市场学case10pricing.docx

市场学case10pricing.docx

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市场学case10pricing

CompanyCase10（pricing）

USAIRWAYS:

THEAIRLINEPRICEWARS

SupposeyouwantedtoflyfromSeattletoSanJose,California.ThefareinJune1995wouldhavebeen$22;in1997,itwouldhavebeen$59.thefarefromDetroittoMinneapolis–whichisroughlythesamedistance–wouldhavebeen4216.obviously,airlinesdon’tsettheirfaresbasedondistance.So,whydothesefaresvarysogreatly?

OnereasonisthecontrastbetweenoperationsofdiscountairlinessuchasSouthwest（theSeattle-to-SanJoseroute）andamajorairlinesuchasNorthwestAirlines（DetroittoMinneapolis）.SouthwestAirlines,knownastheLoveLinebecauseitsoriginalhomewasLoveFieldinDallas,Texas,isano-frillsairline.Itoffersnofoodservices,complimentarydrinks,extensivebaggagehandling,orotheramenities.Itfliesalimitednumberofdirect,usuallyshort,routes,carefullyselectingitsroutesbasedonthepopularityoftheflights.Iflotsofpassengersnormallytakeacertainroute,thenSouthwestmightchoosetooperateonlyonthatroute.Also,Southwestfrequentlyfliesintoalternativeairportsratherthanthemostpopularairport.TheSeattle-to-sanJoserouteisagoodexampleofaSouthwestroute.TherearemanypassengersflyingfromSeattletotheSanFranciscoBayareaofCalifornia.So,Southwestcutsfaresonthatroutetolurepassengers,andcutscostsbyflyingintoanearbyalternativeairport–inthiscase,SanJose.

WhenSouthwestbeganoperationsatSeattle,competingairlinesroutinelychargedfarestoSanFranciscorangingfrom$89to$119.southwestenteredwithpricesbetween$39and$59.oneofthelocalairlinesreduceditspricesto$25andSouthwestrespondedwith$22.howdidthisprice-wartacticwork?

Notsowell.Afterinstitutingthe$22fare,a137-seatSouthwestBoeingpulledawayfromthegateinSeattlewithonly19passengersonboard.Therevenuefromtheflightwas$418,comparedwithacostof$6,567.04–notexactlyarecipeforsuccess.Thingsweresobadthattheflightattendantjokinglyaskedpassengerstoshifttoonesideoftheplanesothatwhentheytaxiedpastthecompetition,itwouldlookliketheplanewasfull.Evenifheairplanehadbeenfull,revenueswouldnothavecoveredhalfthecostoftheflight.

Iffarewarsresultinsuchlosses,whydoairlinesengageinthem?

Theprimarycauseisrelativelyflatairtrafficgrowth.AlthoughthenumberofflyersgrewrapidlyafterWorldWarII,therateofgrowthslowedgreatlyinthe1980sand1990s.In1991,thenumberofairlineseatssoldactuallydeclined.Facinglowertraffic,airlinescutroutesandparkedsurplusaircraftintheSouthwesterndeserts.Cut-ratecompaniesthenleasedthesesurplusplanesatlowratesandwentintobusiness.So,reductionsbythemajorairlinesactuallyprovidedtheinexpensiveplanesthatfueledcompetition.Ascompetitionincreasedinaflatmarket,fareshadtodecline,withtheresultthatmanymajoranddiscountlineswereforcedintobankruptcy,includingEastern,TWA,Braniff,andMarkAir.

ThisexplainsthesituationinDetroit,whereyouwouldprobablyhavebeenflyingNorthwestAirlines,notadiscountairline.BecauseNorthwestcarries74percentofDetroit’soutboundpassengers,ithasalockontheDetroittoMinneapolisroute.Withlittlecompetition,itcanchargehigherprices.Infact,Northwestisthenation’shighest-pricedairline.

“Anypassengerwhopaysmorethan30centsamileisprobablybeingovercharged,”assertsTimHannegan,assistantdirectorforaviationcompetitionfortheGeneralAccountingOffice,watchdogfortheU.S.Congressonfederalprograms.Usingdatafrom1996,ConsumerReportsevaluatedmilegeandfares.Northwest’saveragecostforflightsupto300mileswas68centspermile.ExamplesofotherNorthwestfaresandmileageare:

DetroittoTraverseCity,$154or74centsamile;DetroittoKalamazoo,$228or90centsamile;DetroittoGrandRapids,$135or$1.12permile.AccordingtotheConsumerReportsstudy,USAirwayswasthesecondmostexpensiveairlineat58centsamile,andSouthwestwastheleastexpensiveat17centsamile.Northwestcalledthestudy’sdataflawed,sayingthatthestudyignoredfixedcostsforflightsonrouteswithfewpassengers,whichraisesitsoverallcosts.TogetthekindoflockonanairportandroutesthatNorthwesthasinDetroitrequiresairlinestoserviceallroutes,notjustthemostpopularones.

NotonlyisNorthwestexpensive,travelersalsogiveitlowratingsonfactorssuchason-timearrivals,easeofairportcheck-in,andconvenienceofscheduling.Asurveyofbusinesstravelersonninemajorcarriers,conductedbyJ.D.PowersandAssociates,foundNorthwestbelowaverageincustomersatisfactionforflightsunder500milesandonlyaverageforlongerflights.Thebest-ratedairlineswereContinental,TWA,United,American,andSouthwest.Allthissuggeststhatcompetitionamongairlinesresultsinlowerandbetterservice.

