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5 Product Analysis in Airline Marketing Once an airline has its strategy in place, attention needs to shift to the translation of this strategy into the product design process. This Chapter looks at the theory of product analysis in Marketing and discusses the ways in which it can be applied to Marketing in today’s airline industry. 5:1 What is the “Product”? At first sight, it might be thought that applying theoretical product principles to the airline industry is inappropriate. These principles have mainly been developed for industries dealing with tangible consumer products. The airline industry’s “product” is, of course, an intangible one which is instantly perishable and cannot be stored. This is an argument which can be rejected. The airline industry’s product may be intangible and many-facetted. It is still capable of providing − or failing to provide − customer satisfaction. It is also the case that many of the analytical models developed for analysing products in Fast Moving Consumer Goods industries can also be used in the air transport industry. They do, though, have to be used in an analogous way, to take account of the intangible nature of the airline product. In this chapter we shall begin by looking at questions of product innovation and product management using the theoretical principles that can be derived from the concept of the Product Life Cycle. 5:2 The Theory of Product Analysis and its Application to the Airline Industry 5:2:1 The Product Life Cycle In all areas of marketing, the processes of product development, product Product Analysis in Airline Marketing 143 innovation and product management need to be continuous and neverending. The reasons for this are derived from the model illustrated below. Sales Time Intro Innovators Growth Early Adopters Maturity Early Majority Late Majority Decline Laggards Figure 5:1 The Product Life Cycle When a new product is introduced into the market, it is inevitable that it will first go through the so-called Introductory stage of the Product Life Cycle. The product is new, so there will not have been time for advertising and promotional work to come to fruition. Also, the product will not benefit from so-called “Imitative Buying”, because few people will know about it, and fewer still will be using it. The Introductory stage will be a crucial stage in the life of a product. Some pass through it and go on to be successes. A far greater number do not. Instead, sales are disappointing and the product has to be withdrawn from the market after a short time. Somewhere between 60% and 80% of new products eventually come into this category. Sadly, the aerospace industry illustrates well some of the risks involved in product innovation. For example, Concorde was completely unsuccessful in achieving commercial sales and had to be withdrawn from production as a marketing disaster. The only aircraft operated commercially were those given to Air France and British Airways under the most favourable terms. A more recent case was the Advanced Turbo-Prop of British Aerospace. This aircraft, a 64 seat propeller-driven plane, was abandoned after fewer than 40 had been produced. Even re-naming it the Jetstream 61 failed to change its fortunes. The Saab 2000 aircraft had a similarly short and disappointing Life Cycle, again being withdrawn after 144 Airline Marketing and Management very few had been sold. In 2005, Boeing had to stop production of its 717 aircraft after only a relatively short time. Airline marketing also illustrates the perils of innovation. Many airlines have the experience of launching a new route amidst great optimism, only to find that the financial results are so disappointing that it has to give up very quickly. Some have made an innovation in their inflight product, only to find that this is unpopular with passengers and has to be quickly withdrawn. An example of this came in 1990 when Lufthansa up-graded product standards in the rear cabin of its aircraft in Europe, and re-named the whole of this cabin “Business Class”. It was a change which was unacceptable to those passengers who had paid higher fares and who felt that they were entitled to greater recognition. Innovation can also be risky in terms of selling or distribution concepts. For example, in the late 1980’s British Airways invested in a new chain of up-market travel shops in Britain’s high streets using the branding of “Four Corners Travel”. Again the concept had only a short life. It was soon discontinued, with, presumably, substantial losses having to be written off. An example of a failed product innovation which combined together issues in both aerospace and airline marketing occurred in 2006. Earlier, Boeing had launched an initiative to offer airlines the opportunity to give their customers onboard access to email and the internet. This was done using the brand named of Connexion by Boeing. Unfortunately, it did not turn out to be a success. The necessary equipment proved to be costly and unreliable, and added significantly to aircraft weight – a