm, the internal communications and programs for recognizing employee eforts are broadly referred to as internal marketing. Ofen defned as marketing by a service frm, directed at its employees to train and motivate them and instill a customer focus (Wirtz and Lovelock, 2018), internal marketing eforts can be used as one way to instill a service culture and increase employee satisfaction. For internal marketing to be successful

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AIRLINE SERVICES the practice needs to be a continual process by which managers actively encourage, stimulate, and support employee commitment to the organization and its customers while providing the needed training, support, and incentives to employees (Peter and Donnelly, Jr., 2019). Internal marketing eforts must also be fully supported by senior management. Te following presents only a few of the internal marketing eforts undertaken by airlines across the globe.

9.1

Marketing in practice

Examples of airline internal marketing Delta’s Chairman’s Club: Having just completed 23 years of recognizing employees across all aspects of Delta’s operations, the Chairman’s Club recognizes 100 employees at an annual gala at the airline’s Atlanta headquarters. The employees recognized are from the more than 80,000 employees in 60 countries across the globe employed by the airline. The 100 selected come from over 5,000 submissions from their peers as a testament to their service, dedication, and allaround embodiment of “the spirit of Delta.” (Goggans, 2019) Lufthansa and Singularity University: While an airline must be recognized for being safe, that can hamper decision making in a technological environment. Looking to retain younger employees, Lufthansa’s ProTeam trainee program looked inward to focus on young employees who could actively lead changes the airline needed in order to remain competitive. The program brought together 30 managers and young employees at Singularity University to work through a series of exercises for the participants that helped those involved think of ideas for the airline to address cultural and technical changes. (Singularity University, 2018) Virgin Atlantic and Internal Corporate Communications: An interview with Viktoria Tegard, Head of Internal Communications at Virgin Atlantic Airways at the time, sheds light on Virgin’s internal marketing and culture. “Talking openly about innovation and fndings from trials of new ideas and initiatives, both when things have been successful and when they need more work and input, is incredibly important. We always consider things from the customer’s perspective and encourage everyone at Virgin Atlantic to play a part in coming up with new ideas and provide feedback. Our senior leaders also spend a signifcant amount of time listening to our people. This is crucial when it comes to inspiring innovation from our workforce. It not only ensures our leaders are in touch with the customer and what’s really going on in the business, it also ensures our people and their ideas are heard.” (Gras, 2015)

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American Airlines Novel Approach to Communications: “Blurring the lines between internal and external communications,” American Airlines began utilizing podcasts to communicate with its 120,000 plus employees in 2018. The series of podcast episodes are also available to the public and can be found under the banner of “Tell Me Why” on Apple I-Tunes. The series began as a means of responding to an internal survey that found employees wanted to hear more about the company’s decision-making process. While the airline continues to use town-hall meetings at major stations, the podcasts are a novel means of getting the same message out to all employees and the public. (Josephs, 2018)

Unions Many traditional marketing texts would not present union activity as a marketing service issue. Tis subject is lacking in many airline management, tourism management, and customer service texts as well. However, the impact unions have on airlines and the product and services ofered must be reviewed. As noted in Porter (2011) unions are a major supplier and, as such, airline management must negotiate with various unions. In fact, the airline industry is one of the mostly highly unionized labor forces across many industries. Te three main labor groups airline employ, pilots, fight attendants, and mechanics, are ofen members of a union. Among four US major airlines, Delta, United, American, and Southwest, only Delta does not face union representation across all three of major employee groups. Globally, the ability of unions to call for daily strikes or other forms of “industrial action” can have a crippling efect on airline operations. While traditionally associated with legacy carriers, even many of the growing ULCCs must now deal with active union groups as pilots for airlines such as Ryanair have now unionized. Te contract provision and job actions presented have the efect of constricting the product ofering of the airline or creating disruptions that impact service delivery the airline must address. It was reported recently that airlines may soon face an employee shortage in critical areas such as pilots and mechanics giving unions signifcant negotiating leverage (CAPA, 2019b); yet the COVID-19 pandemic has changed things, at least temporarily, with signifcant layofs now projected as airlines downsize to deal with demand that has suddenly evaporated around the world. As previously mentioned, the pilots fying the planes, fight attendants providing service in-fight, and the various airport customer service personnel that may also be unionized are the embodiment of the airline in the customer’s eyes. Hence, it is incumbent upon airline marketers to work closely with these groups to help ensure that everyone is on the same page regarding customer centricity and service philosophy.

Labor law In the United States, the Railway Labor Act (RLA) was amended in 1936 to include airlines and related unions (Nguyen, 2019). Te laws and procedures outlined in the RLA control relations between airlines and the diferent unions that while guaranteeing employees the

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AIRLINE SERVICES right to collective bargaining makes it very difficult for the employee groups to strike in the US. Te airlines were included in the act as the transportation services ofered by the airlines were seen as core to the nation’s economic functioning. As such, minimizing labor unrest and prescribing a means for settling disputes was deemed very important in the public interest. Under the RLA there are prescribed actions and steps that unions and management must go through to address disputes between the parties—starting with a series of mandated mediation sessions. Only afer an issue is categorized as a major dispute can the union ask for permission to strike. Even then, a strike is not likely to occur as the parties must be “released” by the National Mediation Board to proceed and frst try voluntary arbitration. If arbitration is not seen as viable, the president may form a Presidential Emergency Board (PEB) to engage in fact-fnding in the situation. While the PEB is being established, ofen referred to as a cooling-off period, airline management and labor must maintain the status quo of actions and operations. Tese steps—required mediation, voluntary arbitration, then the PEB—severely limit the likelihood of labor action in the US. It is not uncommon for the terms of a contract to end with negotiations toward a new collective bargaining agreement still ongoing for years afer the original expiration date. Such was the case recently at Spirit Airlines whose pilots approved a new agreement in summer of 2018—nearly three years afer the last pilot contract became amenable in August of 2015 (Lazar, 2018). In the European Union, where industrial action is much more likely to occur, a very diferent set of labor laws and policies are in place. Starting in 1987 and continuing through the 1990s the European market was liberalized and instead of individual EU aviation regulations, the marketplace was brought under the EU Commission into a single market. While this action greatly changed the structural aspects of the EU aviation market, there were no changes to the labor laws and policies. While airlines now operate under European business law, trade unions—such as those for pilots, attendants, air traffic control, and ground handling, still work under domestic or national employment laws (Harvey and Turnbull, 2012). Reviewing the number of unions involved in civil aviation within the EU who are members of the European Transport Workers Federation with trade union affiliates across the continent found 84 labor groups out of more than 200 union affiliates (CAPA, 2019b). Tere exists other aviation transport unions not affiliated with the federation as well. Hence, with the number of diferent unions and cross-border operation, labor relations in the EU can be more complex than in the United States and elsewhere around the globe. As such, the opportunity for inconsistency in service delivery goes up as evidenced by multiple disruptions from various labor groups in recent years.

US labor actions Union infuences can be felt in a variety of ways across the airline industry. For the US full service network carriers unions can have a direct infuence on the fights, routes, and scheduled services ofered by the airline. For instance, many of the regional fights that feed the airline hub for a full service carrier will fall under the control of the airline’s scope clause. A scope clause is a provision in the contract between the major carrier and the airline’s respective pilot unions that ofen controls the amount of fying that is outsourced to the regional carriers. Te scope clauses are in place to keep a limit on the regional fying and preserve

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AIRLINE SERVICES Table 9.1 Global industrial actions, July–December 2019 Major Airline Impacted

Union

Flight/Operations Impact

Air France

ATC (Air Traffc Controllers)

20% of fights cancelled on December 5

South African Airways

NUMSA (National Union of Metalworkers of South Africa) and SACCA (South African Airways Cabin Crew Association)

Eight-day strike starting on November 15, costing the airline approximately $50 million a day

Lufthansa

Flight Attendant’s UFO Union

1500 fight cancellations on November 7 and 8

Alitalia

USB (Basic Trade Union) and CUB (Unitary Base Confederation)

More than 200 fights cancelled on October 9

KLM

FNV (Netherlands Trade Union Confederation)

12 European fights cancelled on September 18

British Airways

BALPA (British Airline Pilots Association)

Cancellation of over than 2000 fights with an estimated $100 million loss on September 9 and 10

Ryanair

BALPA (British Airline Pilots Association)

The airline avoided cancelling their fights by engaging contractors and bringing in foreign crews to cover their operations from September 2 to 4

Eva Air

TFAU (Taoyuan Flight Attendants Union)

Cancellation of more than 2000 fights on July 2 to July 10, which accounted for a fnancial loss of $91.07 million

Source: Compiled from media reports in Skift Airline Weekly, July–December 2019.

fying for the airline’s mainline pilots. Te scope clauses may include such issues as the types and size of regional aircraf allowed, how many are allowed, and what percentage of regional aircraf may make up a hub’s operations (Russell, 2018). A scope clause in many ways is a constraint on the product oferings of the airline. United in an efort to address limits in the scope clause in place at the current time has plans to launch the CRJ-550 aircraf. While built for 70 seats, the regional jet is to be confgured with a frst-class section to drive premium revenue possibilities and only have 50 seats. Te confguration of the aircraf also meets the current United scope clause which limits the number of 70-seat aircraf that can be fown by the airlines regional partners (Russell, 2019).

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AIRLINE SERVICES Table 9.2 Scope clauses Airline

Large RJs

Total RJs

Notes

American Up to 75% of Airlines mainline narrow body feet minus large RJs (279 aircraft at 2017 YE)

6676 seats: 40% of mainline narrow body feet (320 aircraft at 2017 YE)

75% of mainline narrow body feet (599 aircraft at 2017 YE)

Prelim 1/1/2020 discussions can begin Jan. 2019

Delta Air 125 aircraft Lines

51–70 seats: 102 aircraft 71–76 seats: 223 aircraft

450 aircraft

United Airlines

Small RJs

70–76 seats: Up to 90% of mainline narrow 255 aircraft body feet (515 aircraft at 2017 YE)

Up to 770 aircraft (2017 YE)

Amendable

12/31/2019

Up to 70 more 1/31/2019 76-seat jets in exchange for small mainline narrow body at ratio of 1:1.25 aircraft

Source: Credit Suisse Research, company data

Other means by which union infuence on operations may occur include an action known as work to rule. Work to rule can be carried out by any of the three labor groups but is mostly connected to pilots and mechanics. Te concept of the labor action is to simply follow the stipulations of the contract to the very specifc terms negotiated. Additionally, at many times while involved in a work-to-rule period, union members may not engage in any overtime, which due to airline operations is ofen available to all of the labor groups. Tere have been court actions taken by airline management against pilots at Spirit in 2017 and by management at Southwest against mechanics in 2019 during times when labor negotiations were contentious (Sider and Cameron, 2019). In both situations, airline management claimed the actions of the union groups involved negatively impacted airline operations creating more cancellations and delayed fights. American Airlines during the summer of 2019 faced similar difficulties while involved in contentious issues with the unions representing the airline mechanics. American claimed the impact of the actions of the unions severely hampered fight operations as the number of aircraf available for the airline to operate was reduced. Instead of the goal of having no more than 35 planes out of service, on some days more than 60 planes were not available due to maintenance issues. With the additional planes not in service, mounting cancellations and customer service complaints were a problem for the airline throughout the months of June and July during the busy summer schedule.

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Did You Know? Have you ever heard of CHAOS? It stands for “Create Havoc Around Our System,” a trademarked job action program that is part of the Association of Flight Attendants-CWA. The job action strategy employs tactics that might vary by carrier and include intermittent strikes that may impact a select few series of fights, such that a fight schedule for a day may be impacted due to targeted cancellations, up to an all-out strike for a day. The CHAOS strategy cannot be deployed until after permission to strike has been granted by the National Mediation Board under the provisions of the Railway Labor Act that governs airline labor relations. Having the possibility to conduct the job action—combined with an information campaign that is effective in spreading the news of cancelled fight possibilities—puts pressure on management to settle and does not fnancially impact the attendants as a protracted labor action may. The tactic has been used by the fight attendants in the past at Alaska Airlines and has been credited by the attendants for helping to get contracts settled across the industry. Check out their website at https://unitedafa.org/afa/ chaos/ and learn more about their strategies for contract campaigns. Source: Murphy, Jr. (2018)

Conclusion While investment in technology continues by airlines that can ofen reduce both the number of human touchpoints and friction associated, service personnel are still a critical component for airline success and the service they provide can be a source of competitive advantage. In fact, labor may be the leading cost center for many airlines. Tis is especially the case over the past several years in which the price of fuel has been relatively low. Te airline industry is indeed labor-intensive. Te COVID-19 pandemic will intensify airline eforts to reduce human touchpoints needed in the service process; yet the industry is still likely to be labor-intensive for years to come. What is truly unique within the industry is the number of diferent employee groups in the service process that are unionized. Tis high degree of unionization places a constraint on the customer service decision-making process of airline management as any changes in structures, rules or procedures for dealing with customers may need to be collectively bargained or negotiated with a union before being instituted. While management must continue to support and communicate the importance of the role of service personnel within the airline to serve customers, at times airline management can fnd themselves in confict with these key service personnel who are the face of the airline to customers. It is important for managers to recognize the link between employee satisfaction and customer satisfaction that the service proft chain suggests. Satisfed employees are more likely to provide high levels of service quality. To provide service quality, airline management must defne and measure the dimensions passengers expect. As such, service quality is the subject of the next chapter for which attention will now shif.

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Chapter review questions 1 In your own words, describe the diferences between the various I’s in the service characteristics framework outlined in the chapter’s opening fgure. 2 Pick your favorite airline and analyze it from an internal marketing perspective. Do you think it has a healthy company culture? What values does it state to have with respect to treating employees? What employee rewards and recognitions does the airline celebrate? 3 Does it appear that your favorite airline believes in the service proft chain? What evidence can you provide either for or against this? 4 Research your favorite airline to determine how many of its work groups operate as unions. List your fndings. 5 Determine what labor law your favorite airline operates within and describe it. 6 In your view, how is the relationship between management and the labor unions at your favorite airline? Describe the state of contract negotiations. Have there been any strikes or labor disruptions in recent years?

