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Miihran Kalaydjian - Airline Solutions

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Consumer Loyalty in the Airline Industry

Consumer Loyalty in the Airline Industry

Published in: Travel, Technology, Business
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  • 1. Sample Solution Consumer Loyalty in the Airline Industry Consumer Loyalty in the Airline Industry Professor David Wessels ©2006 The Wharton School of the University of Pennsylvania 3620 Locust Walk, Philadelphia PA 19104
  • 2. Professor David Wessels The Wharton School of the University of Pennsylvania 2 Sample Solution Consumer Loyalty in the Airline Industry Presentation Overview • With the advent of the internet, consumers now have a wide choice of air carriers. Since airlines have trouble distinguishing themselves, the business has become commoditized, and profits are difficult to obtain. Evaluation of alternatives Information search Purchase decision • Travel websites such as Orbitz, display the prices and schedules of nearly every airline providing service between two cities. Almost half of all leisure travelers survey do not limit their search to a specific airline. • For most differentiating items, the majority of surveyed travelers can not distinguish between the network carriers and low cost carriers. Business travelers will pay a premium, but the premium is extremely small. • With choice plentiful, and differentiation difficult, the most travelers purchase solely on price. However, airlines still control the final purchase, and could alter the final decision.
  • 3. Professor David Wessels The Wharton School of the University of Pennsylvania 3 Sample Solution Consumer Loyalty in the Airline Industry Survey Demographics • The survey was distributed to colleagues of incoming MBA students. • There were 1,406 respondents. • Before we start, some important characteristics about the travel survey conducted by our students… Survey Characteristics 39% 95% 81% 60% 67% 0% 20% 40% 60% 80% 100% % Leisure travelers % Living in the Southeast % With college or higher degree % Under the age of 35 % Male Characteristics % of Respondants
  • 4. Professor David Wessels The Wharton School of the University of Pennsylvania 4 Sample Solution Consumer Loyalty in the Airline Industry The Consumer’s Information Search Total Set Awareness Set Consideration Set Choice Set Decision • For a given city pair in the United States, most network carriers and some low cost carriers will provide service. • Traditionally, the awareness set was limited to carriers flying in and out of home airport. • Travel websites expanded the awareness set to the total set. • Nearly half of leisure travelers surveyed said they would not limit their search. • However, even though the consideration set has expanded greatly, most fliers continue to do business with their preferred airline (perhaps due to price matching).
  • 5. Professor David Wessels The Wharton School of the University of Pennsylvania 5 Sample Solution Consumer Loyalty in the Airline Industry Most Consumers Aware of All Choices… • More than 1/3 of surveyed travelers consulted a travel website, such as Orbitz. • Travel websites rank all available flights by price*. • Traditionally, consumers used agents who would not reveal the total set of available options. * Some airlines, such as Southwest do not participate with travel websites. Media Sources Used when Booking Travel 35% 41% 41% 45% 17% 9% 0% 25% 50% 75% 100% Business Leisure Travel Website Airline Website Other Source: Goizueta travel survey
  • 6. Professor David Wessels The Wharton School of the University of Pennsylvania 6 Sample Solution Consumer Loyalty in the Airline Industry Will Consider Any Airline… • Only 1/4 of business travelers and 1/5 of leisure travelers limited their search to their preferred airline. • In fact, nearly 1/3 of business travelers and 1/2 of leisure travelers did not limit their consideration set at all. Number of Airlines Considered on Last Ticket Purchased by Survey Respondents 26% 39% 4% 31% 19% 33% 4% 44% 0% 10% 20% 30% 40% 50% 1 2-3 4-5 No Limit Airlines Considered PercentofRespondents Business Leisure
  • 7. Professor David Wessels The Wharton School of the University of Pennsylvania 7 Sample Solution Consumer Loyalty in the Airline Industry But Usually Default to a Preferred Airline Percentage of Flights on an Airline for which Consumer had a Frequent Flier Membership 0 50 100 150 200 250 300 350 400 0-20% 20-39% 49-60% 60-79% 80-99% 100% Respondents Leisure Business • Even though many consumers do not limit their search, they still limit their choice. • The majority of travelers limit at least 80% of their travel to airlines for which they have a frequent flier membership. • Why do they sometimes deviate? Most likely price and/or route availability (no data currently exists).
  • 8. Professor David Wessels The Wharton School of the University of Pennsylvania 8 Sample Solution Consumer Loyalty in the Airline Industry Presentation Overview • With the advent of the internet, consumers now have a wide choice of air carriers. Since airlines have trouble distinguishing themselves, the business has become commoditized, and profits are difficult to obtain. Evaluation of alternatives Information search Purchase decision • Travel websites such as Orbitz, display the prices and schedules of nearly every airline providing service between two cities. Almost half of all leisure travelers survey do not limit their search to a specific airline. • For most differentiating items, the majority of surveyed travelers can not distinguish between the network carriers and low cost carriers. Business travelers will pay a premium, but the premium is extremely small. • With choice plentiful, and differentiation difficult, the most travelers purchase solely on price. However, airlines still control the final purchase, and could alter the final decision.
  • 9. Professor David Wessels The Wharton School of the University of Pennsylvania 9 Sample Solution Consumer Loyalty in the Airline Industry The Key Attribute: Price • Prior to 2001, air travelers identified scheduling convenience and loyalty programs as the most important factors in choosing an airline. • Today, leisure travelers rate price even more important than safety and loyalty programs are no longer a top priority. Top 10 Factors in Selecting an Airline 3 3.5 4 4.5 5 Check-in convenience Customer service Connecting flight convenience On-time arrival Baggage-handling Reservation convenience Non-stop flights Scheduling convenience Safety Price Importance Rating out of 5 Business Leisure
