Traditional airlines (Delta, United, and American) segment the market
into two major segments, one profitable (Business Travelers) and one
unprofitable (Leisure Travelers). These two segments can further be
broken down by average length of trip, frequency of trips, and loyalty
to a certain airline.
Business travelers are very profitable for airlines because they tend
to buy their tickets at the last minute when prices are higher and
their schedules are not flexible enough to change flights. They often
don?t have time to go with a substitute means of travel. Business
travelers pay for the convenience factor. In an economic sense, the
price is relatively inelastic.
Business travelers are offered different levels of service than
leisure travelers. Airlines offer more room for work, telephone
connections, and WiFi connections so that businesspeople can continue
to work on-board. The amount of business travelers can determine
routes in that business travelers demand non-stop trips as opposed to
the hub and spoke system. This is especially prevalent in the Pacific
with airlines like Thai Airways and Singapore Airlines. Due to the
profitability of this value-add strategy, traditional airlines will
focus on these routes as their moneymakers.
Leisure travelers are not nearly as profitable because they are more
willing to change flights and/or modes of travel based on prices. The
leisure traveler segment is very price elastic. This market segment
requires a cost leadership method, which the traditional airlines are
not prepared to compete in. Southwest & Co., the budget carriers,
will dominate this market probably in the end forcing out the
traditional carriers who can?t match the low fixed cost structures of
the cost leaders.
In the next 5-10 years we?ll see a shift in power between the two
market segments. They are two very different segments that require
two different strategies. Business and International travel are more
profitable, but will require successful airlines to keep costs low
while differentiating their service. Budget carriers who will offer a
lower level of service and lower prices will serve leisure travelers.
I hope this answers your questions. Let me know if I can clarify anything. |