CASE STUDY

DELTA AIR LINES—WHAT DOES THE “SPIRIT OF DELTA” REALLY MEAN? After 35 consecutive years of achieving profts, the Atlanta-based carrier suffered a loss in 1981. One would think this would dampen the spirit of employees at Delta but it was quite the opposite in fact. Known for its Southern charm and warm employee relations, the rank and fle stepped up to help the company in a time of need. Spearheaded by three fight attendants, the employees enacted a campaign called “Project 767” raising funds to buy Delta its frst 767 (Delta Flight Museum). Yes, that’s right, the employees and retirees actually bought the airline a plane. Dubbed the “Spirit of Delta,” the plane cost 30 million dollars and few for over 23 years as an ambassador for Delta until being retired in 2006. However, as with most airlines, Delta has experienced its share of setbacks with various employee groups. In the mid-1990s the airline enacted a cost-reduction plan called “Leadership 7.5” aimed at reducing Delta’s cost per seat mile from 9.26 cents to 7.5 cents over three years. Delta did ultimately achieve this target but it came at a heavy price—employee morale and the award-winning customer service culture of Delta suffered (Bryant, 1997). Employee morale also suffered post 9/11 as industry demand softened and Delta limped toward bankruptcy. During contentious negotiations with the pilots’ union, senior management was unable to gain concessions and the CEO at the time, Leo Mullin, came under scrutiny from both Congress and union representatives for what was considered an excessive pay package (Maynard, 2003). Delta eventually emerged from the abyss and has been an industry leader for the last several years both in fnancial performance and in servicing customers. In 2019 for the fourth straight year Delta was named among Fortune magazine’s Top 100 companies to work for based on employee ratings of workplace culture. The company also paid out $1.6 billion dollars in proft sharing to its employees (Davis, 2020).

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Case study questions 1 It is important for companies to control costs. Was Delta wrong to enact a cost-cutting program? Explain. 2 What examples are there in the case of internal marketing both good and bad? 3 Given what you have studied in this chapter, how important do you think employee relations and company culture are? Are they more important perhaps for airlines than other industries? If so, why? 4 Research and describe how Delta is handling the COVID-19 pandemic from an employee perspective.

References Bryant, A. (1997). What price efficiency? Focus on costs may have blurred Delta’s vision. Te New York Times, C1. CAPA. (2019a, January). Climate change: Its impact on aviation. Te time to plan is now. Retrieved from https://centreforaviation.com/analysis/reports/climate-change-its-impact-on-aviation-thetime-to-plan-is-now-454475 CAPA. (2019b, August). European airline labour relations: Multiple unions are a challenge. Retrieved from https://centreforaviation.com/analysis/reports/european-airline-labour-relations-multipleunions-are-a-challenge-481508 CHAOSTM. (Updated 2016). Frequently asked questions. Retrieved from https://unitedafa.org/afa/ chaos/faq/ Davis, R. (2020). Fortune names Delta one of the 100 Best Companies to Work For. Delta News Hub. Retrieved from https://news.delta.com/fortune-names-delta-one-100-best-companies-work-0 Delta Flight Museum. Boeing 767 Te Spirit of Delta. Retrieved from https://www.deltamuseum.org/ exhibits/exhibits/aircraf/b-767-the-spirit-of-delta Dickinson, G. (2018, May 17). Self-boarding is here—but do you feel safe getting on a plane without any human checks? Te Telegraph. Retrieved from https://www.telegraph.co.uk/travel/news/ self-boarding-facial-recognition-fights/ Goggans, L. (2019, November). Best of the Best: Chairman’s Club honorees celebrated for embodying spirit of Delta. Delta News Hub. Retrieved from https://news.delta.com/best-best-chairman-sclub-honorees-celebrated-embodying-spirit-delta Gras, H. (2015, April). How Virgin Atlantic Airways connects employees with innovative internal communication tools. ORTEC for Communications. Retrieved from https://www.orteccommunications.com/how-virgin-atlantic-airways-connects-employees-with-innovative-internal-communication-tools/ Harvey, G. and Turnbull, P. (2012). Power in the skies: Pilot commitment and trade union power in the civil aviation industry. Advances in Industrial and Labor Relations, 20, 51–74. Heskett, J. L., Jones, T. O., Loveman, G. W., Sasser, W. E., and Schlesinger, L. A. (1994). Putting the service–proft chain to work. Harvard Business Review, 72(2), 164–174. International Air Transport Associations. (2017, October). 2036 forecast reveals air passengers will nearly double to 7.8 billion. Retrieved from https://www.iata.org/en/pressroom/pr/2017-10-24-01/

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AIRLINE SERVICES Josephs, L. (2018, May). American Airlines gives employees (and the public) a peek at its decision making one podcast at a time. CNBC. Retrieved from https://www.cnbc.com/2018/05/14/ american-airlines-unveils-new-animal-policy-in-employee-podcast.html Kamb, L. (2019, December 23). Hours on the tarmac, missed connections, missing bags: Shortage of baggage handlers wreaks holiday havoc for Alaska Airlines passengers. Seattle Times. Retrieved from https://www.seattletimes.com/seattle-news/shortage-of-baggage-handlers-wreaks-havoc-onalaska-airlines-holiday-travelers/ Lazar, J. (2018). Spirit Airlines pilots’ new contract could be bad news for United Airlines. Chicago Business Journal. Retrieved from https://www.bizjournals.com/chicago/news/2018/01/31/spiritairlines-pilots-deal-may-be-bad-for-united.html Maynard, M. (2003). Embattled chief executive of Delta Air Lines to step down. Te New York Times, November 23, C.1. Murphy, Jr., B. (2018, November). Tese fight attendants just authorized a strike. Teir strategy is very unusual (maybe brilliant). Inc. Retrieved from. https://www.inc.com/bill-murphy-jr/theseunited-airlines-regional-carrier-fight-attendants-just-authorized-a-strike-their-strategy-chaosits-genius-or-maybe-evil-you-decide.html Nguyen, T. (2019, September). A brief history of airline worker strikes. Vox. Retrieved from https:// www.vox.com/the-goods/2019/9/11/20860891/british-airways-history-worker-strikes Nigam, S. (2016). SOAR: How the best airline brands delight customers and inspire employees. Washington, DC: Ideapress. Peter, J.P., and Donnelly, Jr., J.H. (2019). Preface to marketing management. New York: McGraw Hill Education. Porter, M. E.  (2011). Vision 2050 IATA Report. Retrieved from https://www.iata.org/contentassets/ bccae1c5a24e43759607a5fd8f44770b/vision-2050.pdf Russell, E. (2018, March). Analysis: Are US airlines at their next scope crossroads? FlightGlobal. Retrieved from https://dashboard.fightglobal.com/app/#/articles/446881?context=newssearch Russell, E. (2019, February). Analysis: United’s business case for the CRJ550. FlightGlobal. Retrieved from https://dashboard.fightglobal.com/app/#/articles/455676?context=newssearch Sider, A., and Cameron, D. (2019, July 19). Labor stress on the rise for airlines. Wall Street Journal, B3. Singularity University. (2018). Lufhansa develops new culture of cross-generational appreciation, trust and teamwork. Retrieved from https://su.org/resources/enterprise-customer-story/ lufhansa-develops-new-culture-of-cross-generational-appreciation-trust-and-teamwork/ Wirtz, J., and Lovelock, C. (2018). Services marketing. Harlow: Pearson.

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CHAPTER 10

Airline service quality Measuring and managing the˜customer experience CHAPTER OUTCOMES At the end of this chapter, you will be able to …  Differentiate between service quality and customer satisfaction  Discuss the differences between hard and soft measures of service quality  Calculate and interpret a net promoter score  Explain what is a contract of carriage  Review the forms of fairness in service recovery  Use your understanding of chapter content to discuss a case study related to JetBlue Introduction In the feld of airline marketing a belief exists that delivering service quality that meets the needs and wants of the customer can lead to customer satisfaction. Another belief is that customer satisfaction is a required precursor to customer loyalty. With loyalty comes repeat business and greater proftability. Tis all seems reasonable, right? Yet, nothing is quite so straightforward in the airline industry. While support for the frst two links are present in the academic literature on airline service quality, the evidence is not as strong for the linkage to proftability (Rhoades, 2018). In addition, various factors, ofen outside of the airline’s control, can break linkages at any point along the way to proftability. Tis chapter starts by describing common ways in which the linkages break down and follows with a theoretical discussion about the nature and interrelationships of service quality and customer satisfaction.

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AIRLINE SERVICE QUALITY A common management axiom states, “What gets measured gets managed.” Said another way, “What can’t be measured can’t be managed.” Airlines are able, and in some cases must measure, a host of factors related to service quality and customer satisfaction. While some of these measures are released into public domain in in the US, the same cannot be said globally. None of the measures are perfect, but they assist in the various methods by which airlines, regulators, and the public at large attempt to know the service quality of an airline.

Breaks in the chain Many factors can disrupt the service proft chain (Chapter 9) for airlines. Some are obvious based on the nature of customer traveling habits and airlines may have to deal with the outcome. Others are born of the complexity that is inherent in air travel for which airlines have limited control, while other breakdowns are clearly the fault of airlines and must become part of their ongoing improvement eforts. To illustrate this complexity, an airline may operate a fight on time, have a functional in-fight entertainment system, deliver the customer’s bag in a timely and efficient manner, and meet all of the operational targets for the service factors within the airline’s control. However, a passenger may still report an unsatisfactory experience due to another passenger’s behavior, difficulties with the security procedures, or post-fight transport difficulties at the arrival airport due to ongoing airport renovations. As such, the customer may rate the airline high on service quality yet still report dissatisfaction with the experience. Due to the interactions of personal and situational infuences during the service delivery—events that may be outside of the airline’s direct control—the passenger’s experience is negatively impacted. Knowing these external infuences exist is only one reason airlines strive to control the aspects of the service experience that they can. Further still, loyalty may not occur even when customer satisfaction is high due to a number of factors. A business fier, for example, may not have control of the airline choice due to company travel policy. Having to book through a TMC as outlined in Chapter 6 may restrict the customer’s ability to be loyal to their preferred airline. Meanwhile, many leisure passengers may only fy one or two times a year and price determines their airline selection more than past experiences. Airline changes, such as route deletions and schedule changes, may no longer ft with a customer’s needs and break the chain for what would otherwise be a loyal customer. Tese few examples presented are not meant to dissuade eforts to build loyalty. Airlines need repeat business and numerus studies support another managerial axiom that repeat customers are typically more proftable for a business over the long term compared to the acquisition costs associated with new customers.

Did You Know? Airlines are in a tough spot when it comes to the customer experience. They realize that situational infuences over which they have little control can negatively impact the customer experience; and yet they have to be very careful in how they navigate such situations because they do not want to be viewed as passing blame. Take the

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situation described earlier in this section in which a fellow passenger is behaving badly and it completely ruins the fight. Not long ago on an American Airlines fight a video surfaced of a man hitting the back of a woman’s seat because of a disagreement over her reclining it into his space. The video went viral on the internet causing embarrassment for the airline. Only a few years ago American Airlines ran a marketing campaign called “The World’s Greatest Flyers Fly American.” In the video ads American seemingly gives a nod to business passengers who know “the rules” associated with being a respectful traveler such as asking permission to raise or lower the window shade. In some respects it was a very clever ad for it gave business travelers a reason to feel proud and this market segment is obviously very important to an FSNC like American. The video ad also attempted to subtly educate other travelers that their moods and behaviors impact the customer experience of everyone on the fight. However, it may not have been subtle enough because American received criticism for the ads in the press and on social media by those who perceived it as the airline passing the blame for its poor customer service onto passengers. Check out the video here and decide for yourself. https://vimeo. com/181118549

Service quality and customer satisfaction Tese concepts can be intermingled, as both are ofen determined in some form of comparing expectations to performance outcomes (Zeithaml, Bitner, and Gremler, 2018). Service quality focuses on the dimensions of the service that leads to attitudes and beliefs about the frm and services ofered. Te features and elements that drive the dimensions of service quality can vary between service experiences. A knowledgeable passenger alternating between fights on a FSNC and an LCC may have very diferent expectations in mind when determining service quality of the diferent fying experiences. Expectations of premium passengers and economy passengers can vary not just by class of service, but by the type of airline the passenger may be fying (Sezgen, Mason, and Mayer, 2019). Te attitudes and beliefs derived in forming perceptions of service quality can be relatively stable but still change over time as re-purchasing situations occur or new information about the service is learned. Service quality perceptions are also built across the range of transactions a customer may have with an airline across the travel stages outlined in Chapter 3 from planning through the fight experience and post-fight interactions with the airline. Ultimately, to achieve excellence in service quality a frm must deliver a high standard of performance that consistently meets or exceeds customer expectations (Wirtz and Lovelock, 2018). Considering that airlines have to deal with many external factors in their operations, this is a difficult standard to meet at times. Customer satisfaction is referred to as a broader construct that is the result of the interactions of service quality and the purchase situation. Satisfaction is a more immediate reaction that is evaluative of the transaction the consumer has experienced. As such, it can bring forth a range of feelings afer the service encounter from dissatisfaction to contentment to

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AIRLINE SERVICE QUALITY satisfaction. As consumers enter a service experience, they possess expectations that can stem from a variety of information sources that they may have been exposed to in the search process. If the outcome of the service encounter exceeds expectations, satisfaction is generated that may lead to positive word-of-mouth generated on behalf of the airline. When expectations are met, customers may have feelings ranging from neutral to contentment. While not negative, the feelings may not be positive enough in strength to drive satisfaction and brand loyalty. When the expectations are not met, a situation of disconfrmation exists—negative feelings and dissatisfaction manifest. Tis process is sometime referred to as the disconfrmation paradigm (Oliver, 1993) and is one reason marketers stress that service quality should exceed expectations in order to drive satisfaction. Moreover, when customers are dissatisfed it can lead to customers spreading negative word-of-mouth about the airline—amplifying the consequences of the service failure.

