Marketing Within The Airlines/Aviation Industry - Essay Example

? Marketing within the Airlines/Aviation Industry Marketing within the Airlines/Aviation Industry The Airline industry is an expansive and growing industry that is essential to the dynamic process of globalization. It is also conducive to the world’s trade, tourism and growth and investment levels. Travel by air has increased by 7% over the last 10 years, people travel by air for purposes related to business or pleasure to destinations all over the globe. The availability of larger aircrafts that are economically friendly has enabled people to fly out farther and more frequently, as air travel has become cheaper and easier. People from the first world travel to beautiful destinations in developing countries and to cater to the incoming tourists, the governments of these countries have developed tourist resorts, hotels and other tourist activities. This in turn boosts the economic development in these developing countries and increases their per capita income. Eventually, through the trickledown effect the population of these developing countries soon becomes able to afford to be international tourists themselves and thus continues the chain that was spurred by the existence of the aviation industry. With the increase in the scale of globalization and the extensive use of the aviation industry, worldwide business has also grown exponentially as investors are now able to invest in international markets as well as finding customers and production and supply chains there. The increase in world trade and international investments has increased the percentage of people who travel for business purposes, hence giving back some of the benefit to the worldwide aviation industry. Air travel has increased around the average rate of around 6% per annum and according to forecasts will continue to do so in the future. However, the wellbeing of airlines is closely tied to the wellbeing of the global economy. The worst times for the aviation industry have been during the worst economic downturns and the industry has thus learned to take adequate measures to ensure its survival during hard times. Many airlines have consequently taken aggressive measures to cut costs, reduce capacity growth and increase the amount of load they can carry. What happens as a result is that when the economy is healthy again, these measure help take the airlines towards profitable levels faster than normal. Furthermore, the airlines have to strive to meet the ever increasing demands of their customer base. As a result of this, airlines have to pour money into venture that will increase their on-ground and in-flight service quality. As a part of these quality increasing measures, airlines have also introduced ticketless air travel, in-flight entertainment systems and more comfortable seating space and travel experience to attract new customers and keep their old ones loyal to themselves. On the other hand, several other factors are forcing the airline companies to cut costs and frills and become more efficient. The European union has ruled against the giving of subsidies to airlines who are not making profit. Deregulation has also stimulated competition among the industry especially from smaller, lost cost airlines. Furthermore, the airline industry has expanded with help from alliances between international airlines themselves who cooperate to ensure the expansion of networks and the customer base. Forecasts for the aviation industry predict steady growth, much like as it has seen in the past two decades. However, the future for this industry will be fairly challenging and only those airlines that perk up their service quality while still keeping their costs in check will be able to survive and continue being profitable. The aviation industry in the United States has expanded much since the end of World War II and the great depression. The United States remains the single largest market for the aviation in the world with around 33% of the world airline customers. When the aviation industry in the United States was deregulated it had many effects, as a direct result new airlines entered the market, air fares fell and new routes opened up. The industry suffered severe blows as the economy of the country was dealt severe blows on the parallel but has since then adapted fairly well and taken measures to combat such situations in the future. Now, the US aviation industry is one which has low costs and charges low fares. In this age, when global airlines are being called the ‘global carries’ of the future, airlines from the United States have a major stake in this and thus play a major role. Q1: What are the advantages and disadvantages of different incomes for the sales force? Give examples with companies you know best?  