Consumer Loyalty in the Airline Industry

1. 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

2. Professor David Wessels
The Wharton School of the University of Pennsylvania 2
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.
Evaluation of
alternatives
Information
search
Purchase
decision
• 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.

3. Professor David Wessels
The Wharton School of the University of Pennsylvania 3
Sample Solution Consumer Loyalty in the Airline Industry
Survey Demographics
• The survey was
distributed to
colleagues of
incoming MBA
students.
• There were 1,406
respondents.
• Before we start, some important characteristics about the travel survey
conducted by our students…
Survey Characteristics
39%
95%
81%
60%
67%
0% 20% 40% 60% 80% 100%
% Leisure
travelers
% Living in the
Southeast
% With college
or higher degree
% Under the
age of 35
% Male
Characteristics
% of Respondants

4. Professor David Wessels
The Wharton School of the University of Pennsylvania 4
Sample Solution Consumer Loyalty in the Airline Industry
The Consumer’s 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).

5. Professor David Wessels
The Wharton School of the University of Pennsylvania 5
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
35% 41%
41%
45%
17%
9%
0%
25%
50%
75%
100%
Business Leisure
Travel
Website
Airline
Website
Other
Source: Goizueta travel survey

6. Professor David Wessels
The Wharton School of the University of Pennsylvania 6
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
26%
39%
4%
31%
19%
33%
4%
44%
0%
10%
20%
30%
40%
50%
1 2-3 4-5 No Limit
Airlines Considered
PercentofRespondents
Business
Leisure

7. Professor David Wessels
The Wharton School of the University of Pennsylvania 7
Sample Solution Consumer Loyalty in the Airline Industry
But Usually Default to a Preferred Airline
Percentage of Flights
on an Airline for which Consumer
had a Frequent Flier Membership
0
50
100
150
200
250
300
350
400
0-20% 20-39% 49-60% 60-79% 80-99% 100%
Respondents
Leisure
Business
• 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).

8. Professor David Wessels
The Wharton School of the University of Pennsylvania 8
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.
Evaluation of
alternatives
Information
search
Purchase
decision
• 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.

9. Professor David Wessels
The Wharton School of the University of Pennsylvania 9
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
3 3.5 4 4.5 5
Check-in convenience
Customer service
Connecting flight convenience
On-time arrival
Baggage-handling
Reservation convenience
Non-stop flights
Scheduling convenience
Safety
Price
Importance Rating out of 5
Business
Leisure

10. Professor David Wessels
The Wharton School of the University of Pennsylvania 10
Sample Solution Consumer Loyalty in the Airline Industry
Attributes Which Matter Less
• 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.
Bottom 10 Factors in Selecting an Airline
1.7
2.2
2.3
3.0
3.1
3.6
3.4
3.2
3.5
0 1 2 3 4 5
Availability of business class or first
class
Quality of meals
Ability to upgrade
Loyalty program
Seat size or legroom on plane
Airport Location
Efficiency of airline security checks
Ability to change or cancel plans
w ithout penalty
Professionalism of airline personnel
Importance Rating out of 5
Business
Leisure

11. Professor David Wessels
The Wharton School of the University of Pennsylvania 11
Sample Solution Consumer Loyalty in the Airline Industry
Consumer Perceptions of
Discount versus Full Service Airline Services
-150% -100% -50% 0% 50% 100%
PercentofRespondents
I can't tell the
difference
Discount
airline is
better
Major airline
is better
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.
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

12. Professor David Wessels
The Wharton School of the University of Pennsylvania 12
Sample Solution Consumer Loyalty in the Airline Industry
But Most Consumers Can’t 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
15%
30%
33%
38%
45%
46%
49%
49%
52%
54%
55%
55%
0% 25% 50% 75% 100%
Ticket price
Frequent flyer program
Availability of non-stop flights
Availability of business class or first class
Convenience of arrival/departure times
Quality of meals
Convenience of check-in
Location of airport
Customer service
Seat size or legroom on plane
Likelihood of an on-time arrival
Professionalism of airline personnel

13. Professor David Wessels
The Wharton School of the University of Pennsylvania 13
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
10.0%
6.7% 6.2%
5.2% 5.1% 4.7% 4.4% 4.1%
2.3%
0%
2%
4%
6%
8%
10%
12%
Safety
O
n-tim
e
arrival
Legroom
Baggage-handling
Security
check
efficiency
Check-in
convenience
Custom
erservice
Reservation
convenienceM
ealquality
Premium

14. Professor David Wessels
The Wharton School of the University of Pennsylvania 14
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.
Evaluation of
alternatives
Information
search
Purchase
decision
• 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.

15. Professor David Wessels
The Wharton School of the University of Pennsylvania 15
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
Airline
phone rep
16%
Airline ticket
counter
3%
Airline
w ebsite
37%
Travel
w ebsite
25% Travel
agent
16%
Other
3%

16. Professor David Wessels
The Wharton School of the University of Pennsylvania 16
Sample Solution Consumer Loyalty in the Airline Industry
The Purchase Decision: Business Traveler
Preferred Ticket Purchase Method for
Business Travelers
Airline
phone rep
9%
Airline ticket
counter
3%
Airline
w ebsite
26%
Travel
w ebsite
17%
Travel
agent
40%
Other
5%
• 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.

17. Professor David Wessels
The Wharton School of the University of Pennsylvania 17
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.