Measuring service quality There is no single agreed-upon measure for airline service quality. One way of beginning a review of some of the common measures used in the airline industry is dividing the categorizations between soft and hard measures (Zeithaml, Bitner, and Gremler, 2018). Hard measures are quantifiable by methods such as taking counts, measuring time or through other means of observation as part of a service report or audit. Many of the items that may fall under hard measures are often derived from customer-defined service standards. The benefits of such measures are that the items and criteria selected can usually be easily recorded, analyzed, and presented as percentages and statistics in various reporting formats and included in dashboards used for tracking key performance indicators.

Hard measures of service quality Within the aviation industry, press and academic literature the best-known report of hard measures released to the public is from the US airline industry. Te Air Travel Consumer Report (ATCR) is a monthly report from the US Department of Transportation that documents key airline operating measures and passenger interactions. Te ATCR began in 1987 with four key measures being the focus of the report: (1) airline on-time statistics; (2) baggage reports fled; (3) over-sales (voluntary and involuntary overbooking); and (4) number of complaints. Some of the data reported, such as on-time performance, is presented in diferent formats and by leading airports. Moreover, complaints are broken down across numerous categories as classifed by the DOT. Te ATCR has not remained static over the years either. Other data felds have been added and the way certain measures are reported have been adjusted in a manner consistent with consumer interest and airline practice. Data points added include the number of delays and how delays are classifed, fight cancellations, violations of the tarmac rule, reports on airport operations of the Transportation Security Administration, animal incident reports, and just recently reports on missing wheelchairs and scooters. Besides these changes to the data in the report, the DOT has adjusted the reporting requirements resulting in an increase in the number of

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AIRLINE SERVICE QUALITY carriers required to report including the larger regional carriers. With the regionals now in the ATCR, how data is reported has been adjusted in some key measures to diferentiate between the marketing carrier and the operating carrier. Te FSNCs “market” the majority of fights, but the regionals “operate” a good portion of the routes on a contract basis for these FSNCs (see Chapter 2). Te data reported in the ATCR is used as a basis for articles in the popular press and studies conducted by academics on the US airline industry. Two popular rating systems of airline service quality have been developed from tracking the ATCR over time. Te frst system called the “Airline Quality Rating” is released each spring. Using the four original data points entered into a weighted equation produces a yearly score for each carrier that the authors use to provide a yearly rank of the major carriers. Another system from academia produces the “Service Disquality Index” (Waguespack and Rhoades, 2014). Te SDI has evolved and integrated additional reporting factors such as cancellations to the system. Normalizing the data by departures in an attempt to balance the diference in size of carriers, the SDI produces a probability of service failure per fight. Te methodology of both systems has allowed for longitudinal studies of service quality among US airlines and comparisons between the carriers. Other organizations use the ATCR data as well. For example, the Wall Street Journal (McCartney, 2020) now produces a yearly airline ranking system based on ATCR data. Delta has ranked best in their system from 2017 to 2019 as the WSJ does not include Hawaiian due to the large percentage of the airline’s operations being between the Hawaiian Islands and not exposed to the continental US domestic system. Unfortunately, as no other countries release such operational data on the carriers in their respective countries, global comparisons utilizing hard measures are not possible.

Soft measures of service quality Sof measures are those that require surveying of consumers to get their perceptions of the service experience. Tese are referred to as sof measures as they are not counted, timed, or directly observed in the same manner as hard measures. Sof measures are gathered through individual interviews, focus groups, questionnaires and surveys, internet and social media comments. Te most common sof measure is the post-fight survey, which some airlines in the past would send to all passengers for whom the airline had an email (McCartney, 2013). With digital technologies today and alternative means of sending the survey whether through email, airline app, or text message links, airlines now use a more targeted approach for survey administration. While known as sof measures, the many forms of sof measurement approaches coupled with modern data science techniques allow for the creation of quantitative measures such as scores or indexes that may also be used for key performance indicators.

SERVQUAL and the dimensions of service quality Te most common measure in the service literature for measuring service quality is the SERVQUAL system developed as a means to measure the dimensions of service quality

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AIRLINE SERVICE QUALITY (Parasuraman, Zeithaml, and Berry, 1988). SERVQUAL identifes fve dimensions of service quality: Tangibles: Physical facilities, equipment, and appearance of personnel Reliability: Ability to perform the promised service dependably and accurately Responsiveness: Willingness to help customers and provide prompt service Assurance: Knowledge and courtesy of employees and their ability to inspire trust and confdence Empathy: Caring, individualized attention the frm provides its customers Since the introduction of SERVQUAL, the system has been used across many service industries. Many times the items are adapted to ft the unique operating characteristics of the service being investigated. One review of service quality measurement in the airline industry found 24 diferent studies that have used the SERVQUAL framework (Rhoades, 2018). Many of these studies are country specifc due to the location of the authors and the research constraints of attempting a large multinational survey is beyond the means of most academic researchers. Other researchers have ofered variations of the SERVQUAL system. Recently in the academic service quality and aviation literature there has been a derivation named AIRQUAL (Ali, Dey, and Filieri, 2015). Te AIRQUAL system difers by attempting to be specifc to the airline industry. Te fve dimensions developed include airline tangibles, terminal tangibles, personnel quality, empathy, and airline Image. Unfortunately, the items used in the AIRQUAL dimensions are not consistently found across the airline service quality studies where used (Nedunchezhian and Tirunavukkarasu, 2018).

American Customer Satisfaction Index (ACSI) Begun by a group of academics from the University of Michigan in conjunction with industry partners, since 1994 the American Customer Satisfaction Index (ACSI) has measured the customer evaluations of quality for a wide range of goods and services purchased in the US, including the major air carriers. Much like the ATCR, the airlines in the ACSI have changed as the airline industry changed. In 2015 the ACSI began to review additional LCCs besides Southwest as the ULCCs Frontier, Spirit, and Allegiant, along with growing full-service carrier Alaska entered the system. Te ACSI does not by name present any regional carriers, but has an “all others” category for the smaller airlines and regionals for which data is gathered. Additionally, like the ATCR, the ACSI has changed the dimensions used to drive the overall index score with new items added to the service attributes and features that the ACSI measures. Te ACSI not only reports an individual score for each of the US airlines, but it also reports an overall industry score and then provides a score for each of the benchmarks. Trough much of the early 2000s afer 9/11 and the SARS outbreak in 2003, and until the end of the Great Recession in 2010, the airline average score lagged in comparison to other

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AIRLINE SERVICE QUALITY Table 10.1 ACSI customer experience benchmarks, 2019 Item

Score

Ease of check-in process

82

Quality of mobile app*

82

Reliability of mobile app* (minimal down time, crashes, lags)

82

Ease of making a reservation

81

Courtesy and helpfulness of fight crew

80

Courtesy and helpfulness of gate staff*

80

Timeliness of arrival

80

Website satisfaction

80

Baggage handling

79

Boarding experience

79

Call center satisfaction

78

Cleanliness of cabin and lavatory*

78

Range of fight schedules

77

Loyalty program

75

Availability and size of overhead storage*

73

Quality of complimentary in-fight beverage and food*

73

Quality of premium (purchased) in-fight beverage and food*

73

Quality of in-fight entertainment*

71

Seat comfort

69

*New to the 2019 airline experience benchmarks Source: ACSI travel report (2018–2019)

industries near the bottom of the industry ratings. While the ASCI average started to rise between 2012 and 2019 from the bottom of the industry scores indicating some measure of overall improvement, only time will tell if the industry average plummets again with the COVID-19 outbreak in spring 2020.

JD Power North America S atisfaction S tudy JD Power is a well-known research company focused on conducting unbiased consumer quality and satisfaction surveys across a wide variety of industries. As the frm extended its satisfaction research beyond its original focus on the automobile industry, one of the industries J.D. Power began reporting fndings on is the airline industry starting in 1992 (Bryant, 1992). However, citations for the airline satisfaction research are limited for most of the 1990s and into the early 2000s. Starting in 2005 a yearly airline satisfaction index report has been released for the past 15 years (J.D. Power, 2019). While the exact questions asked and

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AIRLINE SERVICE QUALITY Table 10.2 ACSI scores Airline

2015

2016

2017

2018

Average

JetBlue

81

80

82

79

80.5

Southwest

78

80

80

80

79.5

Alaska

75

77

78

79

77.3

All Others

73

74

74

73

73.5

Delta

71

71

76

74

73.0

Yearly Average

69

72

75

73

72.3

American

66

72

76

74

72.0

Allegiant

65

65

71

74

68.8

United

60

68

70

67

66.3

Frontier

58

66

63

62

62.3

Spirit

54

62

61

62

59.8

*New to the 2019 Airline Experience Benchmarks Source: ACSI Travel report 2018–2019

Table 10.3 JD Power scores Airline

2015

2016

2017

2018

Average

JetBlue

801

790

803

812

802

Southwest

781

789

807

818

799

Alaska

719

751

765

775

753

Delta

709

725

758

767

740

Yearly Average

719

726

750

757

738

American

700

693

736

729

715

United

665

675

716

708

691

Frontier

659

662

663

693

669

Note: US carriers only for comparison to the ACSI *New to the 2019 Airline Experience Benchmarks Source: ACSI Travel report 2018–2019

format of the study are not reported, the press release does include the time frame for when the data was collected and the number of respondents in that year’s study. Focused more broadly on North America, the Canadian airlines WestJet and Air Canada are included in the results. Te report divides the carriers by strategy—traditional carrier and low-cost carrier rankings. Seven factors of service quality are focused on in the press release: reservation, check-in, boarding, baggage, aircraf, fight crew, in-fight services, cost, and fees. For frms who subscribe to the report, additional features reported on include airline lounges, amenities, boarding, baggage, food and beverage, in-fight entertainment plus connectivity.

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Skytrax A United Kingdom-based consultancy, Skytrax manages an online review and ranking site of the world’s airlines. Skytrax research utilizes a 1 to 5 star system for airline reviews based on an audit and assessment of between 500 and 800 product and service delivery items. While ofen used in airline promotions as a means of demonstrating quality, the system has faced criticism as the methodology of the audit process is not clearly explained by Skytrax and questions have been raised about the customer reviews on the site (Garcia, 2015). Other critiques of the system note a confict of interest may exist. While airlines are not allowed to explicitly pay for a higher rating, carriers are allowed and encouraged to purchase consulting services from Skytrax. Because consulting is how the frm makes most of its money, some wonder how the frm can objectively evaluate airlines that may be Skytrax clients (Schlappig, 2019; Steinberg, 2019). On some of the frequent fier boards and social media sites the hashtag #Scamtrax has now appeared refecting views about the validity of the ratings. Nevertheless, the site is highly popular among travelers based on its rating system and ease of use.

Tripadvisor Te tripadvisor.com online site launched in 2000 with reviews of the hotel industry. At that time tripadvisor did not provide airline industry ratings or reviews. Te site frst began allowing airline ratings in 2011 allowing shoppers at the site’s airline metasearch engine to see ratings provided by other site members (PR Newswire, 2011). Changes to the rating factors have occurred and the current items are legroom, seat comfort, in-fight entertainment, onboard experience, customer service, value for money, cleanliness, check-in and boarding, and, lastly, food and beverage. In 2016 the site added the ability for users to provide airline reviews, with comments, as the site updated the fight metasearch platform (Tripadvisor, 2016). With the changes, the site began the yearly Travellers’ Choice Awards for airlines that in 2019 issued 91 total awards to 57 airlines across eight global regions (Tripadvisor, 2019). Tripadvisor ratings and reviews are not just used by potential travelers searching for information as part of trip planning. Academic researchers are using the reviews as Tripadvisor is one of the largest user-generated content sites in the travel marketplace. Brochado et al., (2019) used content analysis to fnd nine airline service themes that dominated the reviews: fights, seats, service, staf, airlines, classes, airports, entertainment, and fying. Examining the themes in conjunction with the value for money rating that accompanied the review, the researchers found that reviews with low value for money ratings were dominated by themes of fight delays and airport operational issues of lost, delayed, or damaged baggage. Passengers who provided high value for money ratings, meanwhile, included positive themes related to seats, entertainment, services, and staf. Sezgen, Mason, and Mayer, (2019) used the Tripadvisor airline reviews to examine service quality attributes across global airlines that drive customer satisfaction and dissatisfaction across airline cabin class and strategy of the airline. Grouping the passengers into three groups— (1) premium cabin passengers (2) economy class passengers and (3) low-cost airline passengers—satisfaction was driven across the groups by cabin service and positive crew interactions. Dissatisfaction across the groups was driven by unprofessionalism of staf, uncomfortable seats, and fight and baggage disruptions. While utilizing diferent means to

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AIRLINE SERVICE QUALITY analyze the reviews, there is largely agreement across the studies on factors that users state drive satisfaction and dissatisfaction.

Net Promoter Score Te Net Promoter Score (NPS) is not a measure of service quality and not a direct measurement of satisfaction, but has been recommended as a measure of consumer loyalty. For many airlines the NPS is a key performance indicator tracked and shared across the airline. Frederick Reichheld (2003) introduced the NPS in a Harvard Business Review article titled “Te One Number You Need to Grow.” In the article, Reichheld uses the US domestic airline industry as a case study on the value of the NPS and found that no airline increased its growth rate without improving its NPS. Since then, the NPS has become one of the most tracked and debated metrics in the marketing research and customer experience felds. An analysis of the NPS conducted by the Wall Street Journal (Safdar and Pacheco, 2019) found the term “net promoter” mentioned in 56 proxy flings and cited more than 150 times in earning conference calls by 50 S&P 500 companies in 2018. While widely used within frms and reported in fnancial documents as noted, no one service publishes a publicly available NPS yearly benchmark, although numerous frms do sell industry specifc studies. For example, Satmetrix, a leading NPS consultancy, produces a yearly US Consumer Net Promoter Benchmark. In an infographic highlighting the 2019 report, Southwest is shown with the highest airline NPS of 71, while the US airline industry average is 39 (Satmetrix, 2019). Other research frms, such as J.D. Power or airline consultancies, such as SABRE, can integrate the NPS measure into the client airline’s customer survey program (Ewbank and Porklab, 2014).

