Long Haul Airlines - Online Ticket Sales

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1 With reference to a market of your choice, critically appraise the issues facing international marketers with respect to changing channels to market. Long Haul Airlines - Online Ticket Sales This work is submitted as part of the requirements of the MSc in Marketing and Strategy. The work contained in this assignment is my own, individual and original work and has not been used in whole or in part for any other assessment in this or any other degree. I have read and understand the University rules on Plagiarism. Word Limit: % (Count: 2750) Student Number:

2 Contents INTRODUCTION: CHANGING AIRLINE CHANNELS.. 3 MARKET COMMODITISATION...4 PREMIUMISATION...5 ONLINE SERVICE IMPROVEMENTS PRICE AND CONTROL...7 IMPROVED MARKETING INFORMATION DEVELOPING CUSTOMER RELATIONSHIPS. 9 ISSUES OF DIRECT CHANNEL DISTRIBUTION...10 CONSIDER CULTURE TECHNOLOGICAL LEVEL...12 RECOMMENDATIONS...13 CONCLUSION...14 REFERENCES:...15 APPENDIX 1 LONDON TO HONG KONG EXPERIMENT:...18 APPENDIX 2 PREMIUMISATION THROUGH WEBSITE..19 2

3 Introduction: the changing channels within the Airline Industry The travel sector has moved towards online ticket booking, particularly apparent within the long-haul airline industry. The internet has given power to consumers, especially when using online travel agents (OTAs) such as Expedia. OTAs speed up the process of searching for flights, quickly showing airlines that can take you to your chosen destination. The days of loyalty to the national flag carrying airline are over, Mintels (2009) report on long haul airlines found just 2.1% of consumers base their airline choice upon this factor. The rise of OTAs has created more price conscious consumers, effectively commoditising the long haul airline market in a similar way to the low-cost airlines. Doganis, R (2002) identified that most airlines see their own website as the key to future sales, for example British Airways, who aim to achieve 80% of direct customer booking transactions, 100% electronic ticket distribution and 50% of passenger self check-in, expecting these initiatives to save them 100 million. It is highly likely that customers who book their flights directly through the airline website will be aware of the ability to check-in online, if firms can promote online booking these cost savings can hopefully be achieved. This essay will consider not just the directly financial benefits, but those stemming from a direct channel between the airline and customers. Alamdari, F (2002) identified that the current system of booking through OTAs prevents airlines from accessing this direct communications channel, while also a more expensive method of ticket distribution. Benjamin and Wigland (1995) found the internet has reduced the need for intermediaries, which is makes it surprising that such a large percentage of airline bookings still go through OTAs or traditional travel agents. This essay will consider the issues that long haul airlines face as they try to obtain increased sales through their own website, highlighting the global problems they may encounter in adopting a single-channel approach. 3

4 Market Commoditisation It is accepted airlines follow a single strategy, very rarely do they combine multiple, Singapore Airlines are a notable exception, they successfully followed cost minimisation combined with differentiation, identified by Heracleous, L., Wirtz and Pangarkar, N. (2006). A premium strategy could strive for a Skytrax 5-Star ranking, which recognises the highest standard of product across different quality categories and consistently high standards of staff service delivery, this represents the fact that airlines can differentiate, although premium carriers are typically unlikely to be price competitive against non-premium airlines. OTAs have commoditised the market, emphasising price, while neglecting important value adding factors, such as the Skytrax criteria. Mintel identified (2009) in a survey that commoditisation seems to be a growing trend, which rewards the cheapest or potentially most efficient airlines, but effectively becomes a race to the bottom. Through encouraging more customer interactions with the airlines website, brand equity can be developed, whilst demonstrating aspects of differentiation between airlines and reminding customers there is more to long haul flying than price alone, the next section will deal with developing a Premiumisation strategy. 4

5 Premiumisation Mintel s consumer research (2009) revealed those who hadn t flown long haul had been predisposed to price by the typical low-cost decision experiences of deciding between carriers such as Ryanair and Easyjet. To add value and differentiate the airline, key aspects should be communicated online, including convenience of the airport, flight timings, previous experience with the airline, in-flight comfort and service, the safety record and customer service, Appendix 2 gives examples of how these aspects can be displayed using an airlines own website. This represents a key benefit over OTAs and traditional agents, where most flights are booked blind, by price, airline and basic details. The website should develop its brand, which can represent its competencies, make performance promises and reassure the consumer, identified by Driver, J (1999). The development of a strong brand should aid brand recall, allowing it to enter the consumers choice set, hopefully becoming their preferred airline. This is especially important to carriers flying London to Hong Kong as over 10 airlines serve this route. The next section considers benefits of booking directly through the website and methods to improve the encounter. 5

