Marketing
Introduction
The recent years have witnessed a spurt in the entry of low cost airlines. This has brought about a revolutionary change in the passenger flight transport sector. The start of 1970s saw the introduction of low cost carrier by Southwest Airlines, in the United States of America. However the phenomenon gained popularity in the 1990s and diverse low cost carriers came to be launched at various parts of the world (Forgas et al. 2010).
The main highlight of the business model of low cost carriers is cost saving. Such low cost carriers strike out services and comfort traditionally guaranteed by the airline industry and has hence come to be known as “no frills” airlines. Some of the pricing strategies adapted by no frills airlines are the deletion of free in-flight meals (they have to be purchased), using secondary airports by a point to point connection and employing homogenous fleet. Several scholars have made a complete price analysis of the no frills airlines and have provided supreme importance to strategies which help in cutting costs. One of the main factors of the success of low cost airlines has been featured by the willingness of the customers to pay flexible prices which was not adapted by the traditional airlines (Oliveira & Huse 2009).
Literature review
The research will be contained mainly with the two prime literature fields – analyzing the framework adapted by the low cost carriers and a careful review of the dynamic price structures adapted by the no frills airlines. According to a study conducted by academic scholars, low cost carriers can acquire specific benefits in price by carefully selecting their operation strategies (Franke 2004; Doganis 2006). One such example can be posed by that of Ryanair which operates single flights which flies up to four places before returning to the point of origin. This helps in tremendous cost cutting as they prefer to retain the same pilot and crew for travel. On the other hand, the airline also ensures that such operation steps are taken for short distance flights lasting up to three hours or so.
Pricing strategies by low cost carriers
The low cost carriers have changed the business and structure of the airline industry. It has adapted innovative mechanisms for using infrastructure, operations, passenger service and distribution and has conducted all these with lowered expenses. The emergence of low cost carriers has posed to become a threat to existing traditional airlines. The following pricing strategies have been adapted by no frills airlines (Centro 2008).
- Mainly focus on point to point flights
- It mainly caters to short routes which are mostly from regional or secondary airports.
- Such airlines mainly target leisure customers thereby emphasizing on traffic that is mainly sensitive to price.
- They do not offer customer loyalty programmes and mainly offer only a single class of service
- They provided minimized passenger services and charge for some in flight services like meals
- On the whole, the average fares are significantly low and emphasize on competitive prices
- They offer a plethora of fares depending on the time elapsed between ticket purchase and departure of flight and load factors of the aircraft
- They ensure maximized utilization of aircraft and have lesser turnaround time between two operations
- Their fleet is mainly comprised of one or two aircraft types
- They have a simple overhead structure and management and have a low planned decision making system
- They are mainly private sector organizations (Gerardi & Shapiro 2009).
The above pricing strategies are adapted by most low cost airlines. In fact one of the success measures of low cost carriers is the manner in which they maintain a balance between the load factors, operating costs and the levels of fares provided to the consumers. The revenue structure and price determination are critical elements which help in minimizing costs and garnering high revenues. According to a study conducted by Zhao & Zheng (2010), an optimal pricing strategy leads to an increase in turnover from 2 percent to 5 percent. Another strategy is used by airlines like Ryanair which helps in lowering the total expenses incurred. This airline ensures that all its flights return to its base by night. Hence, the management does not need to spend extra money on arranging overnight accommodation for its aircraft crew; thereby leading to significant cost cutting (Gros & Schroder 2007).
The year 2010 has seen a downturn in the airline industry with a combined loss of $ 4.3 billion in the European market as per sources by IATA. Despite this, there is strong competition in the European low cost carrier market which is viewed to be one of the world’s largest low cost carrier markets. The below graph displays that in the year 2001 there was around 5 percent growth of the no frills airline market which has soared to a 35 percent growth in the year 2010 (CAPA 2010).
Jan-Oct-2010
Source: Centre for Asia Pacific Aviation & OAG FACTS
On the whole, it has been found that prominent business is garnered by low cost carriers in traditional markets. The year 2012 has witnessed at least 38 percent of the entire travel in Europe by no frills airlines. Significant penetration of no frills airline has been experienced in North America (30 percent) and South West Pacific (37 percent). Europe being a mature market, the low cost carriers are looking to new business prospects which are separate from the conventional framework (Jorre 2013).
An analysis of the pricing strategies adapted by low cost carriers have revealed that the international increase in the passenger capacity of low cost carriers have registered a positive change of 6.80 percent in the year 2013. The below table provides a clear picture of strong growth in capacity across Middle East and Asia and increase in growth in North America and Europe.
Capacity change by region. First half of 2012 compared to first half of 2013
Source: Amadeus Air Traffic Solution, 2013.
It has been revealed that one of the main pricing strategies used to garner optimized revenue is that of dynamic pricing. The concept of dynamic pricing implies that the airline fares tend to increase as the travel date nears. Scholars have maintained that the time preceding the date of departure of the flight the increase in price trends depends on taking the risk of unavailable seats and the option for waiting for competitive price (McAfee & te Velde 2006). The estimated demand curve of tickets being sold, help to make possible assumptions about the booking trend and the curve with respect to the possibility of the aircraft being completely sold out (Anjos, Cheng & Currie 2005). The demand structure, in this aspect, is influenced by pricing strategies of competitors and the opportunities available to the passenger for a substitute service. Scholars have also maintained that the prices on routes operated by low cost airlines have witnessed a decrease in the price by full fare airlines also (Alderighi et al. 2004).