10.1

Marketing in practice

Calculating a Net Promotor Score The Net Promoter Score is calculated by fnding the answer to the question “how likely is it that you would recommend [the airline] to a friend or colleague?” The question is scaled from 0 = not likely at all to 10 = extremely likely. Not Likely 0

Neutral 1

2

3

4

5

Extremely Likely 6

7

8

9

10

Promoters are respondents who answer 9 and 10. Detractors are those who answer 0 through 6. Passives are those who answer 7 and 8. The NPS is the (% of promoters) – (% of detractors). Due to the way the score is computed, the range can be from –100 to 0 to 100. While some articles note anything above 0 is preferred, benchmarking against competitors in your industry and the industry average should be done to make a relative judgment of performance.

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Promoters are key as they tell others about their experience and usually have the highest rates of repurchase. Promoters have a larger customer lifetime value and generate new customers, at a lower cost, for the airline. Passives, while often giving an airline positive satisfaction scores, may easily switch to other airlines, especially when a new competitor or price competition exists in a market. Passives may validate the airline basic service proposition, that the airline got the passenger to their destination and the fight was on time, but passives do not motivate others to purchase. Detractors and the negative word-of-mouth they spread damages an airline reputation and any attempts at a brand image a carrier may be trying to build. Dealing with detractors can be costly and require a great deal of effort to manage in the social media channels when found.

Among the airlines that have been known to use the NPS include Southwest, Alaska, JetBlue, Delta, Azul, Finnair, Jetstar, Qantas, the IAG airlines (British Airways, Iberia, Aer Lingus, Vueling, and Level) with additional carriers around the globe. Airlines have come to focus on the metric in the belief of its value to the frm. Delta, for instance, focused on raising their NPS from a score of 20 in 2011, to a score of 41.5 in 2017, and reached their target of a NPS over 50 by 2019 (CAPA, 2019). Decisions made by Delta guided by feedback received while tracking their rise in NPS included adding fresh baked cookies on transatlantic fights, keeping a nine-abreast seating in the carriers 777 economy section (e.g., not moving to ten across seating as other carriers densifed), and enhancements to the Delta mobile application (Safdar and Pacheco, 2019). In addition to the product improvements, Delta believes the focus on improving NPS performance is directly related to the revenue premium the carrier has been able to charge relative to its competitors. Airlines use the NPS as one part of their overall customer satisfaction and experience research. Te metric itself is easy to track and provides a valuable reference in employee communications and on company dashboards. What cannot be overlooked though is the need to know what drove the NPS response a customer provided. Afer the NPS question, any administration should ask in some form the question “Please explain why you gave us this score” and provide an open reply opportunity for the customer to explain. Te information gathered from the open-ended question response must then be analyzed in an efort to understand the features, attributes, and interactions that drove the positive score and to determine if the actions can be replicated in a cost-efective manner. Te detractor replies must also be studied to fnd failures in service delivery and to determine customer handling processes that the airline can correct. Airlines must also be aware of what impacts the NPS as some users note the score can be more “volatile than some other key performance indicators” (Walton, 2018). Two service quality elements in particular have been known to drive scores downward. Flight delays and cancellations, which are ofen the leading source of complaints to the DOT as reported

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AIRLINE SERVICE QUALITY in the ATCR (Waguespack and Rhoades, 2014) have a major impact in driving individual fight scores downward. Many airlines now make sure to link the fight the passenger was on as they answer the NPS question to see the degree of negative interaction. As arrival delays get longer, the NPS goes downward, and this relationship should be internally communicated across all airline service and operational employees. Te other key service factor that can infuence the NPS score is baggage delivery as that can be the last service touchpoint for many customers with the airline (Kinsella, 2019). Azul, for instance, has found that no matter how good the service delivery is from the reservation process through the completion of the fight, if it takes more than 20 minutes for a customer’s bags to reach the baggage carousel, there is a drop in Net Promoter Scores. Based on the information found studying NPS replies is one reason that baggage delivery time is a key metric that Azul tracks across the airports the carrier serves.

Service recovery Service failure in the airline industry is a fact. As customer’s dread this possibility, airline managers dread it even more. Te complexity of the industry, especially as a carrier grows in size and operations, requires numerous information and customer processing systems capable of coordinating over an increasing network, no matter the design of the network. As the network grows, the probability of a service failure increases. One leading airline operations text identifes 12 diferent groups who work on a fight before its departure from the airport (Abdelghany and Abdelghany, 2009, p. 7). Multipling that by the numbers of planes and fights a major carrier may operate in a day, within the constraints discussed already by labor contracts, government policies, airport operational limits, mandated safety and security procedures, in uncontrollable weather, at airports requiring high levels of timing precision for passenger fows, creates an overwhelming number of opportunities for a failure to occur. As such, service recovery strategies are a required necessity of airline operations and customer service. In the airline industry, some aspects of service recovery are established by international agreements (Hooper, 2018). For countries around the globe, the extent of these agreements, known as the Warsaw Convention and updated by the Montreal Convention of 1999, are used by civil aviation authorities to establish the minimum standards international airlines are required to meet for service recovery. In other areas, policies may exceed these minimums, but can be somewhat difficult to fnd unless the airlines are required to post or provide the policies to the passenger in some manner. In the US, the DOT maintains the Aviation Consumer Protection website with links to various service failures that can occur for which consumers may want to learn more about their rights including potential compensation. In examining the site, a distressed consumer would fnd that except for a few of the service items mainly under the control of the international treaties the US has agreed to, many service recovery policies and compensation amounts are lef to the individual airlines to decide. Some guidance is provided for service issues such as lost or damaged baggage and compensation for denied boarding, but numerous exceptions or limits on the amount of compensation mandated by the government are noted. To fnd the actual airline service recovery policies and what might be included, one must go the airlines contract of carriage. Among the various terms and conditions a consumer is

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AIRLINE SERVICE QUALITY agreeing to when purchasing a ticket, besides those attached to the ticket by the airline revenue management system, are the conditions in the contract of carriage. By policy, the US airlines must provide a link on the home page of the airline’s website that provides access to the contract. Te difficulty though for consumers is that contracts can be lengthy, stated in legal terms that are difficult for passengers to understand, can be modifed by the airline at any moment, and further still, the policies and procedures across carriers are ofen very different (McGee, 2017). Basic monetary amounts for items such as lost baggage, fight delays and cancellations, overbooking compensation, and policies for ticket refunds, if applicable, are stated in the contract. When COVID-19 fight disruptions began in spring 2020 many of the US airlines went by the terms of the contract of carriage and refused cash refunds. Being proactive and starting to shelter-in-place, ticket holders cancelled fight itineraries before the airline took any action such as cancelling or rescheduling a fight. Meanwhile, as the airline received bailout funds from the CARES Act, fight operations had to be maintained. Airlines therefore did not cancel or re-schedule fights. Te airlines followed the terms in the contract of carriage and only ofered vouchers to those consumers who had cancelled their itineraries as the fight still operated. Now wanting refunds, as due to the pandemic the ticket holders had no reason to fy and with economic hardships many needed the funds for other uses, the airlines declined. Under the terms in the airline contracts, as the consumer acted to cancel their ticket before the airline officially took any action and the fight did occur, the consumer was only entitled to a future fight voucher, not a cash refund (Posey, 2020). Diferent from the US system, is the EU, where due to the common aviation market, an official air passenger rights’ website exists that consumers can access to learn their rights and the remedies for service failures. Utilizing a menu selection feature, a passenger can select the service failure that occurred and then click through to fnd the rule in place and links to the service remedy allowed. Te service failures noted are: • Your fight was cancelled • Your fight was delayed • You were denied boarding • Your fight was overbooked • Your fight was upgraded or downgraded • Your luggage was lost, damaged or delayed Besides access to the remedy for each of the failures noted, the site provides a FAQ document that ofers examples of when the airline may have to ofer a recovery option or compensation. Additionally, a defnition and explanation of extraordinary circumstances that might impact a fight and create a cancellation or delay is provided. Unlike in the US where airlines may defne these circumstances diferently or more broadly, the EU attempts to provide a singular defnition for the airlines governed by the passenger rights regulations. In a situation where the site may not provide the answer needed, the site recommends the consumer contact the civil aviation authority of the airline involved for additional guidance.

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Role of service recovery Service recovery activities can infuence consumer post-purchase behaviors and responses. Research has shown support for the proposition that when able to provide satisfactory service recovery activities and actions, recovery activity can lead to passenger satisfaction and loyalty (Hooper, 2018). Service recovery activities give the airline the opportunity to turn what may have been a detractor into a promoter. Tis does not mean the same service failure can keep occurring, as customers will look for other service options quickly in such a situation. In examining service recovery, consumers look for a sense of justice and fairness from the service recovery eforts. Outcome fairness concerns the results that the customer receives from a complaint fled or any process implemented for service recovery. Procedural fairness refers to the policies, procedures, and rules in place for the service recovery process. Interactional fairness focuses on the personal interactions during the service recovery process and how a passenger feels they were treated by airline staf during the service recovery process (Zeithaml, Bitner, and Gremler, 2018). Interactions between the three forms of fairness occur. A passenger, for example, may feel the compensation was fair but the rules to access it were difficult and the personal interactions were rude and lacking empathy. Hence, the consumer still has a negative evaluation resulting in dissatisfaction. Service recovery procedures must be closely measured to determine if any form of fairness is being denied in the view of the consumer. An airline may never be able to meet the outcome fairness of all consumers—some will demand recovery actions from the airline that are simply not possible operationally or compensation amounts that are not viable fnancially. However, factors related to procedural and interaction fairness are ofen under the control of the airline and the process and people involved are vital for successful service recovery eforts.

Complaint behavior Unfortunately, due to what has at times been referred to as the “hassle factor” of air travel, the set of rules and guidelines that control passenger processing, and the complex nature of the airline business, service failures, and complaints occur. Contrary to public opinion, airlines actually welcome passenger complaints for three reasons. First, the complaint provides the opportunity for service recovery to occur turning a negative situation into a positive one that may actually create a promoter for the airline. In the complaint resolution process the knowledge and data exchanged allow the airline to better understand the needs of the customer and respond accordingly in a repurchase situation. Moreover, as airlines get to know their customers, especially repeat passengers and those in the frequent fier program, learning from past failures can lead to proactive solutions that forestall future complaints. In examining who complains and their behavior, the ACSI (2019) found that business travelers who complained are more satisfed than other passengers, likely because of the opportunity for service recovery that occurs. Secondly, complaints may let the airline know of a service standard no longer meeting traveler needs or changes in consumer needs and wants the airline needs to address. While airlines attempt to monitor changing consumer needs and wants, as in many businesses, this may be difficult as the airline focuses on the fnancial and

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AIRLINE SERVICE QUALITY operational constraints of the marketplace. Tracking, compiling, and analyzing complaints may provide actionable information for the airline. Lastly, especially in the US, complaining directly to the airline means that the complaint does not end up in government airline statistics. Complaints are one of the items tracked in the ATCR, but only complaints made to the DOT through their website. Airlines do not have to report complaints made directly to the airline. For the reasons stated, airlines use various means to mitigate complaints. Airlines provide communication tools within the airline app to report service difficulties, some allow communication through the airline in-fight entertainment system and many have customer service instructions in the airline in-fight magazine. Te other means airlines use to try to resolve complaints before the situation may escalate is the use of social media monitoring, which is diferentiated from social listening (see Chapter 3) as monitoring is concerned with knowing your brand mentions in real time and looking for issues, such as complaints, the airline can address. Social media monitoring groups are common across the major airlines. Centers operate 24 hours a day monitoring across the major social media platforms in the global locations the airline serves (Chamberlain, 2020). Te centers are stafed with people knowledgeable on airline service processes such as seat assignments, re-booking for cancelled and missed fights, and baggage complaint resolution. Te goal of the team is usually to get the passenger posting the complaint to use the direct messaging capability of the social media platform to contact the team member with a direct message. With contact established, the airline can get the needed information such as fight number and frequent fier information in order to clearly identify the passenger and address the service difficulty (Keraghosian, 2020). Of course, direct messaging also helps the airline to avoid having contentious exchanges with passengers on social media in the public domain.

10.2 Marketing in practice Airline customer service on Twitter As alluded to in Chapter 3, Twitter has become a primary way for customers to engage with airlines and it pays for airlines to be responsive. According to one study, 40 percent of passengers have attempted to contact an airline by Twitter. Airlines have responded by ramping up their customer service efforts on social media. Standouts include American Airlines with their “social media hub” in Fort Worth and JetBlue with their “social media and customer commitment team” with all of their members at JetBlue working from home. American Airlines receives roughly 4,500 mentions on social media in an hour and 70–80 percent of them are on Twitter. American was dubbed the most responsive carrier in North America according to a 2017 report issued by Conversocial, a software company, with American having responded to 32.6 percent of Twitter mentions. In the same report, JetBlue won the award for fastest response time on Twitter averaging 4 minutes and 50 seconds. Both companies staff their teams with long-time employees out

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of the reservations area that are familiar with the airlines systems and rebooking procedures. For instance, the average social media customer support person at American has been with the company for 17 years! Sources: Madrigal, 2017; Taylor, 2019

Conclusion Tis chapter has outlined the many considerations involved in airline service quality. Delivering service quality is difficult and there is a negative impression in the marketplace towards airlines that only seems to get reinforced with every service failure video posted across social media. Tere is no doubt a feeling among some consumers that “it does not matter what carrier you fy, they are all the same” and that sentiment is not meant in a positive way. However, this is not a reason for airlines to be apathetic toward service quality. In fact, it should be exactly the opposite. An airline’s ability to distinguish itself as it relates to service quality and customer satisfaction is bound to gain a competitive advantage over its rivals. Fortunately for airlines, as covered in the chapter there are many ways, both publicly and privately, to create metrics to measure service quality. In addition to the various indexes in academia, this chapter covered popular sources that produce airline customer satisfaction rankings and the widespread usage of NPS. As noted as the end of the chapter, even at a time of service failure and facing a dissatisfed customer, responding with an appropriate message and acknowledgment can turn the interaction into a positive experience for the customer.

