Miihran Kalaydjian - Airline Solutions
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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
Professor David WesselsThe 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 ofalternatives
Informationsearch
Purchasedecision
• Travel websites such as Orbitz, display the prices and schedulesof 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 premiumis 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.
Professor David WesselsThe 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%
% Leisuretravelers
% Living in theSoutheast
% With collegeor higher degree
% Under theage of 35
% Male
Cha
ract
eris
tics
% of Respondants
Professor David WesselsThe Wharton School of the University of Pennsylvania 4
Sample Solution Consumer Loyalty in the Airline Industry
The Consumer’s Information Search
TotalSet
AwarenessSet
ConsiderationSet
ChoiceSet 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).
Professor David WesselsThe 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 allavailable 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
AirlineWebsite
Other
Source: Goizueta travel survey
Professor David WesselsThe 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
Perc
ent o
f Res
pond
ents
Business
Leisure
Professor David WesselsThe 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%
Res
pond
ents
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).
Professor David WesselsThe 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 ofalternatives
Informationsearch
Purchasedecision
• Travel websites such as Orbitz, display the prices and schedulesof 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 premiumis 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.
Professor David WesselsThe 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 f light convenience
On-time arrival
Baggage-handling
Reservation convenience
Non-stop flights
Scheduling convenience
Safety
Price
Importance Rating out of 5
Business
Leisure
Professor David WesselsThe 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 f irstclass
Quality of meals
Ability to upgrade
Loyalty program
Seat size or legroom on plane
Airport Location
Eff iciency of airline security checks
Ability to change or cancel plansw ithout penalty
Professionalism of airline personnel
Importance Rating out of 5
Business
Leisure
Professor David WesselsThe 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%
Perc
ent o
f Res
pond
ents
I can't tell thedifference
Discountairline isbetter
Major airlineis 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 programsFirst class
Non-stop flightsMeal qualityTravel times
Airport locationCheck-in convenience
LegroomProfessionalism
Customer serviceSafety
On-time arrivalReservations
Baggage handlingSecurity checks
Price
Professor David WesselsThe 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 f lyer program
Availability of non-stop flights
Availability of business class or f irst 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
Professor David WesselsThe 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 ServicesBusiness 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
On-tim
e arriv
alLe
groom
Bagga
ge-ha
ndlin
g
Security
check
efficien
cy
Check-i
n conv
enienc
e
Customer
servi
ce
Reserva
tion c
onve
nienc
eMea
l qua
lity
Pre
miu
m
Professor David WesselsThe 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 ofalternatives
Informationsearch
Purchasedecision
• Travel websites such as Orbitz, display the prices and schedulesof 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 premiumis 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.
Professor David WesselsThe 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 agent16%
Other3%
Professor David WesselsThe 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 agent40%
Other5%
• 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.
Professor David WesselsThe 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.