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.