Chapter review questions 1 Find another airline review or rating system not listed in the chapter that is published by a magazine, website, blog, etc. in the last year. Explain how that system works. What are the main service quality items used for the system? 2 Examine the yearly J.D. Power Satisfaction Index. What service quality item that ofen leads “hard measures” is missing? Does this missing attribute infuence the validity of the system in your view? 3 While the Net Promoter Score is widely used by airlines, the NPS has critics. Research the criticisms of the NPS and discuss what you found. Should airlines drop the use of NPS because of these in your view? 4 Find a US airline contact of carriage and the section of the contract that provides the airline’s policies for one of the service failures listed by the EU. Compare and contrast the airline’s contract policy to the corresponding EU policy. 5 Examine the airline contract of carriage and select a policy and procedure for resolving a service failure. Go to a site such as Tripadvisor.com and fnd some negative reviews of the airline for the service failure selected. Does the absence of any form of fairness stand out in the reviews?

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CASE STUDY

JETBLUE—WEAR A MASK OR ELSE YOU ARE NOT WELCOMED BACK? Across the airline industry, the COVID-19 pandemic has airlines, regulators, unions, and the trade groups examining customer service standards and procedures. Many changes were quickly implemented such as new cleaning standards, and in the immediate aftermath some airlines have been willing to block seats or limit the number of passengers to enforce social distance practices. The steps were taken to assure consumers of their safety in an effort to restore a sense of confdence in air travel. One of the most immediate actions as shelter-in-place restrictions were lifted and air service began again was the requirement for passengers to wear face masks onboard the aircraft. JetBlue was the frst US carrier to mandate the policy. The airline was addressing health and safety concerns by promoting use of the mask and focusing on the ability of cabin air to be quickly re-circulated through HEPA flters that provided additional protection for passengers. With other airlines seeing the overwhelming favorable expressions of consumer sentiment, the directive quickly spread among the major US carriers. Labor groups, especially the pilots and fight attendants, also expressed support for the directive. Enforcement was relatively easy—before someone boarded if a customer was unwilling, the airline could just deny boarding until the passenger complied. Additionally, the airlines had masks available for those who may not have one in their possession as no national policy on mask wearing existed and the FAA did not mandate the directive. The diffculty arose when someone boarded and then removed the mask. As noted by one pilot, once in the air, the airline could not simply ask the passenger to leave the plane as was occurring at some retail store locations. In an attempt to defuse potential confict, JetBlue trained the gate agents and attendants in dealing with passengers to use “the ABCs—ask, bargain, and convince.” Going through these steps, JetBlue reported they did not have non-compliant passengers. Asked if non-compliance should occur, what action would JetBlue take next, an executive stated, “We’re going to have to review whether we want that person to fy JetBlue again … The safety of our customers and crewmembers is paramount. This is the new fying etiquette, at least until there’s a different solution” to the pandemic. Source: Broderick (2020)

Case study questions 1 In today’s social media environment, where customer interactions readily appear across platforms and go viral, are the “ABCs” enough if a passenger refuses? 2 Te executive’s statement was “we are going to have to review”—is this a strong enough statement? Should the policy be stated clearly that future travel on the carrier will not be allowed and added to the contract of carriage? 3 Research and report on the latest fight safety initiatives designed to prevent the spread of infectious disease? Are carriers still requiring passengers to wear face masks?

References Abdelghany, A., and Abdelghany, K. (2009). Modeling applications in the airline industry. Burlington, VT: Ashgate.

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AIRLINE SERVICE QUALITY ACSI Travel Report 2018–2019. (2019, April 30) Retrieved from: https://www.theacsi.org/newsand-resources/customer-satisfaction-reports/reports-2019/acsi-travel-report-2018-2019/ acsi-travel-report-2018–2019-download Ali, F., Dey, B. L., and Filieri, R. (2015). An assessment of service quality and resulting customer satisfaction in Pakistan International Airlines. International Journal of Quality & Reliability Management, 32 (5), 486–502. Brochado, A., Rita, P., Oliveira, C., and Oliveira, F. (2019). Airline passengers’ perceptions of service quality: Temes in online reviews. International Journal of Contemporary Hospitality Management, 31, 855–873. Broderick, S. (2020, May 9). JetBlue’s Hayes sees less restrictive ticket policies post-pandemic. Aviation Week Network. Retrieved from: https://aviationweek.com/air-transport/airlines-lessors/ jetblues-hayes-sees-less-restrictive-ticket-policies-post-pandemic Bryant, A. (1992, November 3). J.D. Power launches survey ranking domestic airlines. Journal Record. Retrieved from http://ezproxy.libproxy.db.erau.edu/login?url=https://search-proquest-com. ezproxy.libproxy.db.erau.edu/docview/259273375?accountid=27203 CAPA (2019, May 9). US airlines’ net promoter scores: Delta, Alaska, JetBlue. CAPA - Centre for Aviation. Retrieved from: https://centreforaviation.com/analysis/reports/us-airlines-net-promoterscores-delta-alaska-jetblue-471674 Chamberlain, L. (2020). How airlines’ embrace of social media is evolving afer a decade of learning. Kambr Media. Retrieved from: https://kambr.media/how-airlines-embrace-of-socialmedia-is-evolving-afer Ewbank, J. P., and Porkolab, J. B. (2014). Voice of the customer. Ascend: A Magazine for Airline Executives, 2, 44–46. Garcia, M. (2015, March 13). From Freddies to Skytrax: Making sense of airline and airport awards. Skif. Retrieved from https://skif.com/2015/03/13/understanding-the-players-during-airline-andairport-awards-season/ Hooper, P. (2018). Consumer passenger regimes and passenger complaints. In Nigel Halpern and Anne Graham (Eds.), Te Routledge companion to air transport management, pp. 362–363. New York: Routledge. J.D. Power (2019, May 29). As airline satisfaction climbs to record highs, line blurs between low-lost and traditional carriers, J.D. Power fnds. Retrieved from: https://www.jdpower.com/business/ travel-and-hospitality/north-america-airline-satisfaction-study Keraghosian, G. (2020, February 24). She answers up to 100 tweets a day for Southwest Airlines. Here’s what it’s like. SFGate.com. Retrieved from: https://www.sfgate.com/travel/article/She-answersup-to-100-tweets-a-day-for-Southwest-15068189.php Kinsella, N. (2019, April 10). Retail Net Promoter Scores: A critical delivery experience lesson from the airline industry. Fluent Commerce.com. Retrieved from: https://fuentcommerce.com/ retail-net-promoter-scores-a-critical-delivery-experience-lesson-from-the-airline-industry Madrigal, A. (2017). Te people who read your airline tweets. Te Atlantic. Retrieved from: https:// www.theatlantic.com/technology/archive/2017/12/on-the-other-side-of-your-airline-traveltweets/548693/ McCartney, S. (2013, April 4). Dear airline, here’s the problem . . . , Wall Street Journal, p. D1. McCartney, S. (2020, January 15). Te best and worst U.S. airlines of 2019. Wall Street Journal. Retrieved from: https://www.wsj.com/articles/the-best-and-worst-u-s-airlines-of-2019-11579097301. McGee, B. (2017, July 12). Contracts of carriage: Deciphering murky airline rules. USAToday. com. Retrieved from: https://www.usatoday.com/story/travel/columnist/mcgee/2017/07/12/ airline-contract-carriage/469916001/ Nedunchezhian, V. R., and Tirunavukkarasu, A. (2018). Validation of airline service quality scale: Evidence from Indian and European passengers.Academy of Marketing Studies Journal, 22(1). Retrieved

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AIRLINE SERVICE QUALITY from: https://www.abacademies.org/articles/validation-of-airline-service-quality-scale-evidencefrom-indian-and-european-passengers-7023.html Oliver, R. L. (1993). Cognitive, afective and attribute bases of the satisfaction response. Journal of Consumer Research, 20, 418–430. Parasuraman, A., Zeithaml, V. A., and Berry, L. L. (1988). Servqual: A multiple-item scale for measuring consumer perceptions of service quality. Journal of Retailing, Spring, 12–40. Posey, J. (2020, May 12). Airlines are issuing billions of dollars in vouchers – but can you still get a cash refund for coronavirus-related fight cancellations? MarketWatch.com. Retrieved from: https:// www.marketwatch.com/story/airlines-are-sitting-on-over-10-billion-in-vouchers-as-they-refuse-refunds-for-coronavirus-cancellations-democratic-senators-say-2020–04–17 PR Newswire (2011, January 11). Tripadvisor adds airline ratings to fight search. prnewswire.com. Retrieved from: http://multivu.prnewswire.com/mnr/tripadvisor/42940 Reichheld, F. F. (2003, December). Te one number you need to grow. Harvard Business Review, 81, 46–54. Rhoades, D. L. (2018). Airline service quality and the consumer experience. In Nigel Halpern and Anne Graham (Eds.), Te Routledge companion to air transport management (pp. 362–363). New York: Routledge. Safdar, K., and Pacheco, I. (2019, May 16). CEOs embrace a dubious metric—NPS, a customer-satisfaction score, has a cultlike following but is doubted even by its creator. Wall Street Journal, p. A1–5. Satmetrix (2019). 2019 B2C NPS benchmarks at a glance. Satmetrix.com. Retrieved from: https://www. satmetrix.com/infographic/2019-us-consumer-benchmarks/ Schlappig, B. (2019, May 11). Outrageous: Turkish Airlines downgraded to Skytrax 3-Star airline. Onemileatatime.com. Retrieved from: https://onemileatatime.com/turkish-airlines-skytrax-3-star Sezgen, E., Mason, K. J., and Mayer, R. (2019). Voice of airline passenger: A text mining aproach to understanding customer satisfaction. Journal of Air Transport Management, 77, 65–74. Steinberg, E. (2019, May 13). Downgraded: What is Skytrax and what do its ratings mean? Te PointsGuy.com. Retrieved from: https://thepointsguy.com/news/skytrax-ratings-what-is-it-airlines/ Taylor, M. (2019). Airlines and Twitter: Te good, the bad and the future. Travel Pulse. Retrieved from: https://www.travelpulse.com/news/airlines/airlines-and-twitter-the-good-the-bad-and-the-future.html Tripadvisor (2016, July 12). Tripadvisor introduces airline reviews and redesigns its fights search experience for travelers. Tripadvisor.com. Retrieved from: https://tripadvisor.mediaroom.com/2016-06-12-TripAdvisor-Introduces-Airline-Reviews-and-Redesigns-its-Flights-Search-Experience-for-Travelers Tripadvisor (2019, April 2). TripAdvisor recognizes fyers’ favorite airlines in the world based on reviews with 2019 Travelers’ Choice Awards. Tripadvisor.com. Retrieved from: https://tripadvisor.mediaroom.com/2019-04-02-TripAdvisor-Recognizes-Flyers-Favorite-Airlines-In-TeWorld-Based-On-Reviews-With-2019-Travelers-Choice-Awards Waguespack, B. P., and Rhoades, D.L. (2014). Twenty fve years of measuring airline service quality or why is airline service quality only good when times are bad? Research in Transportation Business & Management, 10, 33–39. Walton, J. (2018, November 28). Delving inside the popular airline metric Net Promoter Score. RunwayGirlNetworkcom. Retrieved from: https://runwaygirlnetwork.com/2018/11/28/delvinginside-the-popular-airline-metric-net-promoter-score/ Wirtz, J., and Lovelock, C. (2018). Essentials of service marketing, 3rd ed. Harlow: Pearson. Zeithaml, V. B., Bitner, M. J., and Gremler, D. (2018). Service marketing: Integragting customer focus across the frm, 7th ed. New York: McGraw-Hill Education.

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Appendix

Airline alliances Oneworld

Star Alliance

Sky Team

American

British Airways/ Iberia

United

Lufthansa

Delta Air Lines

KLM/Air France

Cathay Pacifc

Qatar

Air China

Turkish Airlines

Korean Air

China Eastern

Royal Jordanian

Qantas

Air Canada

Swiss Airlines

Aero Mexico

Aerofot

SriLankan Airlines

Japan Airlines

Avianca

Singapore Airlines

Aerolineas Argentinas

China Airlines

Fiji Airways

Finnair

Copa Airlines

THAI

MEA

Garuda Indonesia

S7 Airlines

Malaysia

Ana Airlines

EVA Air

Saudia

Air Europa

Royal Air Maroc

Air New Zealand

Ethiopian

Tarom

Alitalia

Air India

Shenzhen Airlines

Vietnam Airlines

Czech Airlines

Aegean

Scandinavian Airlines

Xiamen Air

Kenya Airways

Austrian

LOT Polish

Egyptair

South African Airlines

Asiana

Air Portugal Croatia Airlines

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APPENDIX

Freedoms of the air 1st Freedom The right to fly over a foreign country without landing

Home Country A

Country B

2nd Freedom The right to refuel or carry out maintenance in a foreign country without embarking or disembarking passengers or cargo

Home Country A

Technical Stop in Country B

3rd Freedom The right to fly from one’s country to another country

Home Country A

Country B

4th Freedom The right to fly from another country to one’s own country

Home Country A

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Country B

APPENDIX 5th Freedom The right to fly between two foreign countries on a flight originating or ending in one’s own country

Home Country A

Embark & Disembark PAX/Cargo Country B

Country C

6th Freedom The right to fly from a foreign country to another while stopping in one’s own country for non-technical reasons

Country B

Home Country A

Country C

7th Freedom The right to fly between two foreign countries while not offering flights to one’s country

Home Country A

Country B

Country C

8th Freedom The right to fly inside a foreign country, continung to one’s country 3rd Freedom

Home Country A

Local Traffic

Point 1 Pick up PAX Country B

Point 2 Deliver PAX Country B

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APPENDIX 9th Freedom The right to fly inside a foreign country without continuing to one’s own country Local Traffic Cabotage

Country B

Country B

Major aviation trade associations Airlines Airlines for America: www.airlines.org In the US is the trade association for major air carriers. A4A “advocates on behalf of its members to shape crucial policies and measures that promote safety, security and a healthy U.S. airline industry. We work collaboratively with airlines, labor, Congress, the Administration and other groups to improve aviation for the traveling and shipping public.” Regional Airline Association: www.raa.org Membership composed of North America regional airlines, fying aircraf usually holding less than 100 seats. Te “RAA provides a unifed voice of advocacy for North American regional airlines aimed at promoting a safe, reliable and strong regional airline industry” with a focus on maintaining service to many smaller communities across North America. International Air Transport Association: www.iata.org With 290 airline members around the world, IATA states, “our mission is to represent, lead and serve the airline industry.” Representing airlines across the globe, “IATA works with governments, international organizations such as the International Civil Aviation Organization (ICAO), and other relevant authorities to help defne the correct regulatory framework for the industry.”