Airlinesdon’tcompeteonlyonprice.Theyalsoofferspecialpromotions.Forexample,SouthwesthaslaunchedamileagewarinwhichitgivesfliersintheRapidRewardsProgramdoublemileagecreditsonflightsbetween20selectedWesterncities.ThatmeansthatafliermightqualifyforafreeflightbyflyingSouthwestonlyfourtimesinoneyear.Otherairlineshaveusedtie-inoffers.Forexample,inarecentpromotion,anyonepurchasinganAuroraLimitedProductionNumberedGoldRollerBallpeninaspecifiedtimeperiodreceived500bonusDeltaSkyMiles.PurchasersofanAuroraSoleThree-Piecepensetreceived1,000bonusmiles.Sometimesmultipleairlineswillparticipateinapromotion.Customerswhopurchaseda35mmSamsungcamerareceiveda32-pageTravelSaverbookletofferingdiscountsontravel,includingacertificatefor$500inairfarediscountsgoodforseveralairlines.

Withallthiscompetition,howcananairlinegeta“lock”onanairport?

Usually,theairlineusestheairportasahub.Whenitfirstnegotiatedwiththeairport,theairlinemayhavecontractedtoprovideserviceonalargenumberofroutesandtousemostoftheavailablegates.Inreturn,theairportwasassuredofasteadystreamofrevenuefromtheairlineandavoidedtheneedtonegotiatewithalargenumberofairlines.Overtime,however,passengertrafficgrowsandmanyairportsexpandsothattheyhavemoregatesthanareneededbythemainairline.Thiscreatesasituationinwhichdiscountersandotherairlinestillhascompetitiveweaponsthatitcanusetodefenditsmarket.

Themostobviousweaponsareprice,size,andlotsofcash.ConsiderthesituationthatexistedinCharlotte,NorthCarolina.Charlotte,with1.2millioninhabitants,isthesecondlargestcityintheSoutheast,butitsDouglasInternationalairporthadnodiscountairlines.TheAtlanta-to-Charlotteroutewasheavilytraveledandexpensive.DouglasInternationalevenhad21availablegatesoutofthetotalof64.ThisseemedtobearipesituationforadiscountairlinesuchasValuJet.YetValuJetchoseatfirsttoignoretheCharlottemarket,insteadstartingserviceonroutesproducingmuchlessbusinessthanwouldhavebeenrealizedbetweenCharlotteandAtlanta.

WhydidValuJetavoidCharlotte?

ThemostformidableobstacleinCharlottewasUSAAirwaysGroup,whichhad94percentofallflightsintoandoutofCharlotte.Ifadiscounterentersthemarket,USAirwayswillcutfarestodefenditsmarket.AfarewaractuallywouldbemorecostlytoUSAirwayshasmuchhighercoststhanValuJet.However,USAirwayshadthecashtosurvivealongfarewar–ValuJetdidnot.

Butfaresandcostsarenotthewholestory.USAirwaysalsohadconnectionstomanyothercitiestowhichpassengerswantedtotravel.So,althoughUSAirwayscostmore,itwasalsomoreconvenientforflyers.NotesRayMartin,salesmanagerforSouthernBagCorporation,“Youcangetbackhomequicklyandeasily.”Thatisveryimportanttothebusinesstravelers,whomakeuponly48percentofairtravelersbutwhoaccountfor66percentofairlinerevenues.Withoutaccesstoconnectingflights,adiscounterwouldhavetroublecrackingtheCharlottemarketunlessitalsoestablishedflightstoAtlanta,Washington,NewYork,andotherpopulardestination.

Anotherfactoristhewillingnessofcommunitiestoofferincentivestoairlines.“We’restartingtoseealotofsupportfromcommunitiesthatknowwehaveotherchoices,”saysDavidUlmer,vicepresidentofplanningforValuJet.Forexample,inNewportNews,Virginia,acity-operatedeconomicdevelopmentgrouppaidValuJet$1.9million.InJackson,Mississippi,theChamberofCommerceprovidedfreeadvertisingfortheairline.Withsomanycitiesanxiousfortheirservices,discounterscanpickandchoosewheretheywanttogo.ThereisnoneedtoenterasustainedbattlewithamajorairlinesuchasUSAirwaysinCharlotte.

Eventually,however,theeasypickingsranout,andValuJetchosetoentertheCharlottemarketanyway.Todoso,ithadtoofferfaresthatwere68percentbelowthoseofUSAirwaysandDelta–itsmajorcompetitors.Moreover,neithertheairportnorthecityusedfinancialincentivestolureValuJet–theydidn’twanttoupsettheircontractswithUSAirways.Ofcourse,USAirwaysrespondedwithlowerpricessothat,eventually,lowerfareswillprevailonthemorepopularroutes,butitmaymeanhigherfaresonlesspopularroutes.

Questions:

1.Whatinternalandexternalfactorsaffectpricingdecisionsintheairlineindustry?

2.Whatmarketingobjectiveshavethevariousairlinesselected?

3.Whichairlineindustrycostsarefixedandwhichareavailable?

Whatimplicationsdoesthiscoststructureholdforairlineoperations?

4.Whatisthenatureofdemandandcompetitionintheairlineindustry?

Doesdemanddiff