Financial Translation of Marketing Strategies-

Financial Translation Of Marketing Strategies-
The key to Success of Budget Airlines

Iyyanki Srikanth

History Of Evolution Of Low Cost Carriers:

Since 1990, The LCC has evolved as a strong influence on the global airline and travel industry. In fact the rapid growth of LCC has reshaped the competitive landscape of airline industry all over the world leading to new market trends. This has significant impact on the consumer’s buying behavior setting up new trends in the buying experience of travelers with tremendous cost savings to the airlines.

The agile model of budget airline is the new product created in the airline industry targeting a different segment of competitors. The introduction of Low-cost carrier has been helpful to successfully attract not only the leisure travelers but also the business travelers. The budget airlines are the conquerors of the regional airline market initially. Now due to increase of the competition the low cost carriers are even considering to operate the short-distance international routes.

Initially many legacy airlines focused on survival, minimizing cash outflows and cutting fleets, jobs and capital investment. But the 90’s changed the trend by making the airlines realize that the capacity cuts created supply and demand imbalances, which made them to progress by restructuring their overall business strategies. The emphasis slowly changed from enhancing revenues to reducing costs and offering value-for-money, particularly on short-haul markets. Airlines kept their costs in check and thus were able to profitably carry traffic in low-yield environment and continued to prosper and increase their market share.

The governments which were strict earlier have also deregulated their markets. They used to control the routes strictly increasing competition between the carriers, which has driven the industry towards a new scenario where the pricing has to be changed. The prior prices targeted the high-class customers with premium pricing strategies where not every one could afford to travel by air. The potential segment that could not travel by air was much higher than the segment which could afford it. This led the airlines to cut down the costs and increase the efficiency. Based on these factors the airline had to work upon the marketing strategies and restructure the whole business plan model. This led to “Evolution of Revolutionary Budget Airline Model.”

Future of Asian Air Traffic:

The Asian air traffic is growing significantly attracting major players to enter the market, which is even boosted by the deregulations of governments. According to the survey done by Rolls Royce, the Asian air travel market is going to overtake North America within 15 years. Despite natural calamities the Asian operating airlines are quite optimistic about the future and the growing importance of Asian customers is reflected in the new aircraft programs. The survey even revealed that the world passenger traffic would grow by a factor of 2.6, representing an average growth rate of 4.9% per annum. The fastest growing markets will be within (to/from) Asia. Overall, Asian traffic is expected to grow by 6.3% per annum, representing 32% of world traffic.

Airline Industry in Singapore:

Singapore being the hub of Asia is attracting large number of visitors. 67.4% of GDP is coming from service sector in which the main ingredient is tourism. The aviation landscape in the Singapore market has become intensely competitive with many new entrants starting their operations. Due to the increased growth of LCC which is leading the entire legacy airline into serious trouble, the airlines, which had an enviable profitability track record like Singapore Airlines are subjected to significant changes. It is driving the company to lower its cost base continuously by making it chronically unprofitable. Now it is not viable for the legacy carriers to depend on their past glory. The stimuli which is key driver for change due to the environmental changes is no longer enough for the legacy carriers. They are redesigning their business procedures to be more adaptable and customer friendly.

Another underpinning vital factor that has a profound impact on the industry is the price fluctuations in fuel and it is making it very difficult for the airline and causing legacy carriers to seek bankruptcy protection. LCC have put more pressure on the legacy carriers to reduce their fares and costs.

The financial problem the industry is facing currently is with the industry’s long-term adjustment to airline deregulation. The Financial axiom “Curse of Competitive environments” is making the organizations to seek exceptionally profitable projects. The fundamental problem is that there is excess high-cost capacity in industry. Competition among air carriers will reduce such capacity.

The airlines which are reaching growth stage in the product life cycle will make some of the carriers to merge with the leading carriers or undergo liquidation or get acquired by the other airlines in the shake out stage itself. The companies that are successful in this sector are opting for cost cutting techniques and are reducing costs if they have to survive in the industry.

The airlines are gaining competitive advantage by effectively cutting down the costs and working upon their value chain. Whatever the cost advantage a legacy carrier may obtain, it does not effectively bridge the gap between the costs of the legacy carriers and the costs of the low cost carriers.

The LCC are increasing their fleet and at the same time they are gaining access to new routes due to deregulation. They are offering IPOs (Initial Public offers) in order to fund their expansion plans. For instance the Valuair, an LCC operating from Singapore has announced that the carrier is aiming to launch an IPO in 2007­-2008 to fund its expansion plans. The CEO also confirmed that the airline is “On Track” to break even by march-2006. The airline is currently operating twice to Bangkok and Hong Kong and once daily to Jakarta and Perth. It is seeking to launch its services to Eastern Australia, Northern China, Japan, Northern India, Pakistan and Middle East.

Emerging Budget Airline Industry:

This shows that the budget airline model’s success is due to the changes in the buying behavior of the customer, which is actually enhancing the financial viability of the organization leading to the shareholders wealth maximization. All these factors are the ingredients that constitute the evolution and success of the budget airline industry. At the same time the budget carriers are also facing severe threat from the competitors due to change of customer preferences. The companies are changing the original no-frills strategy of budget airline to that of providing good services for the purpose of customer retention due to increased competition. For instance the Pacific Blue and Jetstar are focusing on providing services like portable digital entertainment systems, “Video On Demand” to boost ancillary revenues and to compete for customer loyalty.

Problem of Legacy Airline Leading to the Formation of Budget Carrier:

From 2001 to 2004 the airline industry encountered serious financial problems due to macro economic factors, which over predicted the travelers’ demands that affected the operating profit margin of the industry. The success of the airline in long over haul depends on the aligning capacity with the demand. Otherwise it will lead to worsening the effects on the revenues by raising its costs. Not only this but the confluence of several events also affect the cash flows in the industry. Airline profits depend on the costs and the revenues- revenues on what a carrier is able to charge for the flights and the passengers traveling on it. The cost depends on factors like price of fuel, salaries, and wages etc. As the economies of scale could not be met, the costs exceeded the revenues which led to the downturn of the legacy carriers.

Conclusion:

In conclusion I would like to say that the success of the budget airline is a mix of the marketing and financial strategies taking global drivers into consideration. Needless to say, Airline Industry should always keep in mind Quality of Service with special reference to safety and on time performance.