6 Online Service Improvements Airlines have the opportunity to tailor their websites to suit the the customer of tomorrow, coined by Treacy and Wiersema (1993), they have increased expectations, seek convenience in purchase, require after sales service, uniqueness and reliability. The customer of tomorrow is more knowledgeable, increasingly accustomed to automation and a self service mentality, SITA (2008) found passengers prefer self-service. E-ticketing and paperless communications improve customer service by increasing flexibility and improving process efficiency. Customers are able to check-in online, select their seats, print e-boarding passes instantly. The customer of tomorrow wants to see things from a global perspective, expects a high service quality and expects market transparency. Financial Savings Cost savings could be particularly useful in this industry, the International Air Transport Association (2009) projected that airlines will lose $5.6 Billion in 2010, demonstrating the importance of cost savings. A major cost is the commission payable to those who assist in ticket sales and reservations, Doganis (2002) identified the rates payable for international ticket sales to be between 5-6%. If we assume that revenue could remain constant, then changing channels would drastically improve the finances of the airline industry, while some airlines would be able to pass the cost savings to benefit customers with lower fares. 6

7 Price and Control When using the airline website to search for flights, only the airline and code sharing flights are displayed, allowing more detailed information, this includes stopovers, aircraft, terminals, while showing more choice of flights over a range of dates with subsequent prices. Benjamin, R., and Wigland, R. (1995) identified the abilities for airlines to have more flexibility with pricing, having more reactive pricing strategies with no commitments to other distribution systems, important in a dynamic industry with fluctuating costs. News articles, forums and blogs have made discrimination practices less common although airlines often structure their website to be country specific, which allows the potential to alter prices depending on location, Castle, S (2004) highlighted the issues of price discrimination that occurred internationally, finding price differences for the same flight could be up to 300%. OTAs have played a role in harmonising airline prices through providing greater pricing information. The initial benefits of airline awareness created through OTAs seen to be a hindrance to airlines, creating a price-orientated commoditised industry. A premium airline which is forced to adopt an aggressive price competitive strategy could subsequently damage its brand. The next section will consider the ability of airline websites to improve direct marketing abilities through improved customer information. 7

8 Improved Marketing Information The task facing airlines is making advertising relevant and meaningful when various segments have different priorities; businessmen who want ticket flexibility, while students travellers want to know about onboard entertainment. Furash (1999) identified the internet s ability to tailor to different needs, this can be utilised by airline websites, to segment the consumer groups, providing useful information allowing the ability to personalise advertising, such content based advertising can remove unnecessary adverts, thus becoming more efficient and cost effective for advertisers. Zhang and Wedel (2008) found that optimisation procedures lead to substantial profit improvements and customisation was considered a key solution for companies looking for ways to improve promotion effectiveness. A website allows rapid feedback, providing valuable real-time insights into customer behaviour. If we can assume the pages that customers spend more time on are seen as important to them, this can be closely monitored, for example, a customer segment spending time on the in-flight meals page suggests this is important to them, and subsequent communications can be targeted based on these identified interests. 8

9 Developing Customer Relationships Arnott, D and Bridgewater, S (2002) identified the relationship building abilities of the internet, it is expected that airlines would be able to develop relationships using one to one communications, online help, privileged access, business information, upgrade requests, city guides, language information, hotel booking, entertainment programming, favoured seating, meal selection, text message check-in and updates. McIvor et al (2003) reiterated the importance of capturing and integrating customer preferences, allowing more successful allocation of resources towards analysing and determining customer needs. Building a comprehensive, intelligent customer database record could suggest flights to the customer based on detailed records of past behaviour. It could ensure travel arrangements were suited to the particular needs of the customer, adding value through this expert service, while increasing sales levels and improving liquidity through encouraging early booking, this would all contribute to brand loyalty and create switching costs that very few others could offer. Loyalty is important when following a single channel approach, Koo, B., Mantin, B., O Connor, P (2010) found that for single channel distribution, airlines need to protect themselves from the competition of OTAs. They suggested creating a large base of loyal customers, encourage repeat transactions and develop lock-in through loyalty programmes, such as air mile rewards. Developing loyalty creates customers less sensitive price changes and less willing to switch to other airlines based on price promotions. Advantages of this direct channel have been discussed, now some of the issues must be considered to make a fair evaluation of this strategy. 9

