Airline Marketing & Economics
The Role of Passenger Demand
Airline Marketing and Economics
Jonathon Robert Nield
Graduate Student
Aviation Management and Human Factors
Arizona State University
June 30, 2010
“So long as the airlines preserve their magic quality,
including, above all, their safety and reliability — they
will be guaranteed a significant role in the workings of
the world. Science will never digitalize an embrace.
Electronics will never convey the wavering eye of a
negotiating adversary. Fiber-optic cable can do many
things, but it cannot transport hot sand, fast snow, or
great ruins.”
— Thomas Petzinger, Jr., ‘Hard Landing’
The Interaction of Supply and Demand
• Supply and Demand not independent
• Bottom Line: Unit Revenues>Unit Costs
• 3 Key Performance Variables
– Unit Costs
• ATK/ATM: per available tonne-km/mi
• CASK/CASM: per available seat km/mi
– Unit Revenues
• RTK/RTM: Per revenue tonne-km/mi
• RASK/RASM: Per available seat km/mi
– Load Factors
• Percentage of tonnes/seat sold against available
Airline Planning
• Aircraft Selection
• Scheduling
• Product Planning
• Pricing
• Advertising
• Route Development
Supply-Side
These factors influence but do not dictate demand:
– Aircraft types
– Speed
– Departure & arrival
times
– Frequency
– Air fares
– In-flight services
– Ground handling
Demand-Side
• Demand influences but does not dictate supply such as:
-Density of
-Purpose of
-Nature of
demand
travel
freight demand
-Seasonality
-Distance
• These demands will also cause fluctuations in cost.
• The dynamic nature of demand necessitates the need to
introduce new services which further impacts demand.
Key Stages of Airline Marketing
• Marketing is not simply selling what is
produced!
• Marketing is traditionally the 4-Ps
– Product --Price –Promotion --Place
– A service like an airline is marketed differently
than a product.
What are the differences between
these two products?
What are the differences between
these two products?
• Did you have an easy or hard time identifying some
ways Delta service is significantly different than
United?
• Did you have an easy or hard time identifying the
some ways Southwest service is significantly
different than AirTran?
• The ability and ease for a consumer to identify how
one airline is different than the other is a result of
branding and positioning. Some do it better than
others.
Far too often, airlines look at the world through
their airline industry goggles and approach
problems based on precedent within the
industry.
Lets take off our airline goggles and look at
universal marketing concepts and APPLY those
to the airline industry.
• Exclusivity
Product
– An airline cannot patent flying passengers from Point
A to Point B
– Must lock in services exclusive to carrier (UnitedStarbucks)
• Branding
– No tangibility creates necessity for brand name or
logo recognition (Frontier)
• Capacity Management
– Inseparability of service from provider
– Perishability of service: If not used, it is lost (Empty
Seat)
Pricing
• Used to affect consumer perceptions
• Used to affect capacity management
• Services often use low-peak pricing strategies
Place (Distribution)
• Inseparability of production and consumption
• Distribution of services important to provide
adequate access at the right time, to right people,
at right price (interdependence of the 4Ps)
• Electronic distribution is becoming increasingly
vital to service providers (airlines).
Promotion
• Promotion must stress:
– Availability
– Courteous Service
– Location
– Image (Brand
Positioning)
– Consistent Quality
– Efficient
• Publicity increasingly playing a role in promotion (Spirit)
Core Competencies
• Best Price: Allegiant, Spirit, Air Tran
• Best Product: Continental
• Best Service: Southwest Airlines
Back to looking at marketing with our airline
goggles on…
Key Stages of Airline Marketing
• The key to successful marketing is to demand
oriented, not supply oriented.
• Example of the Concorde: Technically possible
to supply but not successfully marketable
based on consumer demands.
Key Stages of Airline Marketing
• Step 1: Identify profitable markets
– Which markets have demand that is underserved
• Step 2: Decision of products and services to offer each
market
– “Price is most critical of the product features.”
Doganis
– I strongly disagree with this statement. Product
differentiation is the most important whether that be price
or level of service. This misconception is what is killing the
legacy carriers.
– Must balance cost of features with consumers’ willingness to
pay as well as competitive pressures.
Key Stages of Airline Marketing
• Step 3: Plan and organize the distribution and
selling of the products.
– Includes promotional activity
• Step 4: Reviewing and monitoring market
performance and benchmarking against the
set goals
Motivation for Air Travel (UK)
London Heathrow %
London Gatwick %
Business
4.5
1.6
Attend internal co. biz
12.6
6.2
Meeting Customers
10.8
5.4
Conference
3.6
1.3
Other Business
4.3
2.4
Total Business
36.1
17.0
Holiday
18.1
25.8
Holiday Tour/Package
10.1
29.2
Total Holiday
28.2
55.0
Visiting Friends/Family
31.9
26.0
Other (Sports, Studies)
3.8
2.0
Total
100.0
100.0
Total Pax (Domestic & Intl)
67.1 Million
33.7 Million
Business
Holiday
*Table 8.1 Doganis
Socio-economic Characteristics
• Travel motivation and aspects of travel behavior are
linked to certain socio-economic factors.
– Sex --Age --Income --Stage in life --Family Size
– Occupation
• More an airline knows about current or future
market, the better it can target its product and
services
Market Segmentation
• Traditionally segmented as business or leisure
• Segmentation in invaluable since each segment
has varied growth rates,
• Respond differently to internal supply factors:
– Frequency
– Departure times
– Fare changes
• External Factors
– Exchange rate fluctuation
– Economic Recession
Market Segmentation
• Market segmentation increasingly based on
passenger needs and behavior patterns
• Various needs that attract business travelers:
– Attention Seekers
– Comfort Cravers
– Schedule Seekers
• Various needs that attract leisure travelers:
– Schedule Seekers
– Service Seekers
– Nervous Nellies
The Seasonality Problem
• Airline industry is marked by daily, weekly, and
season peaks and troughs.