According to a study done on salary structures, an effective remuneration program for employees needs an essential balance between the internal pay structure among different levels of employment and the external pay structure in other companies among similar levels of employment. Salary structures are thus designed by professionals so a balance is thus maintained within organizations with regard to these factors. Jobs of similar value are assigned similar salaries and thus different jobs within the organization are classified according to their compensation value. Labor unions are very important for the airline industry in the United States. According to reports about 50% of all the people employed by the airline industry have affiliations with labor unions and as a result national and private airlines employee a mix of workers who are in unions and workers who aren’t. Labor unions are important to the aviation industry because of the importance afforded to them by the importance of labor costs to the airlines. According to research, labor costs weighed up to around 25% of total costs of an airline carrier in 2006 because of cutting down of wages and the steep increase in the cost of fuel. Although the share of labor costs as a part of total costs is high in numerous industries, this aspect is of particular importance to the aviation industry because of the importance of labor unions in the setting of the wage rate. Normally in the rest of the industries in the United States wages are determined by a competitive market process. Although not as elastic to the effects of market forces, the US airline industry does not remain impervious to its effects. An emerging trend in the US airline industry has been to remunerate their pilots graciously in terms of salary and benefits; this is a clever maneuver on the industry’s part because it lures away qualified professionals from other fields and attracts them towards being a part of the airline industry. Airlines are similar to other industries in the fact that they provide different salaries to different levels of employment according to their value of contribution and the importance of it. For example, a pilot is paid more in salaries and benefits as compared to an airhostess because the importance of the pilot’s job to the function of the airline is way higher than the contribution by importance made by the airhostess. This system has its advantages and its disadvantages, many of which are apparent in the airline industry and other industries worldwide. Some advantages of this method of giving salaries are discussed below. Firstly, this system can be regarded as a fair system of payment because precedents are set by the industry average and are not based on a personal bias. It is also essential to stay realistic and realize the differences between the levels of jobs in the aviation industry. Obviously, not all the jobs will have equal or even similar contribution and it is only fair to remunerate the employee according to the value he/she has afforded the airline carrier. This can be explained by drawing a parallel to a situation that is more easily related to a layperson. For example, if there is a house that needs to be built and the people who are building it will be paid according to the number of bricks he/she will able to bring from the brick factory to the construction site, then the person who brings most bricks to the construction site will be paid the most because he/she has made the maximum contribution to the venture. He/she may not be the hardest worker and might have carried more bricks in lesser trips as compared to the others but he/she has ended up being the most valuable in terms of contribution to the building of said house. Hence it makes sense that he/she should be paid more than his/her fellow workers. As compared to this person, there may be another person who worked harder, made more trips back and forth between the construction site and the brick factory and put in longer hours but was not able to bring as many bricks to the construction site as the first mentioned person. It therefore seems valid that this person be paid less than the said first person, even though it may be that his hours, commitment or effort exceeded that of the said first person. In such cases however, the contractor in this case and the manager in a more general scenario is entitled to pay the most dedicated person some bonus or benefits apart from said salary. This is to acknowledge the effort put in by the employee/worker and keeps the morale up in the labor force that genuine effort will be genuinely rewarded. The salaries in the airline industry are given out in a similar manner. And they have similar benefits. Whoever makes the most valuable contribution to the organization through his/her job level is paid more and those who put in extra effort are recognized by giving bonuses and extra employment. There are also some added benefits of there being different incomes for the sales force. Differences in pay can be used to motivate the employees, for example in cases where the pay is pegged to the delivery of performance, achieving goals or meeting standards. Moreover, using different pay levels can help control unit labour cost, improve the quality of the service provided by the sales force and help by being more conducive to team work if monetary benefits are tied to the achievements of the employees as a group. However it should be seen that incomes are not discriminatory on the basis of gender, race, age or ethnicity etcetera but should be based on the job the sales force is doing and the performance they show in that job. There are several schemes that can be implemented and each has its own advantages and disadvantages. i. The airline can set a system of individual payment by results Under this system there is a direct link between pay and output. This means that incentives are stronger than in other schemes because the better the employee works the more he/she will be paid. However, earnings may fluctuate through no personal fault of the employee, this can be as a result of inaccurate