10 Issues of Direct Channel Distribution The strategy of providing worldwide ticket sales means airlines must be able to transcend location. Customers will need worldwide accessibility to the online sales channel, which facilitates real-time reservations. A problem with this is finding the time to schedule maintenance, updates and avoid downtime. Pingdom (2009) studied airline industry downtime and considered any less than 99.8% uptime as unacceptable; they found that 62% of airlines couldn t manage this, while 12% had more than 24 hours of accumulated downtime. Online booking can be quite stressful so the website must be free of errors, which can be confusing and may cause the customer to cancel the booking process. Creating trust online is important, including the ability to handle secure international online payments, ensuring a smooth booking process. The security threat will be increased, because of the increased international details, so the company must have capabilities to deal with this. Ko, H., Jung, J., Kim,J., Shim.S. (2004) identified the risks of online shopping, including the fears of those inexperienced with the internet, they made suggestions to encourage and reassure sceptical inexperienced consumers, while emphasising the benefits of purchasing online. The airline industry could utilise these tactics, providing more incentives to book online, as we have seen the financial incentives by Ryanair resulted in a dramatic increase in online check-in. 10

11 Consider Culture Internet marketers must consider the cultural differences when dealing with consumers from around the world. Hall, E. T (1976) identified that lower context cultures tend to explain things further, for example German consumers may expect more detail. McGovern (2005) attributed Ryanair s simple website design to their success, but this may not be sufficient detail for consumers flying long haul. Website localisation is the process of modifying an existing website to make it accessible, usable and culturally suitable to a target audience though a greater understanding of cultural knowledge, Payne, N. (2009) acknowledged its importance, identifying that website layout should be localised, linguistic considerations include Arabic, which reads from right to left and both Japanese and Chinese cultures who read from top to bottom. To demonstrate the necessity of localising language, a recent survey by the IDC suggested that over 76% of Chinese respondents prefer to browse the Internet in their local language, and not in English. An important issue is the trade-off between providing a comprehensive list of site languages against the financial and time costs, a compromise must be reached to achieve a realistic level of localisation. Alamdari, F (2002) found different opinions between cultures over the role of travel agents, US airlines were trying to bypass traditional agents, matched by consumers more willing to search for themselves, while Asian consumers and airlines were found to be dependent on travel agents to make their bookings. Such cultural differences need to be understood as it is likely to involve different strategies to encourage these cultures to adapt to the single channel approach. 11

12 Technological Level Cultural elements can influence the technological level, which is defined as internet users familiarity, education level, training and experience. SITA (2008) were concerned with the number of customers unaware of online check-in for their flights, just over 30 percent of respondents in Sao Paulo did not know whether online booking was available for their flight. In the US, checking-in online has been well established, with 73 percent of respondents using the facility, compared to 64 percent just two years ago. Lack of awareness was high in Johannesburg (45%), Domededevo (34%) and Mumbai (25%), representing the difficulties international airlines could face in trying to encourage online bookings. Mintel (2009) identified that the demographic profile of long haul fliers corresponds with those most likely to have internet access; something must be done to encourage internet use for this strategy to work internationally. They must consider computer and communications infrastructure implications and government policy (Alamdari, F, 2002) while considering methods to integrate technology effectively, such as promotion with internet cafes to areas with low internet penetration, while accepting and publicising electronic payment sites such as Paypal or Entropay. 12

13 Recommendations: Replace OTAs with improved worldwide search facilities Globalisation of the airline industry has resulted in a growing use of alliances such as the star alliance, allowing consistent service across airlines and regions, this improves the connections available to book with a single airline hence code sharing gives access to new markets. Buhalis, D (2004) identified that airlines need to develop stronger alliances and meaningful networks of wealth creation if they are to survive global competition in the future. This could work alongside the single channel sales strategy, while reducing the need to enter potentially unnecessary alliances. The problem for airlines is that consumers don t know enough about the vast number of potential flights available, unless OTAs or Price Comparison sites are used then this is a time consuming process. Koo, B., Mantin, B., O Connor, P (2010) accept that the key advantage of OTAs is its ability to access a broader consumer base beyond the airlines limited reach, Venkateshwara and Smith (2006) agree the concern is the limited potential to reach its audience. It is suggested that firms should follow a single channel method of sales, promoting flights through flight comparison site such as Skyscanner, which would subsequently contain every possible worldwide flight, who would make money from advertising, not booking fees, providing direct links to the individual airlines website. It is also recommended they follow Ryanair s successful campaigns to alert customers of routes, through newspapers and online advertising. Clemons et al (2002) found that different OTAs offer tickets with substantially different prices, when making over 900 requests with 5 OTAs, average prices varied as much as 28% across OTAs for the same requests. My research in appendix 1 revealed current OTAs cannot be relied upon for obtaining the best price, while some OTAs provided better prices for some flights than others, it was a hit-and-miss approach and therefore customers are currently being asked to compare the flight-comparison sites, what a ludicrous concept!! 13

