The fare may result in the negative demand for

The airline industry is made up of different groups
of buyers therefore it is important to segment your customers properly, before
accessing their bargaining power. Airline industry divides buyers into
different segments and each segment has different bargaining power according to
their level of need. We have discussed five of these segments here:

 

The business
traveller segment: The business-class segment is the most important segment
of airline industry. In this segment, traveller doesn’t pay his own fare but it
is paid by employer for which he/she is travelling for. This segment requires
high quality service. They cannot predict the timing of their travel in advance
and they have to travel more frequent. Therefore price is inelastic for this
segment which means buyers have less bargaining power.1

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The leisure
travel segment: The leisure-travel segment consist of those customers who
have to pay their own fares and they travel through economy class. They travel
at vacations with their family or alone to tourist places. This segment is
elastic to price, which gives them high bargaining power. Any increase in fare
may result in the negative demand for airline services.2

 

The personal
travel segment: This segment has one aspect similar to leisure-travel
segment in which customer pays their own fare from their own pockets. On the contrary
customers have tighter timing and route constraints which requires service like
business travellers segment. E.g. emergency travels brought up by some family
matters. Bargaining power is considered to be low in this segment as quality of
required services is high.3

 

The
religious travel segment (Hajj, Umrah, Christmas): The religious-travel
segment consist of those customers who travel for purpose of religious
obligations. They travels in huge numbers and at specific dates. They can
travel through  economy and business
class and mostly they pay more than usual because of busy flights schedule for
those specific dates. Since they have no other substitute to travel on those
dates, they are vulnerable to higher prices which means their bargaining power is
low.4

 

The guest
worker travel segment: The Guest-workers segment consist of
those customers who are away from their homes and working in foreign countries.
Their employer pays for their travels but unlike business class they travel
through economy section of flight. They travel annually or at time of
emergency. Since this segment does not require high services they have moderate
bargaining power. 5

Cargo segment: The air-cargo industry consist of
customers who are sending their shipments from point A to point B via airlines.
The air-cargo industry accounts for only 1% of whole cargo industry, but the
values it transports, is worth 35% of whole industry. They are valuable
customers for airline industry and for growth prospect this is key segment.
Goods they are transporting is valuable commodities and requires unique
services e.g. Capacity considerations (volume, weight, hazmat, and
dimensional), highly controlled transport, direct routing and reliability.
Since it requires premium service to transport such good, airlines are charging
high price and the customers have less bargaining power.6

1.2. Variables influencing bargaining power of buyers: 

 

There
are various factors which have a significant impact on the bargaining power of
buyers. Therefore, we divided them in 5 following segments:

 

Product and
services: The airline Customers have a
high bargaining power because there is no much product differentiation among
different airlines. Almost all airlines are providing the same services.
Therefore, airline
companies always try to get competitive advantages over other companies, which
includes greater legroom, on flight entertainments, on ground services. They do
that in order to differentiate themselves from others and justify price they
are charging.7

 

Online
portals: With the evolution of online ticket booking
applications, now buyers have easy access to different prices over internet.
More informed customers have high bargaining
power as they can compare different airlines online and choose options
according to their need.8

 

Low switching cost: The Airline
industry has low switching cost which gives customer opportunity to utilize low
switching cost opportunity and switch to other airline, where they get
high value. There
are factors such as frequent flyers miles and flag carrier which has their
effect on switching cost. Airline usually provides free miles to overcome
switching of customers, however this has not deterred customers from switching by
large extent.9

 

Price sensitivity: Price sensitivity is another
factor which is influencing airline industry. Now the customer is getting
access to online prices through different agencies portal therefore if they see
any price difference among same product or service, they will switch to cheapest
one. Previously, business-travelers segment was not price sensitive but now
corporate are booking travel tickets and they are pushing price competition
higher for this class too.10

 

Distance: Distance between destinations is divided into three
categories according to availability of substitute:

First one is
distance up to 400 km. Here bargaining power of buyers are high for both
travelers and cargo clients, as they have more substitute, like trains, buses,
trucks or own cars. So buyers can choose from different substitute which gives
them high bargaining power. This means that airline has to compete not only
among themselves but also between substitutes.11

The second
category distance is up to 1.000 km. In this category competition remains same
among substitute and between airlines but preferences of buyers are changed.
They need more comfort for this much distance, but they still have choice of
substitute like trains and buses, which gives them moderate bargained power.
But cargo clients still have high bargained power as they can still rally
around available substitute for transportation.12

The last
category distance is above 1.000 km. In this category level of competition
changes in substitute and between the airlines, both travelers and cargo
clients have low bargaining power in this. They find less airline and only
international airline to travel and transport cargo, bargaining power become
from high to low. They don’t find any feasible substitute to travel this much
distance. Let’s take example of Dubai airport, if you want to travel from Dubai
to Pakistan you can only find a few airlines to travel with, so traveller don’t
have much choices.13

 

1.3. Recommendations

 

Airlines should provide more on-flight services to justify higher
price on business class customers. As business class is becoming more price
sensitive, airlines should have more comfort level on the business classes,
which can create differentiation between business class and economy class wider
and justify the price charge from them.

Airlines should bring innovation in their product lines to
differentiate themselves from competitors. They can use vertical integration
strategy by working with agencies (ticket booking agencies), online portals
(tourist agencies) and with hotels (tourist destination places) to create more
demand for their services.

Airlines should remove, unnecessary services
(which can cost more and add less value) from their airline to provide cheap
flights to economy class travelers. They should take early morning and late
night cheap slots at airport terminals to reduce the cost further.

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