Airports Airports Council International: www.aci.aero “ACI is the only global trade representative of the world’s airports and represents airports interests with governments and international organizations such as ICAO” to assist in developing “standards, policies and recommended practices for airports.” Ofen coordinates activities through the organization’s fve regional bodies, with ACI-North America (ACI-NA) headquartered in Washington, DC.

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APPENDIX American Association of Airport Executives: www.aaae.org “AAAE is the world’s largest professional organization for airport executives and serves its membership through results-oriented representation in Washington, D.C.” In addition to the advocacy across legislative, safety and regulatory afairs on behalf of airports, AAAE ofers a highly respected accreditation program for airport managers.

General aviation National Business Aviation Association: www.nbaa.org NBAA’s mission is “to foster an environment that allows business aviation to thrive in the United States and around the world.” NBAA “is dedicated to representing business aviation before policymakers at the state, federal and local level through daily contact with Members of Congress, as well as officials at the White House, the Federal Aviation Administration, the Department of Homeland Security, the Transportation Security Administration, the Department of Transportation, the IRS, Customs and Border Protection and other federal and local government representatives.” Aircraf Owners and Pilots Association: www.aopa.org Represents general aviation pilots and has members in 75 countries. AOPA’s mission “is to ensure that the sky remains within reach of everyone who dreams of becoming a pilot” and represents owners/operators of general aviation aircraf whether for business purposes or personal enjoyment. “For AOPA, advocacy is more than just lobbying Congress or negotiating with the FAA. It’s about staying engaged with hundreds of state agencies and legislatures and maintaining a network of pilots to monitor thousands of airports.”

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Index

Numbers in bold refer to tables. Numbers in italics refer to fgures. à la carte 149–51, 156 Abdelghany, A.186 Abdelghany, K.186 Acela Express 25 acquisitions 23, 27, 110, 112, 145; see also mergers advertising 32, 44, 52, 55, 58, 67, 75, 96, 116, 130–3, 135–7, 144, 151, 153, 157; agencies 127 130; digital display 52, 55, 58; outdoor 132–3; point-of-experience 133; print 46, 57; radio 132; television (TV) 10, 45, 85, 131–2, 135–6, 153 Aerion Supersonic 39 AerLingus 185 aesthetics 86–7 Agoda.com 113 Air Canada 3, 28, 90, 149, 182 air carrier license 22, 32 Air France 3, 12, 28, 38, 109, 127, 136, 168 Air France-KLM 13, 117 Air Georgian 28 air hostesses 4 Air New Zealand 3, 91–2, 195 air service agreements 32, 36, 102 air space 35 see also airspace technologies air traffic management 37; control system 161, 163; controllers 168 Air Travel Consumer Report (ATCR) 27–8, 178 Air Wisconsin 8, 28 AirAsia 6, 17, 56, 59, 129, 149 AirAsia X 6 Airbus 6, 26, 30, 34, 71, 89, 131; A-320 5, 26, 155; A321 90; A-380 34 aircraf technology 37, 43

aircraf utilization 5–6 AirGateway 119 Airline Deregulation Act of 1978 31, 109; see also deregulation and liberalization airline RASM pyramid 141 airline shuttles 81 airline ticket office (ATO) 105–6, 107 airports 10, 24, 28, 32, 34, 45, 49, 56–7, 72–3, 81, 84, 87–8, 93, 96, 103, 105, 127, 133, 161, 163, 176, 178, 183, 186, 198; check-in 26, 43, 73, 93, 151, 166, 181–3; code 130; concourses 94; customer service personnel 166; landing fees 5–6, 23, 27, 142; landing rights, 23, 26; lounges 26, 73, 87, 94, 151, 182; passenger hold facilities 26; ramp workers 29, 161; screening procedures 34; slot allocation 23, 26; ticket counters 73, 103 AIRQUAL 180 Airspace technologies 35 Alaska Airlines 12, 24, 28, 48, 133, 145, 161, 163, 170, 182 Aldi 4 Ali, F. 180 Alitalia 168 Allegiant Airlines 24, 97–8, 145, 180, 182 alliances 11–12, 17, 27–8, 32, 39; see also joint ventures and partnerships Altexsof 106, 108–9, 111, 115, 117, 146 Amadeus 78–9, 109–10, 115–16, 118 Amazon 50, 59, 64, 148 Ambrose, S. 136 America West 112

201

INDEX American Airlines 24, 28, 69, 81, 86, 90, 106, 110, 127, 132, 145–6, 150, 154, 166, 169, 177, 189 American customer satisfaction index (ACSI) 180–2, 188 American Express 95, 114 AMTRAK 25 ANA Airlines 57; see also Nippon ancillary revenue 5–6, 50, 92, 94–7, 102, 107, 110, 116, 140, 149–53, 155, 161 Andrew, S. 152 Anniston, Jennifer 79 anti-trust immunity 28, 144, 154 Apollo 108, 110 Apple 3, 67, 126, 148, 166 Applebees 66 application programming interface (API) 116–17 Aquafna 146 Arabian Gulf airlines 17, 132 arbitration 167; see also mediation Armstrong, G. 130–1, 133, 139, 143–4, 147–8, 151, 153–4 Arnot, M. 97 Arsenal Football Club 135 artifcial intelligence 35, 59 AS2 39 ASK 142 Aso, K. 38 Assurance 180 atmospherics 89 ATPCO 117 augmented reality 57 Austrian Airlines 117 Available Seat Miles (ASM) 23–4, 141–2, 155 avatars 49, 57 Aviation Consumer Protection website 186 Azul 77, 92, 145, 185–6 Bacari 119 Bachman, J. 37 Backer, E. 75 baggage: complaints 161, 163, 178, 181–3, 186–7, 189; fees 10, 95, 97, 149–53; handling 5–6, 26, 51, 69, 73, 93–4; tracking 56, 107 Baker, M. 116 bankruptcy 17, 77, 95, 109, 127, 171 bargaining power of buyers 22, 25 bargaining power of suppliers 22, 26 barriers to entry 22; see also threat of entry Bass ale 124 Bass Pro Shops 67

202

behavioral: economics 50, 150; segmentation 67–77, 80, 125 Belobaba, P. 147, 157 Berry, L. L. 180 best-cost provider 9 big data 35, 44–5, 69 bilateral framework 12, 32 billboards 75, 132–3; see also advertising Bing 51 bio-fuels 37 biometric identifcation 35, 93 Bitner, M. J. 177–8, 188 Bitzer, M. 53 Blackett, T. 124–5 bleasure or bleisure 69, 79 blog 50, 54, 58, 190 boarding 69, 94, 129, 162, 181–3; denied 186–7, 191; electronic passes 93, 107; priority 6, 95, 151–2 Boeing 6, 30, 34–5, 39, 89, 131; 737 5, 8, 26, 31; 737 MAX 31, 88; 777 185; 787 44 Bombardier CRJ200 8; CRJ550 168 booking: engine (IBE) 48, 50, 56, 111, 114; process of 46, 49–51, 58, 69, 74, 95, 107, 119–20, 128, 151–2; over-booking 72; re-booking 189 Booking.com 113, 116 Boom Supersonic 39 Borko, S. 106 Bouchard, J. 38 Bounty 128 Branif Airways 154 brand 123–37; see also advertising brand equity 59, 123, 125, 128–9 brand image 46–7, 94–7, 185 brand, legal protection of 124 brand loyalty 86, 123, 146, 178 brand positioning 79, 136–7, 140 see also positioning brand recognition 3, 46–7, 88–9 brand refresh 12, 134 branded fare 51, 129, 136, 151 branding architecture 124, 136; distinct subbrands 128; family branding 129 branding iconography 7–8, 12, 124, 127 branding identifcation and quality 125 Brannigan, M. 112 Branson, Richard 56, 77 British Airways 3, 12, 16, 55, 90, 117, 126–7, 133, 136, 168, 185

INDEX Brochado, R. 183 Broderick, S. 191 Bryant, A. 171, 181 Bryant, Kobe 80, 88 Budd, L. 7 Bufett, Warren 123 Bureau of Transportation Statistics 24, 145 Burr, Donald 146 business cycle 29–30 business model 1–2, 4–7, 9–11, 13–16, 21, 87, 97, 113 Buyck, C. 24 BYD 14 cabin 10, 87, 150, 160; brand identity within 12, 129; classes 3, 183; confguration of 15, 29, 89, 90, 91, 151, 155; crew 12, 37, 142, 168; fares/ revenue related to 129, 147, 151; luxury and service standards of 17, 181, 183, 191 cabotage 32 call centers 48, 54, 103, 105–6, 151, 181; see also airline ticket office Cameron, D. 169 Campbell’s soups 129 CAPA 31, 145, 161, 166–7, 185 Carbon Ofsetting and Reduction Scheme for International Aviation (CORSIA) 36–7 CARES Act 187 Carey, S. 153 cargo 7, 34, 50, 104, 131 196–7 Carlsen M. 93 carrier-within-a-carrier (CWC) 9, 15–16 Carroll, Dave 134 Carty, M. 80 Casey, D. 12 CASK 142 Castiglioni, M. 12–13 Cathay Pacifc 7, 37 CBS Sunday Morning Almanac 81 Cendant 110 CEO 5, 59, 77, 128, 135, 154, 171 Chamberlain, L. 189 Champion’s League 33 Changi airport 129 channels: direct channels 5, 101, 103, 105–7, 111, 132; direct connect 115–18; distribution 23, 101–2, 116, 118–20, 140; fows 104–5, indirect 103, 107, 118; management of 115; marketing 5, 44, 131; sales 25–6, 112, 116; social media 132, 162, 185; structure of 102–3, 109, 116

charter 8, 12, 76–7, 131, 146 chatbots 55, 107 CheapTickets 113 Chery 14 Chicago Convention of 1944 3, 32 China Eastern 28, 195 Chivas Regal 65 Chow, D. 35 Christensen, C. 13–14, 18 Christmas 33, 77, 161 Chrysler 13 city ticket office (CTO) 105–7; see also airline ticket office Civil Aeronautics Board (CAB) 3, 31, 143–4, 146 Click ’n Save 53 climate change 36, 161; see also environmental degradation/impact, sustainability eforts CO2 emissions 36–7 Coca-Cola 124–5 codeshare agreement 12, 17, 28 collective bargaining 167 command centers 55 commission 5, 6, 48, 95, 111, 114, 151, 167 commodities 5, 127–8, 144 Commutair 28 Compass Airlines 28 competition-based pricing 140, 143–6, 155 competitive advantage 2, 9, 11, 89, 112, 160, 170, 190 competitive strategy 1, 7, 11 competitive threats 15, 22, 36 complaint resolution 161, 188–9 computerized reservation systems (CRS) 44, 106, 108–10 Concorde 34–5 confused positioning 128 consolidation 12, 23; see also mergers consumer/customer: behavior 33, 46, 67, 102 150; decision process 46, 163; expectations 35, 46, 148, 177; loyalty 3, 68, 136, 148, 164, 175 184; psychology 46 Continental Airlines 3, 110, 112, 179 contract of carriage 186–7, 190–1 conversions 52–3 Conversocial 189 cooling-of period 167 Cooper, M. 128 Copeland, D. G. 105–6 Corbo, L. 11 core product 84–7, 89, 92, 94, 96–7, 129, 150

203

INDEX cost leadership strategy 4–5; see also focused– cost leadership strategy cost per available seat mile (CASM) 29, 142–3, 155 cost-based pricing 143 COVID-19 11, 16, 18, 25, 29–31, 34, 37–40, 80, 89, 92–3, 96–8, 107, 134, 137, 147, 152, 162, 166, 170, 172, 181, 187, 191; see also infectious disease Crandall, Robert 154 create havoc around our system (CHAOS) 170 credit cards 151, 152; co-branded 3, 95, 97, 151, 153 Credit Suisse Research 169 Crest 128 cross-promotions 95 cross-selling 48 cruise industry 103, 113 Ctrip.com 113 cultural purists 79 currency exchange rates 29 customer analytics 150, 152 customer behavior see consumer customer centricity 47, 64, 164, 166 customer decision process see consumer customer experience 3, 17, 29, 86–9, 93–4, 96, 128, 176–7, 181, 184 customer expectations see consumer customer insights 45, 58, 68 customer lifetime value 185 customer loyalty see brand see consumer customer perception 89, 126, 149, 155 customer psychology see consumer customer relationship management 44 customer research see market research customer satisfaction 164, 170, 175–7, 180, 183, 185, 190 customer segmentation 64, 66; see also market segmentation customer segments 2, 4, 13, 76, 80, 84, 105, 124–5, 128–9, 132, 147; see also market segments cyberspace 44, 46, 52, 58, 133 Dasani 146 data scientist 45 database management 45, 68 DATAS II systems 110 Davies, A. 127 Davis, R. 171 deceptive pricing 153, 156 Delgado, P. 115