problem which was particularly serious at a time of high aviation fuel prices. Eventually, Boeing had to bow to the inevitable and withdraw the product from the market, after it had been responsible for accumulated losses of more than three hundred million dollars. There is now substantial literature in the theory of marketing about product innovation. This has largely been derived from the work of the US marketing professor, E. M. Rogers. Using Rogers’ principles, it is possible to suggest that new products must show at least the following characteristics if they are to be long-term successes: 1. Relative Advantage Clearly, new products must be substantially better value-for-money than those they are replacing, in order for consumers to accept the risks of using them. 2. Compatibility An innovation is unlikely to be successful if it is a very radical departure from the existing ways in which business is done in the market sector in Product Analysis in Airline Marketing 145 question, or if it is incompatible with prevailing ethical or moral standards. At the time of writing, this might apply to products which were seen as having an unacceptable environmental impact. For example, if Boeing had moved ahead with the plans announced in 2002 for a so-called ‘Sonic Cruiser’ ( an aircraft with a significantly higher cruising speed than today’s aircraft, but with a much higher fuel consumption) Compatibility questions would certainly have affected the likelihood of a successful product launch. 3. Complexity Some innovations fail because they are perceived as being extremely difficult to use, requiring purchasers to invest a great deal of time and effort in becoming familiar with them. As we have seen, part of the appeal of Low Cost Carriers has been that making flight bookings with them over the internet has been so easy. 4. Divisibility It is often easier to persuade consumers to take a series of short steps, rather than one very large and risky one. Each small step can then be portrayed as a trial, the successful completion of which allows confidence to be built. For example, in aerospace marketing, it may be much easier to persuade an airline to buy a large fleet of a particular aircraft if short-term leases of one or two aircraft have demonstrated that the aircraft will perform well in the airline’s particular operating environment. The principle of Divisibility is also very well illustrated by the growing popularity of so-called Fractional Ownership schemes for business jets. Here, the manufacturers of these jets hope that experiencing the product through a Fractional Ownership plan will result in a company or an individual eventually buying their own aircraft 5. Communicability Customers are unlikely to be persuaded to buy a product if the benefits this product will bring cannot be communicated to them persuasively. If these features illustrate some of the requirements of successful product innovation in air transport marketing, it is equally instructive to look at some of the common mistakes that lead to product failure. Products will fail if the size of the market for them has been over-estimated through poor or non-existent market research. They will also fail if the product cannot be delivered on time, or does not perform well even when it is. Mistakes can also be made in pricing policy, with the product either being offered at a price which is too high relative to the benefits it will bring, or too low (in the case of so-called “Status Goods”) to give the necessary aura of exclusivity. Finally, promotional or distribution policies may be poorly 146 Airline Marketing and Management thought-out. For example, advertising campaigns may offend rather than excite potential customers, or the incentives which are given to distribution channel intermediaries may not be enough to encourage them to push the product strongly. All in all, product innovation represents an extremely challenging part of the product management process, with the range of possible mistakes explaining easily why so many products fail to get beyond even the Introductory stage of their Life Cycle. Let us now make the assumption that a new product does get beyond this stage, and enters the so-called Growth phase of the Cycle. Here, sales accelerate markedly as advertising and promotional work comes to fruition, and the product benefits from imitative buying as consumers see it being bought and used by others. Clearly, the onset of the Growth phase is good news for the innovating firm. Substantial amounts of cash will begin to flow in, allowing the original research, development and promotional costs invested in the product to be recovered. Also, production volumes can be increased, bringing the Economies of Scale and Learning Curve effects which will permit lower unit production costs. The Growth phase does, though, hint at some of the problems which will have to be addressed during the later, much more challenging, stages of the Cycle. When it begins, there will be the task of ensuring that production rates are increased to meet the rapidly-rising volume of demand. If