14 Conclusion A large percentage of consumers still use traditional travel agents, around 75% of global airline tickets are sold through traditional travel agents (SITA, 2008), which limits airlines total power to bypass them immediately, this strategy would need to be fully supported and developed before its implementation. Airlines need to consider the trade off between the exposures created by selling through OTAs and the benefits discussed in this essay by taking a single channel sales approach. Airlines must work together to develop the flight search engine, with the goal of getting every worldwide airline to take part. A strategy could adopt the current trend of UK insurance firms as Money Stop (2007) reported that due to the rising fees they have boycotted the price comparison sites and made a guarantee that their own website will always offer the best value. This essay highlighted how value could be added to long-haul air travel, considering the changing channels within the market, recommending strategies to avoid the commodised trends through developing closer customer relationships. Improving understanding of the consumer segments and targeting the airlines benefits to them accordingly, while adapting to countries individual cultures to offer a more localised approach. It is felt that the benefits allowed through a single channel approach could help firms achieve competitive advantage if utilised properly, especially using insights gained through increased customer knowledge and development of strong customer relationships. 14

15 References Alamdari, F. (2002). Regional development in airlines and travel agents relationships. Journal of Air Transport Management. 8 (88), Alamdari, F., Mason, K. (2006). The future of airline distribution. Journal of Air Transport Management. 12 (99), p Arnott, D., Bridgewater, S. (2002). Internet, interaction and implications for marketing. Marketing Intelligence & Planning. 20 (2), Benjamin, R., and Wigland, R. (1995). Electronic markets and virtual value chains on the information superhighway. Sloan Management Review 36, pp Berthon, P, Lane, N., Pitt, L, Watson, R. (1998). The World Wide Web as an industrial marketing communication tool: models for the identification and assessment of opportunities. Journal of Marketing Management. 14, p Buhalis, D. (2004). eairlines: strategic and tactical use of ICTs in the airline industry. Information & Management. 41, Castle, S. (2004). Airlines told to end price discrimination.available: html. Last accessed 09/03/2010. Chen, S., Chang, T. (2003). A descriptive model of online shopping process: some emprical results. International Journal of Service Industry Management. 14 (5), Clemons, E., Hann, I., Hitt, L. (2002). Price Dispersion and Differentiation in Online Travel: An Emprical Investigation.Management Science. 48 (4), p Doganis, R (2002). Flying off course: the economics of international airlines. 3rd ed. London: Routledge. p113,142, Driver, J. (1999). Developments in airline marketing practice. Journal of Marketing Practice. 5 (5), p Dutta, S., Segev, A. (1999). Business transformation on the Internet. European Management Journal. 17 (5), p466-4 Ezard, K. (2009). Evolutionary path for marketing. Available: Last accessed 08 March Furash, E. (1999), Internet strategy: why banks may be getting it wrong and how to get it right, Journal of Retail Banking Services, Vol. 21 No.2, pp Hall, E. T (1976). Beyond Culture. New York: Doubleday. 15

16 Heracleous, L., Wirtz and Pangarkar, N. (2006). Flying high in a competitive industry: Cost effective service excellence at Singapore Airlines. McGraw-Hill Heung, V. (2003). Internet usage by international travellers: reasons and barriers. International Journal of Contemporary Hospitality Management. 15 (7), International Air Transport Association (IATA). (2009). IATA Projects Airlines Will Lose $5.6 Billion in Available: Last accessed 14/03/2010. Ko, H., Jung, J., Kim,J., Shim.S. (2004). Cross-Cultural Differences in Perceived Risk of Online Shopping. Journal of Interactive Advertising. Vol. 4 ( Spring), p Koo, B., Mantin, B, O'Connor, P.,(2010). Online distribution of airline tickets: Should airlines adopt a single or multi-channel approach? forthcoming, Tourism Management Marcussen, C.H. (2009). Trends in European Internet Distribution - of Travel and Tourism Services. Available: Last accessed 09/03/2010 McGovern, G. (2005). Ryanair success has strong web lessons. Available: Last accessed 09 March McIvor, R., O'Reilly, D., Ponsonby, S. (2003). The impact of Internet technologies on the airline industry: current strategies and future developments. Strategic Change. 12 (Jan/Feb), Miller, P. (2009) Airline of the Year award. Available: Last accessed 14/03/2010. Mintel (2009). Long-haul Airlines UK June [online]. London: Mintel. Available from [Accessed: 08/03/2010] Payne, N. (2009). Culture and Website Localization. Available: Last accessed 14/03/2010. Pingdom (2009). Downtime for international airline websites April 2009 [online]: Pingdom. Available from e.pdf [Accessed: 08/03/2010] Pitt, L.F., Berthon, P. and Berthon, J.P (1999) Changing channels: the impact of the Internet on distribution strategy. Business hoizons vol 42. no 2. pp19-28 Quelch, J., Klein, L. (1996). The Internet and International Marketing. Sloan Management Review. 37 (3), p SITA. (2008). Passengers prefer self-service. Air Transport IT Review. Volume 3, p