204

Delta 3, 10, 12, 16, 23–4, 28, 52, 71–2, 75–6, 81, 95–6, 110, 112, 145, 159, 166, 169, 172, 179, 182, 185; Chairman’s Club 165; comfort plus 129; Flight Museum 171; One 129; Premium Select 129 demographics 52, 67, 70 Dent, J. 102–3 Department of Justice 108–9 Department of Transportation (DOT) 27–8, 31–2, 109, 153, 178, 185–6, 189, 199 Der Arslanian, P. 116 Deregulation Act of 1978 31, 109 deregulation 3, 5, 12, 14, 23, 31, 69, 106, 109, 144, 146, 148 see also liberalization designation 32 desktop 52, 112 destination marketing see tourism detractors 184–5 Dey, B. L. 180 Dickinson, G. 162 diferentiation strategy 2–3, 11; see also focuseddiferentiation strategy digital footprint 44–5, 94 digital marketing 44–5, 47, 57, 68, 130 digital platforms/properties 44, 46, 48, 51, 58, 96, 127, 136–7 digital technology 25, 35–6, 47, 106–7, 116, 179 discounts 10, 23, 26, 65, 69, 72, 114, 131, 143, 146–7, 149, 153–4 discretionary spending 31 diseconomies of scale 14 disintermediation 107, 116–18 Disneyworld 76, 156 disruptive innovation 13, 15–18 distressed inventory 112 distribution see channels diversion 149 Doganis, R. 142, 147, 149 Dolnicar, S. 75 Donauinselfest 33 Donnelly, Jr. J. H. 165 Dostaler, L. 10 DOT see Department of Transportation Drucker, Peter 63, 96 Dunbar, N. 29 Dunkin Donuts 67 dynamic pricing 148, 156–7, 163 Eastern Air Lines 81, 109 easyJet 10, 29, 56, 98, 115, 149, 190

INDEX eco-friendly 8 e-commerce 48–50, 52, 59, 64, 103, 109–12, 132 economics 6, 28–9, 33, 112 economies of density 3 economies of scale 7, 14 Economist, Te 68, 132 EDIFACT 116 education level 67, 70; see also market segmentation Efhymiou, M. 3, 8, 76 Egencia 113 Emadri 119 email marketing 17, 47, 49, 53, 58 Emirates Airline 11, 17, 79, 135–6 empathy 91, 180, 188 Endeavor Air 28, 129 Enelow-Snyder, S. 37 e-newsletters 53 engine: aircraf 14, 26, 34–5, 37–8, 88 entertainment see infight environmental degradation/impact 35–6, 38; see also sustainability eforts Envoy Air 28 EOS 7 ESPN.com 48 ethical pricing 140, 153, 155 Ethical Travelers 78 ethnicity 66, 70; see also market segmentation ethnographic research 91 e-ticketing 77; see also e-commerce Etihad 17 European Aviation Safety Agency (EASA) 86 European Transport Workers Federation 167 European Union (EU) 12, 24, 32, 106, 113, 115, 117, 167, 187, 190 Eva air 168 Ewbank, J. P. 184 Expedia 111–13, 132 Exploits Valley Air Services 28 export 7 ExpressJet Airlines 28 Facebook 54–5 facial recognition 162; see also biometric identifcation Fahmy 116–17 family dynamics 33 fares 143, 150–1, 155; bundle 95, 151, 156; categories 51, 72, 115, 129; restrictions 149; sales/promotions 52–3, 65, 153

Farelogix 110 Federal Aviation Administration (FAA) 31, 35, 191, 198 Federal Trade Commission 32 FedEx 7 Feliu, C. 156 fencing 69 Fenn, A. 57 Ferguson, M. 115 Fernandez, Tony 56 Ferrari 2–3, 8 Ferrell, O. C. 44, 54, 84–5, 124 Field, D. 115 Fiji Airways 195 Fiji water 146 Filieri, R. 180 Financial Times 132 Finnair 55, 89, 185 fve forces model 22 fag carriers 1, 127 Flanagan, Maurice 136 Fleming, K. 140, 147 fight attendant uniforms 129 fight attendants association (CWA) 170 fight attendants Taoyuan Union (TFAU) 168 fight attendants UFO Union 168 fight shaming 38 Flouris, T. 10 Flybe 149 FlyerTalk 118 Flygskam 38 focus groups 67, 179 focused-cost leadership strategy 2, 8–9; see also cost leadership strategy focused-diferentiation strategy 2, 7; see also diferentiation strategy food and beverage see infight Ford Motor Company 13, 64, 66 Ford, H. 64 foreign ownership limits 12, 22, 32, 113 Formula One 135 Fortune magazine 171 4ps 80, 83, 96, 101, 118, 129, 139–40, 146, 155 Fox, L. 107 franchising 12, 129 Freed, J. 153 Freedom of the Skies 32 freight see cargo frequency 32, 86–7

205

INDEX frequent fyer programs 3, 10, 28, 38–9, 49, 52–3, 56, 58, 72, 86, 95–6, 105, 118, 148, 151–3, 163, 183, 188–9 frills 3–5, 8–10, 15, 86 Frontier Airlines 11–12, 14, 24, 145, 152, 157, 180, 182 fuel 14, 29, 35, 37–8, 44, 88, 90–1, 142–3, 150, 170 Fullerton, S. 135 full-service network carriers (FSNCs) 3, 6, 7, 9–12, 14–16, 27, 89, 93, 104, 114, 130, 136, 149–50, 152, 167, 177 179, 180 Futurebrand 127 Galán, J. L. 12–13 Galileo 110 Gallego, A. 12–13 Galloway, Scott 3 GAO 25 Garcia, M. 183 Gavira, M. 116 GE Aviation 39 gender 66, 70; see also market segmentation General Motors (GM) 13, 64 generational cohorts 79 generic competitive strategies 2, 7, 16, 18 Genter, J. T. 94 geographic 17, 30, 66–7, 71, 74, 76, 80, 125; see also market segmentation geolocation marketing 57 Gilbertson, D. 129 Gino, F. 50 global distribution systems (GDS) 10, 25, 78, 106, 108–12, 114–19, 150 Global Positioning System (GPS) 45, 57 Godfrey, K. 89 Godin, Seth 67, 126 Goggans, L. 165 GoJet Airlines 28 GOL airlines 145, 149 Golaszewski, R. S. 26 Golden Age 4 Google, 46–8, 51, 56, 58, 115–16, 118 Graham, A. 27 Gras, H. 165 Great Recession 31, 180 Gremler, D. 177–8, 188 Grewal, D. 104, 125, 127 Grisham, J. G. 155 gross domestic product (GDP) 30

206

Groupdesk 119 GXR (Global Experience Record) 120 H1N1 34 Habtemariam, D. 25, 106, 108–9 Hajj 33 Halpern, N. 27 Hamdi, R. 59 Hammond 116–17 Hanke, M. 44, 48, 52–3, 55–6, 103, 131–3 Hansell, S. 112 Harper, L. 27, 32, 117 Harvard Business Case Study 134 Harvard Business Review (HBR) 17, 44, 184 Harvard Business School 2 Harvey, G. 167 Hawaii Express 77 Hawaiian Airlines 24, 145 Hays, C. L. 125 hedging 29; see also fuel Heinz condiments 129 HEPA flters 191 Heskett, J. L. 164 Hind 149 Honda 14 Honeywell Aerospace 39 Hooper, P. 186, 188 Horizon Air 28 Hotailors 119 hotels 23, 46, 59, 74, 95, 97–8 103, 110–13, 141, 146, 151–2, 156, 162, 183 Hotwire.com 112 Huang, W. 56 hubs 8, 17, 27, 75, 87, 148, 154, 167; cities 3, 133; fortress hub 23; global 71; market 132; network 14; operation of 3, 14, 168 human resources management 155, 159 hybrid airlines 10, 14–16, 89, 115 hyperloop 36 Hyundai 14 IAG 12, 29, 117, 185 IATA 12, 15, 23, 32–4, 36, 61, 93–5, 116, 137, 161, 198 Iberia Airlines 3, 12, 81, 109, 185 IBM 106 IdeaWorks 95, 97, 149, 151 IDEO 91 impressions 52

INDEX income 2, 66–7, 75–6, 80; see also market segmentation; see also personal income Inconsistency (service) 160–1, 163, 167 infectious disease 34, 39, 86, 91, 191; see also COVID-19 infation 29 in-fight: catering 26, 131; entertainment 3, 6, 55, 70, 75, 86, 92–3, 151, 176, 181–3, 189; duty– free/ shopping 4, 86, 92, 95, 150–1; food and beverages 51, 73, 86, 91–2, 95, 153, 181–3; legroom 6, 10, 91, 95, 151, 183; magazines 96, 133, 151, 189; meal service 3, 4, 5–6, 37, 70, 73–5, 92 infuencer marketing 54 Inseparability (service) 160, 162–3 Instagram 38, 55–6 instantaneous production 162 Intangibility (service) 160 integrated marketing communications (IMC) 130, 136 interactional fairness 188 interest rates 29 Intergovernmental Panel on Climate Change 36 intermediaries 25, 101, 103–4, 107, 118; see also middlemen internal marketing 129, 154–5, 164–5, 171–2 International Civil Aviation Authority (ICAO) 32–3, 36, 86 international operations 27, 32 internet 5, 23, 25, 44, 50, 52, 54–5, 80, 106, 109–12, 115, 127, 131, 134, 149–51, 156, 177, 179; see also booking for internet booking engine (IBE) internet of things 45 Inventory perishability (service) 160, 162 investor relation reports 118 Involvement (service) 160, 163 irregular operations (IROPS) 161–2 Ison, S. 7 J.D. Power 181–2, 184, 190 Jazz Aviation LP 28 jet lag 89 JetBlue 10–11, 24, 37, 76–7, 145, 182, 185, 189, 191 Jetstar 9, 129, 185 Jetways 96, 133 Johnston, M. 48, 52 joint ventures (JV) 12, 27–8, 32, 93, 96, 144; see also alliances and partnerships Josephs, L. 45, 166 Journera 120

Kamb, L. 161 Kammel, B. 34 Kane, P. 74 Kaplan, S. 149 Karp, A. 89–90 Katanozaka, Shinya 57 Katz, B. 34 Kayak 113, 115–16 Kelleher, Herb 5, 77 Kelly, B. 128 Keraghosian, G. 189 Kia 14 Kiechel, W. 125 Kinsella, N. 186 Kitching 149 Klein, F. J. 26 KLM 12, 54, 168 Koetsier, J. 64 Korean Air 28, 195 Kotler, P. 130–1, 133, 139, 143–4, 147–8, 151, 153–4 La Compagnie 7, 11, 128 Labor: contracts 186; major dispute 167; strikes 166–8, 170–1; see also Unions LaFrance, A. 53 Laker Airways 9 landing fees see airports LATAM Airlines 7, 145 lavatory 181 Lazar, J. 167 LED lighting 89 legacy airlines 3, 14, 16, 24, 50, 150, 166 legal environment 22, 31–2, 39, 53, 66, 115, 140, 143–4, 153, 155, 187 legroom 10, 91, 95, 183 Leisch, F. 75 Level 185 Levitt 152 Levy, M. 104, 125, 127 liberalization 3, 106, 109, 143, 146; see also deregulation licensing 7, 92; see also franchising lifestyle 66–7, 77–8, 80; see also market segmentation LinkedIn 55 livery 12, 127, 129, 133, 136 Llewellyn, M. 4 load factor 10, 141–3, 155 logos 12, 85, 96, 124, 127, 130, 135; see also brand iconography

207

INDEX Lohmann, G. 12 Los Angeles Dodgers 135 lounges see airport Love Field 130 Lovelock, C. 104, 164, 177 low-cost carrier (LCC) 5–6, 8–12, 15, 70, 72, 75–6, 89, 91–2, 105, 107, 111, 115, 128, 132, 136, 149, 150, 152, 177, 180, low-cost long-haul (LCLH) 6, 9, 16, 128 loyalty programs 53, 86, 181; see also frequent fier plans Lufhansa 109, 117, 165, 168, 195 Lunar New Year 33 luxury 4, 17, 79, 81, 90, 137 machine learning 44, 59, 120 macroeconomic factors 29, 43 macroenvironment 28 Madrigal, A. 190 magazines 57, 68, 132, 151, 171, 190; see also in-fight magazines mainline: aircraf 15, 169; carrier 28; oferings 9; pilots 168 maintenance: costs 5, 91; issues 161, 169; locations 29; personnel 29; services 96, 131 Mariano, K. 92 Market Place Forces 22 market pricing 145, 147 market research 67, 87, 127, 130, 144 market segmentation 63–8, 80, 125, 150 market segments 2–4, 7–8, 10, 47, 58, 72, 76, 81, 118–19, 125, 133, 147, 149, 177 market share 4, 13, 15, 23, 65, 153–4 marketing analytics 43–4, 58 marketing campaign 50, 74, 78–9, 88, 130, 132, 136, 177 marketing concept 63–4, 69, 132 marketing mix 125 marketing strategy 68, 125 Marshall, G. 48, 52 masks 34, 191 Mason, K. J. 177, 183 Massy-Beresford, M. 37 Mayer, R. 177, 183 Maynard, M. 171 McAfee, A. 44 McCartney, Scott 69–71, 91–2, 179 McDonald’s 149–50 McGee, B. 187