they cannot be, there is a risk that a major marketing opportunity will be lost if potential customers are not prepared to wait in order to take delivery. Later in the Growth phase, there will almost certainly be the first worrying signs of a classic problem of product management: the firm’s competitors will see the success of the innovation, and will begin the research and development of their own rival products. In a sense, they will not have to carry out their own market research or demand forecasting exercise. The innovating firm will have done this for them. The leading firm will hope that the Growth phase will go on for as long as possible. It cannot, though, continue forever. Eventually, the Maturity stage of the Product Life Cycle will arrive. Here, firstly, the growth in the size of the total market for the product begins to slow, Most of the people who can be persuaded to buy the product have already done so. The market therefore begins to progressively change from one of growth to one of replacement. Replacement sales are rarely enough to maintain, let alone expand, the volume of demand. The other change of the Maturity phase is more serious still. By this time, rival firms will have had time to complete the research and development of their own, competing products. These will be introduced Product Analysis in Airline Marketing 147 into the market, probably in rapid succession. Worse still, these firms will have had the benefit of being able to study the product of the innovator. They will have been able to isolate its weaknesses and, almost certainly, to develop a product which will leapfrog the standards set by the innovating firm. The Maturity phase of the Cycle is a very challenging one. By this stage, the market is no longer growing rapidly. It is also becoming saturated with competition. Strong product management skills will be needed if the success established during the Growth phase is to be continued in Maturity. In responding to the challenges of Maturity, the situation is by no means hopeless. By this stage, the original costs of developing and introducing the product will have been recovered. It will therefore be possible to make profits at lower prices. Also, the firm should be getting the maximum benefits from production Scale Economies and from the Learning Curve effects which make production more efficient. Again, these factors will increase financial flexibility. The task in managing mature products is to use this flexibility in the most telling way. The keys to doing so lie in the “4Ps” of marketing discussed under the heading of the Marketing Mix in Section 1:1:2. A first possible response is to invest money in the product itself. This can be used to improve its specification so that it catches up with and preferably overtakes the valuefor-money on offer from the products which have arrived in the market later. It can also be used to modify the product so that it can be used to exploit other, hopefully less saturated, markets. Alongside investment in the product, discounted prices can be offered as a possible way of ensuring that growth in the total market resumes, or that a greater share of the existing market is obtained. Also, increased investment in advertising and promotion can be sanctioned with the same two purposes in mind. Finally, greater incentives can be offered to firms in the distribution channel through higher commissions or greater mark-ups. If the right balance of these measures are correctly applied, there is no reason why the success of a product established during a Growth phase cannot be continued for a considerable time once the onset of Maturity has begun. For many products, though, such success cannot be prolonged indefinitely. They will eventually reach the Decline phase of the Life Cycle. This is where market growth comes to an end, and the product is overwhelmed by newer rivals, Once Decline sets in, there is no choice but to abandon the product and take the resources devoted to it and use them for more rewarding purposes. 148 Airline Marketing and Management The inevitability for many products of a Decline phase poses another challenge in product management. If a firm wishes to continue in business and expand, it will be making a grave mistake if it leaves investment in research and development of new products until the Decline phase of its existing products sets in. If it does, the result will be a disastrous period of poor sales and loss of reputation. Instead development and innovation of new products must begin whilst existing products are still doing well. 5:2:2 Product Life Cycles in the Aviation Industry The Product Life Cycle is well-illustrated by applications which can be found both in the aerospace industry, and, by analogy, in airline marketing as well. In aerospace, a very good illustration of successful product management comes with the world’s biggest-selling commercial aircraft, the Boeing 737. The 737 family has a long history - the first 737s were introduced in 1967 - but it continues to sell well today. It does so because, at all stages of its Life