1) The airline industry is a difficult business with thin profit margins due to high fixed costs, perishable inventory, and unstable demand. It has also become a commodity business with undifferentiated brands. 2) Airline marketing focuses on the 4 P's - product (schedules, service quality, network), price (dealing with competition and costs), place (sales channels and distribution costs), and promotion (building brands through loyalty programs and advertising). 3) Creating sustainable differentiation from competitors is a challenge given the commodity perception of the basic airline product and experience. Network breadth and service quality are areas the industry focuses on for differentiation.

1. Marketing in the Real World: The
Challenge of the Airline Industry
Dr. Rob Britton
Adviser to the Chairman
Former Managing Director, Advertising
Austin, 28 October 2009

2. Today’s Agenda
• Overview of the airline sector: a difficult industry
• The challenge of a commodity business
• A brief look at the range of activities in airline marketing
• Questions and discussion
> This presentation will be available as a PDF file

3. A Small Commercial Message!
• I want to acknowledge the kind help of American Airlines,
which for more than 20 years has provided travel support
for my lectures at places like UT
• Without their help I could not visit 32 schools this year
help,
• American Airlines believes strongly in supporting the
communities it serves
• We are proud to be a good corporate citizen – in the U.S.
and all over the world

4. Some “Facts of Life” about Airlines
• The two types of carriers – old ones and new ones – are
very different
– Labor rates and productivity
– Customer expectations
• Profit margins are thin – or nonexistent
• High fixed costs (70-80% of total) drive decisions
• It’s hard to match supply and demand
pp y
– Demand varies temporally, by time of day, day of week, and season
– Product is perishable
– When demand declines, airlines cannot remove costs quickly
declines
enough, or proportional to the decrease
– Low barriers to entry

5. Some “Facts of Life”
• Airlines are capital-intensive, labor-intensive, and energy-
intensive
• The airline market is competitive, but the markets that
supply the business are not
– Union labor and airports are monopolies
– Airframes, engines, and others are oligopolies
• Government influence has been and remains enormous
– The legacy of domestic regulation
– Infrastructure on the ground and in the air
– Excessive taxation
– Archaic laws restricting foreign investment
– Continued regulation of international flying

6. A Catalyst to Economies Worldwide
• Airline services precede or facilitate the flow of
investment, information, and human capital – what we
commonly call “business travel”
• Enable global logistics, the fast movement of high-value,
perishable, or time-sensitive goods
i h bl i ii d
• Provide the indispensable foundation for tourism, by
many measures the world’s largest single industry
world s
• Thus a first question for y to p
q you ponder: how can a
business so indispensable to us be on such unstable
foundations?

7. A Commodity Business
• Undifferentiated brands are one legacy of more than 50
years of government control of key economic parameters –
entry, routes, price, and even amenities
• More fundamentally, the economy-class flight experience is
essentially the same – and has been for decades
• The product is produced and consumed in real time, with
many factors outside our control, notably weather and
infrastructure – and thus prone to failure
• These factors have created product uniformity, and the
belief that “a seat is a seat”
a seat
– In the U.S., we collectively became “the airlines”

8. A Commodity Business
• Flight schedules, historically a major driver of choice, has
also caused “commoditization”
– Companies with big networks and lots of flights have always
enjoyed this benefit
j y
– Conversely, smaller firms with differentiated products have been
disadvantaged
• Examples: Eos, Maxjet, and Silverjet in the London-New York
London New
market
– The hotel-industry model of amenity-based differentiation did not
take hold

9. A Commodity Business
• The commodity problem continues to the present day
– Transparent pricing, the result of online distribution, drives much
consumer choice
– The rise of low-cost carriers (LCCs) like Ryanair, EasyJet,
low cost
Southwest, and Air Asia, all offering a simple product focused on
low price, are perpetuating the commodity perception
• It is possible to create sustainable differentiation as
differentiation,
exists in other sectors?

10. Airline Marketing
• Controls and managed competition during the regulated
era made comprehensive consumer and B2B marketing,
as we understand it today, unnecessary
– A curious exception: Braniff Airways’ rebranding, 1965-69:

11. Airline Marketing
• Airline marketing is thus a new discipline, and we’re
working hard to catch up!
• Professor Kotler’s 4 Ps, elements of the marketing mix,
are a good way to understand contemporary marketing
practice in our business:
– Product
– Price
– Place
– Promotion

12. Product
• Fundamentally, what is the product that we “put on the
shelf”?
• To airline people, it starts with schedule: the ability to
carry you from point A to point B is the basic product
• If you offer lots of “A to B” combinations you create a
A B combinations,
network
– Two basic configurations, point to point, and hub and spoke
• Network may also involve partnerships, with smaller
airlines and with peers
– Airlines and their customers benefit from network breadth

13. Product: Service Quality
• Many believe that the aspect of product that we just
discussed is foundational – it is a given
• Th i focus is on service quality – th components of
Their f i i lit the t f
service delivery at airports and in flight
• Within this framework, there are several fundamentals
– Safety
– Dependability
– Reasonable prices
• Beyond this are the softer, but still vital, elements
– Tangible offerings on the g
g g ground and in the air
– Human connections: friendliness, respect, and responsiveness
• Across this wide spectrum, consistency is key

14. Price
• During regulated times, governments encouraged linear
pricing
• It was easier in those days to minimize some hard
economic realities
– High fixed and thus low variable costs
– Perishability
– Temporal variation in demand
• Today, we must also deal with the following
– Vigorous competitors with much lower cost structures
– Different network configurations
– Varied financial conditions (and in some places liberal bankruptcy
laws)

15. Place (Sales Channels)
• Channel strategy has flip-flopped during the past 40
years
• Managing distribution costs has become a major focus,
partly because so few other expense lines seem
controllable
• We have made great progress with “disintermediation”
– The trend toward online selling and e-Commerce
• But it’s also about regaining control of the product – it is,
after all, ours

16. Promotion
• What can we do to create sustainable brand preference?
• The rise of loyalty programs – the single most effective
marketing initiative since the airline business began
– Increased share of wallet
– Useful data on consumption
– Opportunities to sell points to others
• Tactical advertising increasingly moves online
• What about brand or strategic advertising?

17. Questions and Comments