The AIRLINES Case Study

SUBMITTED BY:Archit GargGeet SawhneyMohit SharmaSiddharth Kumar

Q1: How did the airlines find or discover the opportunities for growth?

The airlines company discovered that the passenger differs in their expectation. Business travellers value convenience, comfort and service while leisure travellers were more interested in just commuting from one place to another.

Q2: What segmentation variables or bases did they use in segmenting the market?

Segmentation was done on the basis of Demographic differences i.e. Social class, ability to pay and occupation.

Q3: Make profile of each of three segments. What targeting strategy did they select?

The three profiles where: - Economy: For $250 per passenger - Business: For $500 per passenger - First Class: For $1000 per passenger

They went for product specialization because the company concentrates on making single product category that it sells to several segments.

M1 M2 M3

P1

P2

P3

M1 M2 M3

P1

P2

P3

Q4: How did they take position or what position strategy they applied?

They have used User positioning and Quality/Price positioning strategy.

User positioning because it involved positioning product as required by some user group.

Quality/Price positioning because product is offering best value for money.

When can segmentation go wrong? How to avoid segmentation from going wrong? What precautions to take?

Basis of segmentation are as follows. If any of the following is not read or analyzed properly , it can go wrong.

Geographic & Demographic variables: Purchasing power, size and characteristics of the segment are interpreted

wrongly. Small and heterogeneous segments. There can be an overlapping in the segments making them in-differentiable from

each other. As in this case, there might be customers who are capable of paying for business class but want to travel in economy class.

  Psychographic Variables: Wrong approach in targeting heavy, medium and low users. Improper selection of services to be provided to suit the lifestyle and personality

of the customer.   Behavioral Factors: Services provided should be based on frequency and urgency to the customers. Loyalty and user-status of the customers should form the basis of the services.

The management can avoid wrong segmentation in this case by:Clearly defining the size of each class in terms of no. of seats

allocated to each class.Services provided in each class should be at par with the prices paid.Ascertaining the profit earned from the seats allocated in each class. Segmentation bases for airlines: Geographical: Tier 1 and Tier II cities

Demographics: - High Income & occupation Psychographics - Life Style - First Class- Customers conscious of status - Business Class –customers who wish comforts and facilities. - Executive Class – customers who wish faster travel at minimum rates Behavioral - Business and first class will remain loyal if they get the required luxuries they expect. - Economy class will remain loyal if they get reasonable travel fare.

Calculate the following :

RevenueCost IncurredProfitProfitabilityBreak Even Point(B.E.P.)

For both strategies for the full plane, for each class and per passenger in each class, assuming that plane is 80% loaded.

UNDIFFERENTIATED STRATEGY

REVENUE

No. of Seats, A= 300Average Load Factor, B=0.8Average no. of seats occupied, C=A*B=240Charge per Seat, D=$250

Revenue=C*D = $60000

EXPENSES

Fixed Cost = $50,000Variable Cost per Passenger = $20Total Variable Cost = No. of passengers * $20

= 240 * $20 = $4,800

Total Expense = $50,000+$4,800 = $54,800

PROFIT  Profit= Revenue - Expense

=$60,000-$54,800 = $5,200

PROFITABILITYProfitability by Revenue= (Profit / Revenue) *

100 = ($5,200/$60,000) * 100

= 8.66%  Profitability by Cost= (Profit / Total Cost)

* 100 = ($5,200/$54,800) * 100 = 9.45%

BREAK EVEN POINT (BEP)

Contribution/unit, C = Price per ticket – Variable Cost per ticket

= $250-$20 = $230Fixed Cost, FC = $50,000BEP (in units) =FC/C = $50000/$230 =217.39 = 218 seatsBEP (in sales) =FC/PV ratio = BEP (in units) * Price per ticket =$54500

DIFFERENTIATED STRATEGY

List down all benefits of segmentation to all possible stakeholders of the airlines.

CUSTOMERS   Customer satisfaction is achieved if the customers get their choice and

preferences. Customers get the value for their money.  SUPPLIERS AND VENDORS  Travel agents: Better commission due to increase in customer base. Caterers: Opportunity to provide superior quality food and beverages. EMPLOYEES  Better wages, therefore they are more satisfied. Clarity in job description, resulting in better performance.  SHAREHOLDERS  Higher dividends Increases faith in management Brand loyalty

Who all could be the beneficiaries?GovernmentService IndustryBusiness travellers- They get personalized

service, comfort and convenience.Company- The profits of the company has

increased a lot due to segmenting the market.

(a) Do you think any segment is subsidizing for any other segment? If so who to whom? If not. Why not?

No, segment is subsidizing for any other segments.

They are receiving services commensurate for the price they paying.

(b) What do you mean by absolute and relative satisfaction? Do you think there is a possibility that any class may feel relatively dissatisfied although absolutely satisfied? How would management prevent it?

Absolute satisfaction of segment:  In this case there is no external comparison but the comparison

is only between what the customer/buyer expected to get and what he got after buying. This occurs when the perceived and delivered value match from the point of the view of the customer.

Relative satisfaction:

In this case customer/buyer compares the value he gets with what the others have got.

For relative satisfaction, a customer should perceive same value/cost ratio as that of another customer in the other high value and high service segment.

Relative dissatisfaction although absolutely satisfied: This occurs when the customer is fully satisfied with the

services received according to his perception, but is relatively unsatisfied vis-à-vis the other high value and high service segments.

In this case, we don’t think any class feels relatively dissatisfied as the price paid are in proportion to the services provided for every class.

 However there is a possibility that the first class and business

class have relative dissatisfaction if the service quality and differential benefits go down.

Prevention of relative dissatisfaction:Management should ensure that the price paid by the

customer is in proportion to the services and values provided. Value/Cost ratio across various segments would remain same.

Thank You