Factors influencing the pricing strategies of low cost carriers
Pricing under conditions of aversion and risk is one of the factors which influence the pricing strategies of low cost airlines (Choi & Sharan 2004). Given the conditions of a duopoly market structure of low cost carriers, if one airline decreases its price then the competitor will be forced to lessen the price and this may negative impact the profitability of both airlines. It has been seen that the services offered by low cost carriers are quite similar and hence the only impact drawn is on the price. Hence it is essential for low cost carriers to strictly follow the sensitivity of market prices and then foretell the conduct of its competitors (Porter 2008).
This is one of the main reasons as to why competitive structure has less influence on the prices levied by low cost carriers. The significant function is played by the historical model of airfares levied by low cost airlines thereby leading to a situation of price leadership (Pitifield 2005). A research conducted by Barbot (2005), revealed that for the London – Amsterdam and London – Berlin routes there exists a totally different price for full fare and no frills airlines. This means that full fare and low cost airlines are not competitors but there exists stringent competition among the low cost carriers only and the full fare airlines only.
Another factor influencing the pricing strategy of low cost carrier is that of price discrimination. The pricing system of low cost airlines has a single booking class which begins with a minimum price and then it gradually starts increasing as the flight date nears. Despite the fact that the markets are not temporarily or physically separate this is a form of price discrimination (Alves & Barbot 2009).
Web based ticket distribution also influences the pricing strategy of low cost airlines. Websites like Orbitz, Travelocity and Expedia in the United States of America and Opodo in Europe has made it possible for passengers to compare the prices of tickets of several airlines at one go. This considerably influences the pricing structure of low cost as well as full fare airlines (Carrier 2009).
The concept of dynamic pricing is one of the most significant factors impacting the pricing strategy of low cost carriers. It has been revealed that consumers are well aware of the taxes and surcharges which are levied by third parties and hence do not doubt this price. However they are sensitive to prices. Hence, it is up to the low cost airlines to use their own creativity and extensively employ this process to earn robust revenues (Wensveen & Leick 2009).
Customers may find it difficult to compare prices of diverse carriers as a result of disguised presentation of prices. The successful marketing slogans of “Lowest European Fares” have also helped the low cost carriers to present superficially less prices.
The airlines also garner revenues from diverse other sources. For example, Easyjet claims that around 13 percent of ancillary profit per seat is garnered by providing chargeable inflight services. Some low cost carriers also have dynamic salary component of flight attendants which is dependent on the profit earned by the flight attendant in that particular flight. Other than these, airlines like Ryanair have started charging for inflight entertainment. Also for check in baggage the same airline is charging extra fees. The latest revenue to be garnered by this airline is by selling the fixed seats and preboarding allocations. This service is provided by full fare airlines without any extra charge. All these have led low cost airlines like Ryanair to garner high profits. The annual revenue of Ryanair has gone up by 25 percent as on March 31, 2012 (Ryanair Investor Relations 2012).
Positive and negative impacts of pricing strategies used by low cost airlines
The greatest beneficiaries of low cost carriers are consumers. They have more choice of flights and can choose between low prices as compared with traditional airlines which operates on every route but quotes higher prices. The emergence of low cost carriers have also led to an expansion of routes as well as secondary airports. Previously flights mainly operated from London Heathrow. However, low cost carriers have also made airports like London Stansted, London Luton and London City airports. This has made air travel more accessible as people living near these airports can opt for a flight from these instead of travelling to the traditional hubs like London Heathrow. At the same time, travelling from a secondary airport is cost effective as it not only saves the commuting time for travellers but also is cost effective for the airlines. The emergence of low cost carriers have led to the construction of new airports in order to manage increasing passenger traffic.
The strategic pricing model of low cost carriers have led to a flexible price system which has mainly benefitted the consumers. At the same time, these airlines have started charging for every extra service provided. Other than inflight meals, Ryanair now charges for inflight baggage also. The consumer has to pay extra and since the price may not be mentioned in the ticket, the impact may pose to be somewhat equal if travelled by a traditional airline. This is especially true for short haul routes.
Another impact is that of peak prices. Prior to the emergence of low cost carriers, prices remained the same for peak and non peak flights. However, the pricing strategy has undergone a change with high fares being charged for peak hours and peak times. At the same time, prior to holidays or important festivals, the low cost carriers drastically increase their prices. Although this leads the airlines to garner revenues, the consumers have to bear the brunt of high prices.
Another external risk is that of fuel prices. The travel industry is extremely vulnerable and with the increase in fuel prices, the prices of airfares increase. This is especially true in the wake of the upheavals in Syria, Iraq and Libya. This impacts the overall prices of both traditional and low cost carriers and passengers may be forced to opt for alternate travel options (Knorr & Zigova 2004).
Antoher weakness is the vulnerable low cost framework. The high prices of fuels can directly disrupt airline revenues and despite this airlines have to slash prices in order to remain in the market. Ryanair is one of the airlines which has faced this upheaval which has led to a decrease in its stocks by 11 percent. The below figure is explicitly details the manner in which the volume of tickets have dropped due to weakness in booking and excess competition among airlines.
Conclusion
The low cost airlines have led to a revolution in pricing and marketing strategies and have made air travel accessible to most people. Despite their creativity and innovation, these airlines are not free from risks and have to bear increased competition other than external risks like economic downturn and the fuel price hike. However, the leading low cost carriers are still garnering revenues mainly because it offers mainly offers short distance flights and ensures that the aircraft returns to its hub at night. The major cost strategies have led many airlines like Easyjet and Ryanair to succeed and at the same time enjoy popularity among the price sensitive customers.
Reference
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