targets, inefficient management and a possible lack of resources. Another disadvantage is that since performance is directly related to personal needs, planning for the future is made difficult. ii. Work measured schemes These can be used to determine target performances. A standard is set and the employee who works at the higher rate and more successfully gets paid more as a result. Schemes should however have provisions for downtime and other times that the employee may be non productive. More importantly, this system should be regularly audited to increase transparency. iii. Measured day work These are schemes where the wage is fixed given that the performance level is maintained. These schemes are but costly and difficult to come up with and implement effectively. iv. Appraisal related pay this is where pay is directly related to how an individual performs, bonuses may be given when performance improves beyond expectations. Advantages are that; this is a fair payment system, results in high performance, shows tangible effects of hard work and bettering performance, link between performance and pay is clear. On the flip side, appraisal can be difficult and may sometimes be biased. v. Competency based pay This is where there is a direct link between skill attained and pay received. Advantages include increased skill, flexibility, performance, efficiency and tangible benefits in return. On the flip side, payroll and training costs increase and finally, when skill set cannot be furthered anymore there is less motivation to increase performance. Q2: Is the maintenance to be done by aircraft manufacturers or is it better for them to let it to the airlines, as a complementary income?  The maintenance and repair of aircrafts is an important aspect in the airline industry because this is what ensures that the flight will be a safe one, that the airplane will not malfunction or crash midflight or not be able to land. These are all horrific possibilities that come as a result of below the par or negligent repair and maintenance of aircrafts. When it comes to assigning the responsibility of aircraft repair and maintenance there are two options that are most viable. The responsibility can either be taken up by the aircraft manufacturer or be given to the airline that is operating the aircraft. There are advantages and disadvantages associated to both scenarios and several of them are discussed below. If the responsibility of the repairs and maintenance is given to the airline manufacturer there are several advantages that come along. Firstly, the aircraft manufacturing firms have a more intimate knowledge of the inner workings of aircrafts because they are the ones building them. They know how everything inside an aircraft functions; how every little piece of machinery works in coordination with the other machinery. The technicians working for these aircraft manufacturers have in depth knowledge the functioning of each type of aircraft because that is what their field is centered around. Thus they are more adept at finding possible faults when there may be any in the aircrafts machinery. Also because of their technical expertise, these technicians know exactly what problem areas to look for when doing the aircraft’s repair and maintenance. They know which areas are critical when doing a maintenance check and which areas they need to thus target. If they find a fault, they would have a better idea what could be causing it. They also know better how to fix that fault and how to better make sure that the fault doesn’t come up again. Another advantage of letting the aircraft manufacturers handle the repair and maintenance is that if they find recurring fault with a particular aircraft model, they can report it back to their management and the firm’s designers can then work to eliminate that fault or shortcoming in an improved aircraft model. This will ensure that the firm’s aircrafts evolve in more efficient ones over time because the company revises designs to remove imperfections as a dynamic process. The picture looks all rosy when the advantages are talked about, however, there may also be some disadvantages in letting the aircraft manufacturers handle aircraft maintenance and repair. This adds additional work to the already hectic workplace of an aircraft manufacturing firm. Moreover, there is also the issue of there being communication errors between the airline and the manufacturer. Since the airline is the one using the craft they will know what problems a particular plane has been experiencing and what areas should be checked when the plane goes for maintenance. However, due to erroneous communication between the two parties, some information may be omitted and thus some problem areas over looked when the technicians of the aircraft manufacturing company take the craft in for repair and maintenance. However, this is not it. The repair and maintenance of the aircraft can also be kept the responsibility of the airline that is operating the aircrafts. This has several advantages as well. First and most importantly, it will result in cost savings for the airline because they don’t have to outsource this job. Second, they are the ones operating the aircrafts so they are more likely to know which areas are becoming problem areas and should be looked at and repaired during maintenance. Third, there is little time lag between spotting the issue and getting it repaired because the aircraft does not