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Traditional major carrier have number of tools to deter entry or lessen the competitiveness of new entrants. These tools include predatory pricing, loyalty.

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Presentation on theme: "Traditional major carrier have number of tools to deter entry or lessen the competitiveness of new entrants. These tools include predatory pricing, loyalty."— Presentation transcript:

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2 Traditional major carrier have number of tools to deter entry or lessen the competitiveness of new entrants. These tools include predatory pricing, loyalty programs, and congestion at popular airports. Yet, these tools are not effective against low- cost carriers with point-to-point networks. A low-cost airline can engage in competition with a high-cost competitor without reducing its own marginal cost. The low-cost carrier can successfully neutralize the dominance of its competitors, by competing on price.

3 The pie chart shows the composition of costs for airline industry in The operating cost distribution suggests that lowering labor costs by 10% can lower the average airline’s total cost by 3.68%

4 The lower cost structure of a point-to-point network include number of factors such as: Airport congestion, which causes costly delays at hubs and is not as prevalent at airports used by point-to-point carriers. Low-cost carriers can achieve fast turnarounds and pay less for leasing airport facilities at secondary airports Low airport lease rates and gate costs also contribute to the lower cost structure of low-cost carriers. Under utilized secondary airports often levy lower charges for the use of their facilities.

5 In comparison, hubs require a large number of gates and personnel per flight. For example, at its Dallas Fort Worth hub American operates banks of flights to make connections convenient. While at neighboring Dallas Love Field Southwest spaces its flights out due to the lower emphasis it places on connecting traffic. Like other hub-and spoke carriers, American Airlines has peak times when a considerable number of planes land at its hubs and passengers rush off to get on their next flight. The system provides customers a high level of convenience but creates operating inefficiencies. Employees stand around between peaks. Planes sit on the ground longer and get caught in line waiting to take off. The hub-and-spoke structure raises an airline’s costs at a hub compared to operating that same hub with a de-peaked structure.

6 Analysts estimate that Low-cost carriers have labor costs 30% to 40% lower than the mainline carriers. For example, United Airlines, American Airlines, Northwest Airlines, and Continental Airlines all have costs at least 40% higher than Southwest. Although, Delta Air Lines and Alaska Airlines have the lowest costs of the majors, each of them has unit costs 30% higher than Southwest’s. Table 1 provides a break down of costs and revenue on an ASM (available seat mile) basis for major and low-cost carriers. The comparison is the same for JetBlue, which has a cost structure marginally lower than Southwest’s.

7 The lack of unionization among low-cost airlines can be characterized as a myth. Of the two largest LCC’s, Southwest’s workforce is unionized and JetBlue’s is not. Aggregate cost structure of the two carriers is almost identical so unionization is not related with high labor costs for low-cost carriers. These carriers also use fewer employees, because they operate point-to- point networks.

8 The most obvious attribute of the low-cost carrier is the no frills service Instead of providing passengers with a menu of product choices priced within a range, the low-cost carriers offer a single type of product, coach service. Low-cost carriers do not provide meals on flights, which results in a savings of 5 to 10 dollars per coach passenger. No meals equates to a savings of up to 3.2% from the average carrier’s operating cost. These airlines lack elaborate loyalty programs, which necessitate extra employees, to provide more personalized service, and expensive facilities, like airport clubs. The main advantage of the low-cost carrier is that it can compete on price, with the high-cost traditional carriers.

9 The key to delivering low fares is to consistently keeping cost low Attaining low cost requires high efficiency in every part of the business and maintaining simplicity Therefore every system process must incorporate the best industry practices Unlike other airlines, low cost fares are not based on complicated restrictions. All fares are quoted one way to allow customers the flexibility to choose where and when they would like to fly Also, where most traditional airlines will only offer cheap flights if the customer stays a Saturday night, or even a Sunday night, and therefore cheap fares will not be available for a one-way or a day-return business or shopping trip. Such a condition does not apply to low cost airlines.

10 There are two ticketing philosophies. Since the outset of its operations easyJet has always had a one-way ticketing policy. The airline has only one price in the market for any one flight at any one time. The lowest fare is offered into the market first and then prices rise as the departure draws closer and the seats are sold. The general policy would seem to be to sell a number of seats (perhaps 10) at the lowest fare and then increase the price by £10.

11 A similar number of seats are then made available at the next price point, this sales policy is then continued, with fares rising perhaps some £150 (one way) above the lead in fare. If sales on a particular flight are deemed to being taken up too quickly then the price rises are increased above the normal £10 level or fewer seats are offered at each price bracket, or a combination of both these strategies. If sales are slower than planned, more seats are released at the lower fares to increase sales, and prices rises are below the normal level.

12 This ticketing philosophy is transparent to consumers. There is a “value for money” offering, which is easily understood by consumers. Consumer know that the cheapest fares are sold first, so consumers checking prices are more likely to purchase straightaway as lower prices are not likely to appear later. As airline sells tickets on a one-way basis therefore if a passenger wants a return ticket they must buy two one-way tickets. The advantage of this for passengers is that they can book short stay trips without having to pay flexible return ticket prices. For business travellers, availability of flexible tickets is considered important because if a business meeting runs over, the traveller needs to be able to change their ticket and take a later flight.

13 This depends on two things. Firstly the ability to change the ticket, and secondly the availability of a later flight to change on to. EasyJet has been targeting business travellers and addressed issue by increasing the number of daily flights to key business destinations and by introducing a method of changing tickets. For a fee of £10, easyJet passengers can change their ticket to a different flight as long as there is an available seat on the desired flight. To reflect the current market price, the traveller will have to pay the difference between the price they originally paid for the ticket and the current price for a seat on the required flight. The airline can then release the seat no longer required on the original flight and sell this seat again.