17 Skytrax. (2010). THE WORLD'S OFFICIAL 5-STAR AIRLINES. Available: Last accessed 14/03/2010. Stavins, J. (2000). Price Discrimination in the Airline Market: The Effect of Market Concentration. The Review of Economics and Statistics. 99 (99), p The Money Stop. (2007). Direct Line launches campaign against price comparison services. Available: Last accessed 14/03/2010. Treacy, M and Wiersema, F. (1993). 'Customer intimacy and other value disciplines. Harvard Business Review. January-February, p Venkateshwara & Smith, Decision support in online travel retailing. Journal of Revenue and and Revenue and Pricing Management. 5 (1), Wynne, C., Berthon, P., Pitt, L., Ewing, M and Napoli, J. (2000). The impact of the Internet on the distribution value Chain. International Marketing Review. 18 (4), p Zhang, J., Wedel, M. (2008). The effectiveness of Customized Promotions in Online and Offline Stores.Journal of Marketing Research. XLV (1), p

18 Appendix 1: Online Travel Agents vs Airline.com Site Experiment Method A random set of fixed dates were used: 1 st April 7 th April for return flights from London to Hong Kong. In order to find airlines which served this route 3 popular Price comparison sites were used Opodo, Expedia and Kayak. The cheapest fare given by each airline was recorded, then I visited the Airlines own site and performed the same search. Key Findings It was interesting to see the variance in the prices given, although Qantas, Jet, Qatar, KLM and Virgin followed the same pricing policy throughout. Quantas was 10 cheaper by booking through OTAs Jet was 6 cheaper by booking through own website Qatar was vastly more expensive if booked through OTAs KLM was vastly more expensive if booked through own website While Virgin offered the same prices regardless of OTA or Website. This suggests that a few pricing structures are possible, depending on the strategy which the company takes, and demonstrates the variances between pricing for the same flight. Results Test 1: Airline Airlines Own Site Difference Cheaper Finnair Airline Air France Airline Quantas OTA Emirates Airline Cathay Pacific OTA Jet Airline Qatar Airline KLM OTA British Airways OTA Lufthansa Airline Virgin Same Air China , Airline Cheapest Flight: Finnair (from Finnair.com) 7 Flights Cheaper with Airline Web site 4 Flights Cheaper using Opodo 1 flight Same Price (less than 1 different) 18

19 Test 2: Airline Airlines Own Site Difference Cheaper Finnair Airline Air France OTA Quantas OTA Emirates Airline Cathay Pacific Airline Jet Airline Qatar Airline KLM OTA British Airways OTA Lufthansa Airline Virgin Same Air China Airline Cheapest Flight: Finnair (from Finnair.com) 7 Flights Cheaper with Airline Web site 4 Flights Cheaper using Expedia 1 flight Same Price (less than 1 different) Test 3: Airline Airlines Own Site Kayak Cheaper Finnair Same Air France Airline Quantas OTA Emirates OTA Cathay Pacific OTA Jet Airline Qatar Airline KLM OTA British Airways Same Lufthansa OTA Virgin Same Air China Same Cheapest Flight: Finnair (from Kayak.com/Airline Site) 3 Flights Cheaper with Airline Web site 5 Flights Cheaper using Kayak 4 flight Same Price (less than 1 different) 19

20 Appendix 2: Abilities to demonstrate the following factors through the web site Price Convenience of Airport Convenience of Timings Personal Experience 20

21 In flight comfort Personal recommendations Safety Record Customer Service 21

22 Frequent Flyer/Loyalty Schemes Company Image National Airline Advertising 22

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