Cycle, Boeing has managed the product skilfully. It is now often forgotten, but when the first 737s were delivered in the late 1960s, there were no signs at all of the enormous success that the aircraft would become. Early sales were slow, and the initial aircraft − designated 737-100s − performed poorly. Such was the scale of the early disappointments that, when it faced a financial crisis in 1972, Boeing came very near to withdrawing the aircraft and stopping production. Thus the 737 was close to being one of the many product innovations that fail to get beyond the Introductory stage of their Life Cycle. Boeing did not do so, though. Instead, an improved version of the aircraft, the 737-200, was put on the market. This entered a very clear Growth phase in the 1970s, achieving more than 1000 sales during the decade. By the early 1980s it became clear that the success enjoyed by the 737200 could not continue indefinitely. The aircraft was not especially fuel efficient at a time when fuel prices were very high. It was also noisy, when environmental resistance to aircraft noise was increasing and the first signs were appearing that excessively-noisy aircraft would be banned. Finally, the early 1980s saw Boeing’s increasingly-confident European rival Airbus planning what has become the highly-successful A320 family. The B737 was clearly reaching the Maturity stage of its Product Life Cycle. The reaction of the company was a very positive one. Instead of ceasing production as they might have done, Boeing invested further by introducing three new versions of the aircraft, the -300, -400 and -500 series. These featured a fuselage stretch (in the case of the -300 and -400. Product Analysis in Airline Marketing 149 The 737-500 was the same size as the -200), a more up-to-date cockpit and quieter, more fuel-efficient engines. These new models revitalised the product, to the extent that more than 2000 aircraft were sold between the beginning of the 1980’s and the early 1990s. By 1994, the 737 was again under threat as the Airbus A320 family expanded and became better established. Then, though, Boeing launched further developments in the form of the -600, -700, -800 and -900 737’s. These aircraft have again sold well, confirming the 737 as by far the most successful aircraft family ever in terms of the number of units sold. Boeing is currently in the process of extending the family still further with another stretch of the aircraft, but the company knows that even its Life Cycle will come to an end eventually. Early plans are being made for the development of an all-new family of aircraft to replace the 737 sometime during the next decade. It is clear that Airbus will also introduce a replacement for the A320 at around the same time. A second, equally convincing, illustration of Product Life Cycle concepts in the aviation industry can be found in the history of Frequent Flyer Programmes. FFPs are a major issue in Airline Marketing today, and will be fully covered in Section 9:3. The first programme, the AAdvantage scheme, was introduced by American Airlines in 1981. It was, of course, then perfectly possible that this would turn out to be an unsuccessful idea, unpopular with customers and abandoned quickly. It did not, though. The programme passed quickly through the Introductory stage of its Product Life Cycle and entered a rapid Growth phase. Soon, the programme had many millions of members and was having a significant impact on choice-of-airline decisions in the US domestic market. Once this had happened, it was certain that American would not be left alone to enjoy its success. The very extent of this success meant that its rivals had no choice but to follow. They did so, first in the US domestic market and then, progressively, internationally as well. At the time of writing, FFPs are at the Maturity stage of their Life Cycle. Almost all airlines are participating in FFPs either by running their own programme or by forming partnership and franchising agreements with those who do. Also, most of the programmes are now similar in terms of the benefits they offer − a clear sign of the commoditization one would expect at Maturity. There are now early signs that FFPs may be reaching a Decline phase of their Life Cycle. The programmes are becoming increasingly unpopular with corporate travel purchasers, who argue that they tempt irresponsible employees to take unnecessary journeys to accumulate extra mileage or to protect their programme status. FFPs also make it more difficult to implement changes in corporate travel policy due to “Switching Cost” 150 Airline Marketing and Management effects, a subject which was covered in Section 4:1:4. Many Corporate Travel Managers are now insisting that FFP points are awarded to the company, or are not given at all. Instead, they require increased levels of corporate discounting. All these factors may, in some cases, make FFPs less important in airline marketing in the future then they are today. Also, airlines are now moving to neutralise their effects. The growing links between the different FFPs within airline