  • 10. Professor David Wessels The Wharton School of the University of Pennsylvania 10 Sample Solution Consumer Loyalty in the Airline Industry Attributes Which Matter Less • Even for business travelers, the ability to upgrade, the quality of meals, and the availability of first class does not matter. • Airlines have responded to less popular attributes by removing meals and making upgrades difficult. Bottom 10 Factors in Selecting an Airline 1.7 2.2 2.3 3.0 3.1 3.6 3.4 3.2 3.5 0 1 2 3 4 5 Availability of business class or first class Quality of meals Ability to upgrade Loyalty program Seat size or legroom on plane Airport Location Efficiency of airline security checks Ability to change or cancel plans w ithout penalty Professionalism of airline personnel Importance Rating out of 5 Business Leisure
  • 11. Professor David Wessels The Wharton School of the University of Pennsylvania 11 Sample Solution Consumer Loyalty in the Airline Industry Consumer Perceptions of Discount versus Full Service Airline Services -150% -100% -50% 0% 50% 100% PercentofRespondents I can't tell the difference Discount airline is better Major airline is better Majors Exceed LCCs on Most Attributes… • The major airlines have invested billions in infrastructure and staff in order to create the perception of a full-service, catered experience. • Consumers do perceive majors to be better. Loyalty programs First class Non-stop flights Meal quality Travel times Airport location Check-in convenience Legroom Professionalism Customer service Safety On-time arrival Reservations Baggage handling Security checks Price
  • 12. Professor David Wessels The Wharton School of the University of Pennsylvania 12 Sample Solution Consumer Loyalty in the Airline Industry But Most Consumers Can’t See Any Difference • For the majority of surveyed consumers, low cost carriers have – the same professional personnel as network carriers – are just as likely to land on time – have the same legroom – and same level of customer service as network carriers % of Respondants Who Can't Distinguish Between Low Cost and Network Carriers 15% 30% 33% 38% 45% 46% 49% 49% 52% 54% 55% 55% 0% 25% 50% 75% 100% Ticket price Frequent flyer program Availability of non-stop flights Availability of business class or first class Convenience of arrival/departure times Quality of meals Convenience of check-in Location of airport Customer service Seat size or legroom on plane Likelihood of an on-time arrival Professionalism of airline personnel
  • 13. Professor David Wessels The Wharton School of the University of Pennsylvania 13 Sample Solution Consumer Loyalty in the Airline Industry Attribute “Prices” for Business Travelers • Full service carriers have identified frequent business travelers as their primary target market because of their willingness to pay a higher fare for last minute bookings and more brand loyalty over leisure travelers. • However, even business travelers are becoming less willing to pay for upgraded services. • 12% of respondents’ companies require that they book the lowest fare without exception. Announced Premium Size for Selected Services Business Travelers Only 10.0% 6.7% 6.2% 5.2% 5.1% 4.7% 4.4% 4.1% 2.3% 0% 2% 4% 6% 8% 10% 12% Safety O n-tim e arrival Legroom Baggage-handling Security check efficiency Check-in convenience Custom erservice Reservation convenienceM ealquality Premium
  • 14. Professor David Wessels The Wharton School of the University of Pennsylvania 14 Sample Solution Consumer Loyalty in the Airline Industry Presentation Overview • With the advent of the internet, consumers now have a wide choice of air carriers. Since airlines have trouble distinguishing themselves, the business has become commoditized, and profits are difficult to obtain. Evaluation of alternatives Information search Purchase decision • Travel websites such as Orbitz, display the prices and schedules of nearly every airline providing service between two cities. Almost half of all leisure travelers survey do not limit their search to a specific airline. • For most differentiating items, the majority of surveyed travelers can not distinguish between the network carriers and low cost carriers. Business travelers will pay a premium, but the premium is extremely small. • With choice plentiful, and differentiation difficult, the most travelers purchase solely on price. However, airlines still control the final purchase, and could alter the final decision.
  • 15. Professor David Wessels The Wharton School of the University of Pennsylvania 15 Sample Solution Consumer Loyalty in the Airline Industry The Purchase Decision: Leisure Traveler • Although travel websites are often referenced, most ticketing is still done directly with the airline. • Thus, the airline has an opportunity to alter the consumers decision through careful marketing (to generate small premiums for certain services). Preferred Ticket Purchase Method for Leisure Travelers Airline phone rep 16% Airline ticket counter 3% Airline w ebsite 37% Travel w ebsite 25% Travel agent 16% Other 3%
  • 16. Professor David Wessels The Wharton School of the University of Pennsylvania 16 Sample Solution Consumer Loyalty in the Airline Industry The Purchase Decision: Business Traveler Preferred Ticket Purchase Method for Business Travelers Airline phone rep 9% Airline ticket counter 3% Airline w ebsite 26% Travel w ebsite 17% Travel agent 40% Other 5% • The business market is still controlled by travel agents. Therefore, some pricing power can be generated by “controlling the channel.” • Travel agents should still be offered incentives to “sell” higher priced fares when possible.
  • 17. Professor David Wessels The Wharton School of the University of Pennsylvania 17 Sample Solution Consumer Loyalty in the Airline Industry Conclusion • The internet has expanded the awareness and choice sets for the average consumer. • The internet reveals only price, schedule, and number of stops, so most consumers rank choices based on these factors only. Other factors are either unimportant, or are impossible to distinguish amongst airlines. • To survive, network carriers must lower costs to within 5% (the average premium willing to be paid for services) or find alternative ways to distinguish their airlines.

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