Full service carrier response, the economic recession and short haul markets

By Anthony Chin

Airneth Fellow Column
July 2009
By Anthony T.H. Chin

The International Air Transport Association (IATA) announced recently that the aviation industry is currently facing “its worst revenue environment in 50 years.” All the full service carriers (FSCs) in Asia have reported disappointing performance in the last quarter of 2008 and at the beginning of 2009. Air Asia carried 19 million passengers in 2008 and is expected to fly 24 million passengers in 2009, increasing by 5 million compared 2007. We suggest ways FSCs should respond in positioning themselves in this economic downturn and volatile environment, given the aggressive expansion of low cost carriers (LCCs). What business model can offer passengers a highly differentiated experience while simultaneously improve operational efficiency? How much do we understand about consumer preferences and behavior in a recession and what services are they willing to pay for? 

Which services are more important to potential consumers and how do they respond towards the inclusion or exclusion of several services by their willingness to pay for the airline tickets. How should airlines formulate credible solutions maintain if not gain a larger market share and improve yields in short haul markets.
We draw from a study on consumer willingness to pay for short haul flights (1-7 hours) by LCCs and FSCs from Singapore to Kuala Lumpur, Bangkok, Beijing, Shanghai and Hong Kong. The factors found to be important in influencing consumers’ willingness to pay for an airline ticket were the cost of living, punctuality, provision of meals, service attitude, baggage allowance, leg-room space between seats, income, efficiency of ground services and flight duration. Of these, flight duration and service attitude were found to be statistically significant influencing willingness to pay for short haul trips. Consumers expressed different willingness to pay (sometimes the difference is significant) for a city pair because of the desire for schedule flexibility and different service levels. Comfort and legroom have proved to be insignificant in very shorter routes such as Kuala Lumpur or Bangkok but become important as flight duration increases. Food is not a part of the overall experience for LCC customers! However, FSC customers expect a “differentiated experience” . Self-check-in, online-check-in, priority boarding, special check-in counters and priority waiting lists become important.

Perhaps FSCs should look at service which eliminates free provision of meals for short flight durations while maintaining a reasonable level of comfort and cabin crew services. “There will be less differentiation in the actual business model but more differentiation in the way airlines style their services and brand their experiences.”

Appropriate FSC solutions proposed include fare or product discrimination, changes in fleet deployment, network and schedule adjustments and aircraft equipment, and other cost-cutting measures so as to reduce operational costs for short haul services. Long haul routes are more profitable for SIA and Cathay Pacific, it should try to exploit these market niches by constantly improving its product, such as bringing entertainment systems to new heights or offering a range of services on state-of-the-art technology aircrafts such as the Airbus A330-300. Due to decline in capacity, some aircrafts could be leased on a temporary basis to other airlines, or even to budget airlines until the economy recovers. Other solutions include introducing hybrid models to try to capture a share of the budget airline consumers who are not as price sensitive.

In summary, we would like to state that we believe that FSCs such as SIA should focus on flights that take more than 2.5 hours. We found that as flight duration increases, the more consumers are willing to pay additional services and third degree price discrimination would be ideal . The airline industry is one that is constantly changing and particularly vulnerable to external shocks. Airlines constantly need to constantly work on new business models and strategies to adapt to these changes and “remain in the skies.”

Category: Anthony Chin, news & columns, columns