alliances mean that often passengers can obtain mileage points in the programme of their choice, irrespective of the airline they actually choose to fly. This is, in reality, an admission by the airlines concerned that the effect of FFPs on market share is increasingly a neutral one, but one which comes at a high cost. A third, and especially fascinating, illustration of the application of the Product Life Cycle comes with the marketing of leisure air travel and of vacation resorts. It requires an understanding of a further aspect of Life Cycle theory. At different stages, of a Life Cycle, different types of customer are buying a product, because people vary in their attitudes to new products. When a product is at the Introductory stage of its Life Cycle, the people who are most likely to buy it are known as Innovators. Innovators are people who have relatively high disposable incomes. They tend to be welleducated, confident, and adventurous in terms of their willingness to experiment with new purchases. They are also often insecure and statusconscious, anxious to impress their friends and acquaintances. Because of these characteristics, a particular marketing mix will often be required at the Introductory stage of a product’s Life Cycle, if the Introductory period is to be negotiated successfully and lead to a profitable Growth phase. The product must be positioned as fresh, innovative and exciting. Advertising and promotional policies must emphasise it as statusenhancing, and something which only the smartest of consumers are yet able to appreciate. Often, a high price will also be needed as a further way of emphasising a product’s exclusivity. Late in the Product Life Cycle, a completely different type of customer will need to be targeted. By this time the product will be seen as oldfashioned by Innovators. Instead the target market will consist of so-called Laggards. Those people who will only buy a product when it is very wellproven. They will usually have only a relatively low disposable income, and will often be poorly-educated and also be fearful of the risks involved in buying a new and, to them, untested product. They may be less statusconscious than Innovators. Bringing Laggards into the market requires a significantly different Marketing Mix, compared to the one which will need to be used to attract Innovators. The product must be positioned as well-tested, tried, and Product Analysis in Airline Marketing 151 proven to work. Sometimes, even shame will be used as a marketing weapon by pointing out how widely used the product is and how behindthe-times non-users are. Testimonials from satisfied customers will also be a common tactic. Prices will have to be kept low, reflecting the generallylower disposable income of Laggards. The theory of Innovator and Laggard behaviour should be applied in Airline Marketing to the marketing of holiday destinations. When choosing their holiday, Innovators will often be prepared to travel to new, untried places, because of their adventurous spirit. They will also want to visit somewhere that is status-enhancing. A new resort area will therefore find a readier audience amongst Innovators. The problem that then arises, though, is that Innovators make up only a small percentage of the population − perhaps only 5% of people show true Innovator characteristics. There is always a temptation on the part of those who manage resort development to aim at a move into mass tourism, to bring greater benefits in terms of employment and balance-of-payments gains. The problem of doing so is that once a resort becomes known as a destination for the mass market, it will at the same time become unattractive to Innovators because “everyone” is going there. This is serious because, although small in numbers, Innovators usually have very high disposable incomes. The history of visitors to some of Spain’s holiday resorts illustrates this use of the theory of the Product Life Cycle very well. In the 1960’s Spanish resorts such as Benidorm, Torremolinos and Lloret del Mar were seen as exciting and different at a time when most people were still taking their holidays close to home. By the 1980s the reverse was the case. The resorts were associated with noise, congestion and unruly behaviour, and were no longer visited by the well-off travellers who could contribute the most to the local economy. During the 1990s it became necessary to spend large amounts in cleaning up the resorts in an attempt to reverse these adverse trends. 5:2:3 Managing a Product Portfolio − the “Boston Box” The management of Product Life Cycles is important in Airline Marketing today. It does not, though, provide the sole basis for effective product management. Most firms do not deal in only a single product. Indeed, any that do are probably dangerously over-specialised. Many firms have a range, or portfolio, of products which may run into hundreds or even thousands of different products. They need a framework which will guide their decision-making so that the contribution of each of the products to corporate profitability is maximised.