14 Airline now needs to plan a booking profile that ensures a satisfactory load factor at a satisfactory average fare. This average fare can then be set on a simple cost-plus pricing basis. Revenue management at its most basic level becomes a simple task of management by exception.

15 The second ticketing philosophy much more similar to the traditional pricing strategies adopted by network carriers. Go practised a five class ticketing structure. Their fully-flexible ticket had no minimum stay requirement, was available on a one way or return basis, allowed name changes, and if cancelled would the holder would be entitled to 100% rebate. The airline also had an advanced purchase flexible ticket, requiring purchase at least five day prior to departure. The rebate available with this ticket was only 50% and name changes were not allowed. The airline also offered a two night stay ticket, a saver ticket and a super saver ticket.

16 All these tickets were only available on a return only basis, were only changeable for an upgrade fee. The saver and supersaver tickets were only available for people willing to stay a Saturday night. Consequently these tickets would be less attractive to business travellers. This pricing structure requires a complex revenue management system to manage inventory and pricing, and a team of well practised revenue managers to control the system. In contrast easyJet’s system is easy to understand by customers, easy to manage and does not require a large team of revenue managers. During the summer of 2001 Go switched their pricing strategy to mirror easyJet’s. So by the autumn data collection all three airlines had a one way ticketing policy.

17 LCC adopts a simplistic fare structure based on time value relationship for seats Generally speaking, the earlier you book the cheaper the fare will be. There are a total of 12 fare buckets; each fare bucket is priced accordingly to our specification The first few tiers are targeted to value conscious passengers, but they can only get their hands to those extremely cheap tickets if they book way ahead of time The mid tier buckets targets the captive market. Once the revenue collected is sufficient to cover all the operational cost of the flight, the system will then move on to the top tier fare bucket. This is when prices start to creep up and our profit grows.

18 The table below shows the average return prices (including all taxes and merchant fees) for the entire data set for the three scenarios. It shows that the cheapest fares six weeks prior to departure is a Tuesday departing two night trip at £ It was expected that this scenario would be the lowest yielding. Table 2: Average low cost airline fares, from six week prior to departure Source: Author calculated from easyJet, Ryanair and Go air fare websites

19 While this mid week trip is the cheapest, it can be seen that, on average, prices do not rise throughout the booking process with the cheapest average fare found three weeks prior to departure, with fares rising afterwards. A similar marginal fall in average fares is also found in Monday day- return scenario, again cheapest time to book tickets was three weeks prior to departure. It is only the Friday weekend trip scenario in which fares rise throughout the booking process, with the average fare a day prior to departure some 59% higher than the average fares offered six week before the flight.

20 The greatest rise in fares is found in mid week trip, with fares rising 78% during the booking process, and the Monday day-return having the smallest rise, at just 32%. It can be seen that in the last week fares rise dramatically. The policy here is that travellers booking very close to departure are likely to be less price sensitive and therefore prepared to pay higher fares. Therefore, customers seeking low fares at the last minute for trips whether they be mid-week, at the weekend or for an Monday morning business trip are likely to be disappointed with two scenarios charging over £90 per sector and the mid week trip charging over £70 each way the day prior to departure.

21 Table shows average fares attained for the various markets. Lowest fares are found in highly competitive domestic markets of Belfast and Glasgow, with passengers paying as little as £35 each way six weeks prior to departure. Highest fares are found in popular leisure destinations Palma de Majorca, Barcelona, and Copenhagen, negating the view that LCCs offer exceedingly low fares to leisure destinations. Table 2: Average low cost airline fares, from six week prior to departure Source: Author calculated from easyJet, Ryanair and Go air fare websites Table 3: Low cost airline fares from London Source: Author calculated from easyJet, Ryanair and Go air fare websites

22 Pricing strategy can be used to draw passengers into the market with very low fares, while offering reasonable fares to most customers throughout the booking period, and retaining some capacity for some high yielding fares in the last few days of booking. The data has shown that reasonably low fares are available until the last two weeks prior to departure. The customers can now make reasoned trade-offs between schedule and timing as all fares are freely available. The price sensitive business traveller can opt for a better schedule, but will perhaps have to pay a higher fare, a price sensitive traveller will make the opposite decision

23 LCC adopts a simplistic fare structure based on time value relationship for seats Generally speaking, the earlier you book the cheaper the fare will be. There are a total of 12 fare buckets; each fare bucket is priced accordingly to our specification The first few tiers are targeted to value conscious passengers, but they can only get their hands to those extremely cheap tickets if they book way ahead of time The mid tier buckets targets the captive market. Once the revenue collected is sufficient to cover all the operational cost of the flight, the system will then move on to the top tier fare bucket. This is when prices start to creep up and our profit grows.

24 This is yield management from the perspective of a LCC. Want cheap fares, book early. If you book your tickets late, chances are you are desperate to fly and therefore don’t mind paying a little more Conversely, a FSC will do things totally apposite; they try to charge as much as they can early on and drop their fares in the last minute due to fear of flying empty seats Yield Management is an exhaustive process that combines elements of science, psychology, market dynamics and most of the time basic common sense Yield management team continuously stress test the fare buckets in order to get the maximum revenue for every flight Achieving the best mix (fare over load factor) is a never ending process and is a continuous learning process Yield Management


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