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

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.
Information search
Travel websites such as Orbitz, display the prices and schedules of 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 premium is 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.

Evaluation of alternatives

Purchase decision

Professor David Wessels The Wharton School of the University of Pennsylvania

Sample Solution

Consumer Loyalty in the Airline Industry

Survey Demographics
Before we start, some important characteristics about the travel survey conducted by our students
Survey Characteristics

Characteristics

The survey was distributed to colleagues of incoming MBA students. There were 1,406 respondents.

% Male % Under the age of 35 % With college or higher degree % Living in the Southeast % Leisure travelers 0% 20% 40% 39%

60%

81%

95%

67% 60% 80% 100%

% of Respondants

Professor David Wessels The Wharton School of the University of Pennsylvania

Sample Solution

Consumer Loyalty in the Airline Industry

The Consumers Information Search

Total Set Awareness Set Consideration Set Choice Set 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).
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Professor David Wessels The Wharton School of the University of Pennsylvania

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 all available 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

100%
17% 9%

Other

75%
45% 41% Airline Website

50%

25%
35%

41%

Travel Website

0% Business
Source: Goizueta travel survey

Leisure

Professor David Wessels The Wharton School of the University of Pennsylvania

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
50%
44%

Percent of Respondents

40% 30% 20% 10%

39% 33% 26% 19% 31%

Business Leisure

4% 4%

0% 1 2-3 4-5 No Limit Airlines Considered

Professor David Wessels The Wharton School of the University of Pennsylvania

Sample Solution

Consumer Loyalty in the Airline Industry

But Usually Default to a Preferred Airline

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).
Percentage of Flights on an Airline for which Consumer had a Frequent Flier Membership
400 350 300 Respondents 250 200 150 100 50 0 0-20% 20-39% 49-60% 60-79% 80-99% 100% Leisure Business

Professor David Wessels The Wharton School of the University of Pennsylvania

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.
Information search
Travel websites such as Orbitz, display the prices and schedules of 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 premium is 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.

Evaluation of alternatives

Purchase decision

Professor David Wessels The Wharton School of the University of Pennsylvania

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
Price Safety Scheduling convenience Non-stop flights Reservation convenience Baggage-handling Business Leisure

On-time arrival Connecting flight convenience Customer service Check-in convenience 3 3.5 4

4.5

Im portance Rating out of 5

Professor David Wessels The Wharton School of the University of Pennsylvania

Sample Solution

Consumer Loyalty in the Airline Industry

Attributes Which Matter Less

Bottom 10 Factors in Selecting an Airline

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.

Professionalism of airline personnel Ability to change or cancel plans w ithout penalty Efficiency of airline security checks Airport Location Seat size or legroom on plane Loyalty program Ability to upgrade Quality of meals Availability of business class or first class 0 1 1.7 2 3 2.3 2.2

3.5 3.2 3.4 3.6 3.1 3.0 Business Leisure

Im portance Rating out of 5

Professor David Wessels The Wharton School of the University of Pennsylvania

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Sample Solution

Consumer Loyalty in the Airline Industry

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.
Consumer Perceptions of Discount versus Full Service Airline Services
Loyalty programs First class Non-stop flights Meal quality Travel times Airport location Check-in convenience Legroom Professionalism Customer service Safety On-time arrival Reservations Baggage handling Security checks Price

Percent of Respondents

I can't tell the difference

Discount airline is better Major airline is better

-150% -100%

-50%

0%

50%

100%

Professor David Wessels The Wharton School of the University of Pennsylvania

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Sample Solution

Consumer Loyalty in the Airline Industry

But Most Consumers Cant 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
Professionalism of airline personnel Likelihood of an on-time arrival Seat size or legroom on plane Customer service Location of airport Convenience of check-in Quality of meals Convenience of arrival/departure times Availability of business class or first class Availability of non-stop flights Frequent flyer program Ticket price 0% 15% 25% 50% 75% 100% 55% 55% 54% 52% 49% 49% 46% 45% 38% 33% 30%

Professor David Wessels The Wharton School of the University of Pennsylvania

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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 Services Business Travelers Only
12% Premium 10% 8% 6% 4% 2% 0% 10.0% 6.7% 6.2%

5.2%

5.1%

4.7%

4.4%

4.1% 2.3%

Professor David Wessels The Wharton School of the University of Pennsylvania

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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.
Information search
Travel websites such as Orbitz, display the prices and schedules of 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 premium is 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.

Evaluation of alternatives

Purchase decision

Professor David Wessels The Wharton School of the University of Pennsylvania

14

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
Travel w ebsite 25%

Travel agent 16%

Other 3% Airline phone rep 16% Airline ticket counter 3%

Airline w ebsite 37%

Professor David Wessels The Wharton School of the University of Pennsylvania

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Sample Solution

Consumer Loyalty in the Airline Industry

The Purchase Decision: Business Traveler

Preferred Ticket Purchase Method for Business Travelers

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.

Travel w ebsite 17%

Travel agent 40%

Airline w ebsite 26%

Other 5% Airline Airline ticket phone rep counter 9% 3%

Professor David Wessels The Wharton School of the University of Pennsylvania

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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.

Professor David Wessels The Wharton School of the University of Pennsylvania

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