208

McKenney, J. L. 105–6 MD–80 88 meal service see infight mechanics 166, 169; see also maintenance mediation 167; see also arbitration merchandising 116, 152 mergers 12, 17, 23, 27, 81, 112, 145 Merlino, B. 114 Mesa Airlines 28 Messi, Lionel 80, 88 metal neutral 12 metasearch 113, 115–16, 118, 183 Michelin-star chefs 92 microenvironment factors 22 microsites 50 Microsof 67, 111 Middle Seat Column 91 middlemen 103; see also intermediaries mission 1, 8, 33, 57, 198–9 mobile applications 47–8, 56, 58, 93–4, 96, 103, 107, 118, 162, 181, 185 Molenkamp, C. 112 Momondo 115 monopolistic competition 144–6 monopsony 26 Montreal Convention of 1999 186 Moretti, L. 102–3 Morris Air Charters 77 Mullin, Leo 171 Murphy Jr., B. 170 Nannichi, K. 57 NASA 35, 39 natural disasters 36 Navitaire 110 Nedunchezhian, V. R. 180 Neeleman, David 10, 76–7 Nepali airlines 86 Net Promoter Score (NPS) 184–6, 190 new distribution capability (NDC) 115–20 New York Times 154 newspapers 132, 154 Nguyen, T. 166 Nigam, Shashank 55, 88, 89, 92, 164 Nike 67 9/11 94, 112, 150, 171, 180 Nippon Airways 57; see also ANA Nobel laureate 50 noise pollution 36

INDEX Nolte, C. 25 non-scheduled fights 8 Northwest Airlines 12, 112, 154–5 Norwegian Airlines 6 Novak, M. 34 NPR “How I Built Tis” 77 NYU Stern School of Business 3 O’Leary, Michael 128 O’Neill, S. 50, 117 OAG 48, 71, 112 Oakley 85 obligation meeters 78 occasions 66, 68, 74–5; see also market segmentation occupation 66–7, 70–1; see also market segmentation oligopolistic competition 144–5 Oliver, R. L. 178 Oliver, W. 29 Olmstead, L. 88 Olympics 34, 135 onboard see in-fight OneWorld 12, 27, 195 online check-in 93 online travel agency (OTA) 59, 111–18, 156 Open Skies 32 OpenTable 113 optional product pricing 151 Orbitz 112–13, 156 outcome fairness 188 overtourism 38 Overture 39 ownership limits see foreign ownership limits Pacheco, I. 184–5 Pan Am 81, 109 pandemic see COVID-19 Papatheodorou, A. 3, 8, 76 Parasuraman, A. 180 park-and-fy services 94 PARS system 110 Parsons, M. 114 partnerships 12, 53, 93, 95, 106, 119; see also joint ventures and alliances passenger name record (PNR) 106 passives 184–5 PenAir 28 People Express 146–7

people processing 162 Pepper, F. 37 perceptual mapping 125 perishability see inventory perishability personal income 30; see also income personal selling 130–1, 136 personalities 56, 66–7, 77–8; see also market segmentation personalized pricing 156–7 petabyte 44 Peter, J. P. 165 Petzinger, T. 14, 65, 75, 86, 143, 147, 154 Phocuswire.com 119–20 Piccadilly Circus 133 Piedmont Airlines 28 Pilling, M. 107 Pilota 120 pilots 3, 5, 29, 142, 166–9, 171, 191 PMYB 55 POE 47–8 political 22, 31–4, 36, 66, 78 pollution 36 population density 66 Porklab, J. B. 184 port of entry 32 Porter, Michael 2–4, 7–11, 14–16, 18, 22–3, 25, 150, 166 Posey, J. 187 positioning 5, 9, 11–17, 21, 27, 45, 51, 58, 80, 84, 112, 118, 124–9, 132; see also brand positioning PR Newswire 183 predatory pricing 153–4, 156 premium economy: fares 73; seating 74, 89, 91 Presidential Emergency Board (PEB) 167 press releases 80, 118, 134, 162 price ceiling 140 price discrimination 147 price elasticity of demand 147 price fxing 153–4, 156 price gouging 144 price inelastic 147 price wars 23, 154 Priceline.com 112–13 pricing foor 140 Pride, W. M. 44, 54, 84–5, 124 procedural fairness 188 Procter & Gamble 128 production orientation 64, 69

209

INDEX Project 767 171 promoters 184–5 psychographic 66–8, 74, 76–8, 80, 125; see also market segmentation punctuality 71, 74–5 purchase funnel 6 pure competition 144 pure monopoly 144 Putnam, Howard 154 Qantas 9, 37, 55, 96, 128–9, 152, 185, 195 Qantas Assure 96 QATAR 17, 94, 195 QR code 57 questionnaires 179 radio frequency identifcation (RFID) 43, 57 rail service 24–5, 36, 113, 116 railway labor act (RLA) 166, 170 RASK 142 Ray-Ban 85 Raynor, M. 15 recession 30–1, 180 recycling 3 Reed, D. 70, 150, 156 refundability 105 Regional Airline Association (RAA) 27, 198 regional airlines 7–8, 12, 16, 27, 129, 198 regional jets 7–8 regulated monopolies 144 regulation 3–4, 12, 14, 33, 38, 66, 86, 109, 160, 167, 187 Reichheld, Fredrick 184 relationship marketing 3 Reliability (service) 71, 78, 180–1, 196 rental car 46, 95, 114 Rentalcars.com 113 Republic Airways 27–8 Responsiveness (service) 94, 180 retailing 50, 95, 152, 155 retargeting 52 revenue management 5, 72, 140, 143, 146–7, 149, 152, 155, 163, 187 revenue passenger miles (RPMs) 141 revenue passenger seat miles 2019 – US airlines 145 revenue per available seat mile (RASM) 141 reward hunters 79 Rhoades, D. L. 32, 175, 179–80, 188 rituals 33

210

rivalry among current competitors 22–3 road system 24 road warriors 70, 73–4 Rolex 85 Rosen, E. 71 routes 3, 6, 13–14, 17, 23, 26–7, 29, 31–2, 34, 39, 43, 65, 69, 71–3, 77, 88, 92, 102, 128, 134, 142, 144, 146, 152, 154–5, 163, 167, 176, 179; network 3, 9, 12, 55, 87, 97, 140 RPK 142 rural 66; see also market segmentation Russell, E. 168 Ryanair 29, 115, 128, 166, 168 S-512 39 Safdar, K. 184–5 sales force 103, 130–1, 136 sales promotion 53, 55, 143–4 sales representatives 70–1, 131; see also sales force Salesforce + Skif 107 SARS 34, 180 satellite technologies 35 Satellite TV 10 Satmetrix 184 Savadelis, L. 76 Scandinavian Airlines (SAS) 93–4, 109 Schall, D. 111–14 Schlappig, B. 183 Scoot Airline 9, 18, 128 scope clause 167–9 Sdoukopoulos 37 search engine marketing (SEM) 51–2, 58 search engine optimization (SEO) 46, 51–2, 58 search engines 46, 51 search marketing 51, 58 seasonal 8, 76 seat: assignment 6, 149, 161–2, 189; availability 72; comfort 75, 181, 183; densifcation strategy 15, 90–1, 185; lie–fat 3, 73, 90–1; pitch 90–1; see also cabin security checkpoint 93 segmented pricing 143, 146–8 Semi-Automated Business Research Environment (SABRE) 106, 108, 110–11, 116, 118, 184 Service Disquality Index (SDI) 179 service failure 163, 178–9, 186–8, 190 Service Proft Chain 164, 170–1, 176

INDEX service quality 164, 170, 175–80, 182–5, 190 service recovery 186, 188 services marketing 160 SERVQUAL 179–80 Seven 7Cs framework 48, 58–9 Sezgen, E. 177, 183 Shabat, J. 149 Shaw, S. 6–7, 11, 14, 64, 71, 73 Shazam 57 Sheivachman, A. 88, 115 shopping see infight Shotton, R. 51 Sider, A. 169 SilkAir 128 Silverjet 7 simplicity searchers 78 Singapore Airlines 9, 17–18, 117, 195 Singh, M. 29 Singularity University 165 SITA 107, 117 ski resort 76 Skif 79, 107, 114, 151, 168 SkyCouch 91–2 SkyMiles 28, 52, 95 Skyscanner 113, 115–16 SkySofa 92 SkyTeam 12, 27–8, 195 Skytrax 183 SkyWest 27–8 slimline seats 91 slot allocation see airports SmartCar 8 smartphones 56–7 smartwatch 45, 57 Soar 88 Social Capital Seekers 79 social class 66–7, 77; see also market segmentation social distance 89, 152, 191 social forces 33–4, 38 social listening 55, 189 social media 35, 38, 45–7, 49, 79, 94, 103, 132; service marketing 161–3, 177, 179, 183, 185–91 social media marketing 54–6, 58 song 9, 134 sonic booms 35, 39 Sorenson, Jay 19, 50–1, 151–2 Sorrells, M. 114

sources of competitive advantage 2 South African Airways 168 Southwest 5, 10, 14, 23–4, 29, 55, 65, 67, 75, 77, 92, 115, 126, 145, 180, customer service rankings 182, 184–5; employment at 164; marketing campaigns 50, 53, 74, 130, 132; pricing ethics 153; website 48; unions 166, 169 Spasojevic, B. 12 Spike Aerospace 39 Spinks, R. 34 Spirit Airlines 6, 14, 24, 145, 153–5, 165, 167, 169, 171, 180, 182 Spirit of Delta 165, 171 spoilage 72 sponsorship 34, 51, 53, 132, 134, 135–7 stage lengths 6, 155 stakeholder 33, 63 Star Alliance 12, 27, 88 Starbucks 67, 84, 130, 150 Steinberg, E. 183 stuck in the middle 9–10 subscription pricing model 152 substitutes 16, 24–5, 144, 147 Sullivan, M. P. 114 Sun Country Airlines 8, 11 sunk costs 23 Sunseeker 97 Super Bowl 33 supersonic aircraf 34–5 supersonic fights 39–40 supplemental features 85–6, 89, 92, 94, 96–7 suppliers 22, 26, 114–5 supply chain 3, 65 surface transport 16 surveys 67, 179, 181 sustainability eforts 36–7; see also environmental degradation/impact sustainable alternative fuels (SAF) 37 Sutherland, R. 67 Swiss Air 13, 117, 195 switching costs 25 symbolic and experiential benefts 85–6 smygfyga 38 SystemOne 110 tablet 52, 56, 149 Tacker, T. 141, 147 tagskryt 38 tangibles 180

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INDEX Tango 149 target market 8, 68; see also market segmentation targeting 2, 76, 125, 128–9; see also market segmentation tarmac rule 178 taxes 29 Taylor, M. 190 technological advancements 14, 16, 34, 36, 43 58, 71, 89, 102, 106, 110 Ted 9 Tedlow, R. S. 64 Tegard, Viktoria 165 television see advertising temperature checks 34 terabyte 44 terrorism 34, 137 Texas Pacifc 112 text messaging 94, 162 Taler, Richard 50 Tanksgiving 33 the 7Cs of website design 48–9 the corporate channel responds 114 the dominant channel 108 the frst indirect channel 107 the fve I’s of airline service characteristics 160 the fve stages of travel 45 the global business travel association 114 the internet adds channel options 111 Te Points Guy 95 Tirunavukkarasu, A. 180 Tomas Cook 98 threat of entry 22–3 threat of substitution 22; see also substitutes ticket counters see airports ticketing see channels ticket fexibility 86 ticket voucher 111, 187; see also e-commerce Tide 128 Tnsinc.com 115 total product considerations 85–6, 89 tour operators 8, 108 tourism and destination marketing 45–6, 55–7, 75–80, 87, 97, 103, 166 Toyota 2–3, 10, 14 trade journals 132 trademarks 7, 12, 52, 58, 124, 170; see also brand iconography Trans States Airlines 28 Trans World Airlines 110 transfarency 50

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Transportation Security Administration (TSA) 34, 178 travel agents/agencies 46, 65, 69, 78, 103–4, 106–14, 118, 132, 150, 156; see also OTA travel friction 93–4, 162–3 travel insurance 86, 95, 151 travel management companies (TMC) 101, 113–18, 176 travel policy 72–3, 176 travel specialists 113–14 TravelBank 120 Traveldoo 113 Travelocity 111–13 Travelport 110–11, 115–16, 118 TravelSky 110–11, 115–16 tribes 67, 77–8, 80 Trip.com 113 Tripadvisor.com 183, 190 Trivago 113 Trump, Donald 81 TUI 8, 76 turboprops 7 Turkish Airlines 17, 80, 88, 195 Turnbull, P. 167 TV see advertising Twawfk 116–17 Twitter 54, 55, 189 U.S. Travel Association 31 ultra-low cost carrier (ULCC) 6, 12, 92, 97, 107, 128, 155 unbundled pricing 149 unbundling of the product 75, 150 Unger, C. 114 uniform pricing 14 unions 12, 14, 24, 29, 159, 166, 168–71; contracts 160; see also labor United Airlines 8, 24, 28, 97, 110, 134, 145, 152, 156, 169 United Express 8 University of Michigan 180 unmanned aerial vehicles 35 UPS 7 upselling 6, 48 Urban, M. 15 US airways 112 usage patterns 66, 68–9; see also market segmentation utility 85, 125

INDEX value-based pricing 140, 143, 148–9 variety of data 45 Vasigh, B. 140, 147 Vegemite 37 velocity of data 44 viral marketing 54 Virgin America 133 Virgin Atlantic 12, 77, 165 Virgin Group 77 virtual meeting environment 16 virtual reality 57 virtualization 13 Visa 95 vision 1, 15, 59 visiting friends and relatives (VFR) 75–6, 80 Volaris 12 Volvo 137 Vueling 81, 185 Wade, B. 111 wage rates 29 Waguespack, B. P. 84, 91, 152, 179, 186 Wall Street Journal (WSJ) 69, 71, 91, 179, 184 Wallace, G. 152 Walmart 44, 66 Walton, J. 185

Warne, D. 92 Warsaw Convention 186 wearables 45, 56 Webfyer 118 WeChat 55 Wendy’s 55 WestJet 149, 182 White, M. 102–3 Whyte, P. 38 Wi-Fi 73, 93, 152 Wirtz, J. 104, 164, 177 Wizz Air 6 word-of-mouth 46–7, 55, 79, 133, 178, 185 World Cup 34 World War II 3, 13, 32 Worldspan 110–11 XB-1 39 XML 116–17 yield 12, 141–3, 155 YouTube 54–5, 81, 88, 132, 135 Zeithaml, V. B. 177–8, 180, 188 Zhang, A. 25, 30 Zoom 25

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