need to be sent to the manufacturer for repair and the airline’s own technicians can solve the possible issues. Furthermore, there are also disadvantages of letting the airlines take control of this job. Their technicians tend to be less intimate with the inner workings of an aircraft than the technicians employed by the manufacturers and thus they are less qualified in comparison to tackle problem areas in the craft. They may sometimes not be aware of a problem’s root cause because their firm specializes in the provision of a service not the repair of the aircraft. In summation, it seems that it is better to let the air craft manufacturers handle the aircraft’s repair and maintenance because they are more qualified to do so, even if it comes with a higher cost for the airlines because the higher cost is almost negated by the benefits of having more qualified and more suitable technicians handle repair as this drastically reduces the chance of any mishaps and the resulting loss of reputation on part of the airline. Q3: Yield Management, what is it? Give an example in a given field  Since the deregulation of airline prices in the late 70s, the prices in the airline industry have gotten mighty competitive. With time the system of pricing in the airline industry has gotten more and more complicated and as a result of these changes the yield management system used by the airline industry has become an increasingly complex and obscure system. Pricing systems in airlines today prove extremely challenging for concerned officials because it does not conform to “the law of one price”. Dynamic management also referred to as yield management or revenue management is basically a set of principles of pricing strategies based on the objective to maximize profits. This pricing method requires two basic principles for it to work effectively. One, that the product in question should have an expiration deadline as airplane flights normally do. Second, that the capacity is fixed in advance and it is considerably difficult to change the said capacity in the short term as is the case with airplane capacity. Due to these factors very large fluctuations in the opportunity cost of sales are created. Because one sale is a possible unavoidable ensuing sale and that the value of a commodity in a shortage is the highest value to the consumer the forecast of this value becomes the process of yield management. Techniques of yield management are reasonably precious to the airline industry. Research has shown that American Airlines makes an additional $5m per annum owing to its yield management practices. It is thus quite evident that price discrimination of this sort is quite valuable economically. In this day, the system of prices used by the commercial airlines is very opaque to the consumer which lets the airline companies change prices as frequently as need be. Pricing in the United States airline industry is a very obscure process. Sometimes the fair for one way travel amounts to more than the fair that is allotted to a round-trip, there is also a huge price difference between tickets that are refundable and non refundable, price changes are commonly recurrent and sometimes the cost of a roundtrip depends upon the city of departure even though the service and offering provided are the same. Quite surprisingly, the research done on yield management or dynamic price management is very little compared to the amount of importance it hold in the airline industry. However, this may be attributed to the general obscurity surrounding the comprehension of the concept. Most common research on the topic relates to concerns about how to maximize revenue. One approach in this arena is one where the airline decides whether or not to serve the customer after they have approached based on how profitable it will be. However, this will in practice be hazardous to the market value of the particular airline that decides to implement it. A more practical approach is one that assumes that the customer may or may not intend to pay when they approach the airline. A closed setting solution is then found to the dilemma using an exponential equation to generate demand figures. Another theory suggests that the problem should be tackled by using a predetermined set of finite prices and that these should depend on the remaining time and stock. According to this model, customers place a request for a particular flight and they are given a price based on the availability of seats and time limit left. However, some authors consider a completely different approach; this approach does not require dynamically changing prices to maximize revenue. According to this approach of yield management, high paying customers are served and a high mark up policy is implemented. Moving further, numerous authors consider the possibility of implementing an origin-destination framework. This model assumes that there are numerous origins, one hub and a singular destination. Price for each flight is different and because of the different combination of origin, hub and destination require different statistical equations to arrive at the figure for demand. One thing remains constant in the study of yield management and price discrimination and that is the never ending tussle between theoretical concepts and practical situations. There are very complex mathematical equations that explain this theory and the methods it uses and benefits it concurs onto the industry, however