• Patterns are affected by geography and
routes.
• The higher the ratio of peaks and troughs, the
more difficult effective utilization becomes.
The Seasonality Problems
• Other factors that affects demand spikes:
– Climate cycles
– Cultural and religious occasions
– Sporting events (Particular challenge)
The Seasonality Problem
• Daily and Weekly peaks
• Daily peaks occur early morning and early
evening due to business travel
• Weekly peaks occur Monday, Tuesday, and
Fridays but depending on culture that may
fluctuate.
• Airlines reallocate excess capacity on off-peak
days.
• LCCs tend to maintain consistent capacity yearround
Factors Affecting Passenger Demand
Factors Affecting All Markets
Factors Affecting Particular Routes
Level of personal disposable income
Level of tourist attractions
Supply Conditions:
Scenic/climatic/historical/religious att.
Fare Levels
Adequacy of tourist infrastructure
Speed of air travel
Comparative Prices
Convenience of air travel
Exchange Rate Fluctuations
Level of economic activity/trade
Travel Restrictions
Population size & growth rate
Historical/Cultural Links
Social Environment
Earlier population movements
Length of paid holidays
Current Labor Flows
Attitudes to travel
Nature of economic activity
Factors Affecting Passenger Demand
• Price of air transport and level of distribution
of personal income contribute most
significantly to demand in markets.
• Much of the growth in the last 40 years can be
attributed to rising per capita income across
globe.
• Strong correlation between GDP and air travel
demand.
Factors Affecting Passenger Demand
• Demand and supply interaction is not restricted
to pricing.
– Frequency
– Seat availability
--Departure Times
--Stops
• Other factors of cost affecting travelers affects air
travel demand
• Political effects
Income and Price Elasticity of Demand
• Leisure travelers tend to spend more on air
travel as personal income rises.
• Income elasticity=
% Change in Demand
% Change in Income
Income and Price Elasticity of Demand
• Business travelers activity correlated with the
GDP of a country.
• Business travelers tend to have lower elasticity
than leisure travelers.
• Other indicators are volume of trade and
exchange rates.
Income and Price Elasticity of Demand
• Price elasticity=
% Change in Demand
% Change in price/fare
• Always negative since demand and price are
inversely related
• Leisure travelers exhibit higher price elasticity
than business travelers.
Cross-Elasticity of Demand
• Measures the responsiveness of demand for
product “A” to the price of product “B”.
• Example:
– If Southwest Airlines fares are lower than United’s,
passengers will be diverted to Southwest Airlines.
• This concept is too complex to discuss in detail
in this presentation but decisions within
markets need to be made with elasticity in
mind.
The Pricing Puzzle
Short-haul international return flight
200 seats and $100 single fare
Total seats offered per day (200 each way) 400
Business Passengers (approx 50 each way) 100
Leisure Passengers (approx 50 each way)
100
Daily Seat Factor (200pax in 400 seats)
50%
Revenue from business market
$10,000
Revenue from leisure market
$10,000
Total Revenue per Day
$20,000
The Pricing Puzzle
Impact of $110 fare
Total seats offered per day (200 each way) 400
Business Passengers
92
Leisure Passengers
80
Daily Seat Factor
43%
Revenue from business market
$10,120
Revenue from leisure market
$8,800
Total Revenue per Day
$18,920
The Pricing Puzzle
Impact of $90 fare
Total seats offered per day (200 each way) 400
Business Passengers
108
Leisure Passengers
120
Daily Seat Factor
57%
Revenue from business market
$9,720
Revenue from leisure market
$10,800
Total Revenue per Day
$20,520
BCG Analysis Southwest Airlines
Market Growth Rate
•Denver-Phoenix
High •Denver-Las Vegas
•Denver-LaGuardia
•Denver-Seattle
•Denver-Milwaukee
Stars
Question Marks
•Phoenix-Los Angeles
•Los Angeles-Las Vegas
•Atlanta-Nashville
•Little Rock-Boise
•Cheyenne-Dallas
Cash Cows
Dogs
Low
High
Low
Relative Market Share
SWOT Analysis Southwest Airlines
Favorable
Unfavorable
Internal
STRENGTHS
•Well known brand among U.S.
Consumers
•High market share of domestic
pax
•Highly regarded for corporate
social responsibility
WEAKNESSES
•Increasing labor costs
•Relatively weak business travel
utilization
•737 Fuel inefficiencies
•Information Technology challenges
External
OPPORTUNITIES
•Increasing dissatisfaction with
legacy carriers
•Low cost solution demand for
international travel
•Technology advancements
improving efficiencies
THREATS
•Fuel costs
•Increasing lower cost competition
•Government regulations
•Airport/Network congestion
•Union coercion and pressures
Relationship Marketing
• Mass Marketing vs Relationship Marketing
• Traditional vs Social Media
• Discuss videos
Thank You
Questions?
Jnield@asu.edu
Thank you to Boeing Company and Airliners.net for
the usage of these photos.
Kerin, Hartley, Rudelius. Marketing: The Core,
McGraw Hill, 2004.
Doganis, Rigas. Flying Off Course: Airline Economics
and Marketing. Routledge, 2010.