they are too complex for a mathematical layperson and cannot be easily understood. These complex formulas however, help analysts determine answers to simple ‘looking’ real life situations in this airline industry, regarding specifically to yield management and price discrimination. (R. Preston McAphee and Vera te Velde). Another study done on yield management in the aviation industry illustrates more on the concept. This paper begins by a personal account given by the author of this particular time in an airplane when he told the man in the seat next to his that he had purchased his ticket for $384, his neighbor was shocked for it turned out that he had paid $1500 for the same roundtrip ticket. The author goes on further to explain that this difference in the prices is due to a process called yield management or revenue management, which is a process undertaken by airlines to maximize their revenue collections. The author puts the method behind yield management quite simply; “sell the right seat to the right type of customer, at the right time and for the right price” and that about sums it up for yield management, the rest is technicalities. The most important thing is to locate the pivotal tradeoff between selling tickets at discount to get the maximum customers or selling expensive tickets and not having that many customers as a result. However, the actual process is not as simple as it has been put in words, I t is quite difficult because it involves the use of past and present consumer trends and behavior which are difficult to obtain and work with. Ideally, yield management is meant for service industries and this is why it is perfectly suited to the aviation industry. However there are certain market characteristics that make it particularly efficient when applied to or implemented in any service sector industry. These characteristics are listed below: i. Fixed industry capacity ii. The ability to segment the market into different sections iii. Inventory that expires or services that have a deadline iv. The ability to sell the product/service in advance v. Demand that is always fluctuating vi. Low marginal sales costs vii. Difficulty in changing short term capacity However, it is important to keep into consideration that the picture is not all rosy. These are some drawbacks with the implementation of this method. These are listed below; i. Overbooking ii. Discounts allowed iii. Traffic management As a conclusion, this paper states that the major issue in this situation is measuring the actual benefits gained by implementing yield management. Furthermore, price discrimination methods though rationally justified sometimes result in building resentment among the consumers and alienating them. another key issue is that employee morale comes under danger of being depressed due to the implementation of price discrimination. A specific case of the implementation of yield or revenue management is seen in the case of American Airlines presented below. American Airlines was the company that pioneered automated flight reservation systems. With time they specialized and improved the process to include the centralization and controlling of all reservation activity in the company. At American Airlines almost all processes are automated because the yield management system is too large and thus too complicated to be operated manually. They thus decided to split this problem into three smaller problems that would invariably be easier to tackle. Today they have a module that manages these three issues called DINAMO. As a result of using this system it was estimated that spoilage percentage was 3% which meant that the probability of empty seats on any given flight of American Airlines was 3%. However, sometimes a flight is “critical” and does meet the requirements of the yield management system and thus has to be manually looked at by the analysts. With the efficiency of DINAMO, even the efficiency of this manual process has increased by 30%. American Trans Air on the other hand is an example that uses manual operations to control the same functions that the DINAMO operates in an automated process and they seem to be functioning quite efficiently. But one very important consideration to not lose sight of is the difference between the scale of operations of the two organizations. (Fredrick Voneche, 2005). Bibliography Boeing (2012). Long Term Market: Current Market Outlook 2011-2030. [Online]. Available at: Airbus. [Online] Available at: Fortier, K. and Fusco, C. J. (2002). Salary Structures. Hirsch, B. (2007). Unions and Wages in the US Airline Industry. Hirsch, B. (2007). Wage Determination in the US Airline Industry: Union Power Under Product Market Constraints. Hirsch, B. and Macpherson, D. A. (2000). Earnings, Rents and Competition in the Airline Labor Market. Van Giezen, R. W. (1996). Occupational Wages and Employee Benefits in the Airline Industry. McAphee, R. P. and Velde, V. Dynamic Pricing in the Airline Industry. California Institute of Technology. Voneche, F. (2005). Yield Management in the Airline Industry. Smith, B.C., Liemkuhler, J. F. and Darrow, R. M. (1992). Yield Management in American Airlines. The Institute of Management Sciences. Barlow, G. L. Yield Management in Budget Airlines: The Case of EasyJet. Dobbs, D. A. (2008). Air Carriers’ Outsourcing of Aircraft Maintenance. US Department of Transportation, the Inspector General, Memo to the acting FAA Administrator. Read More