Strategic Marketing Concepts of Airlines in the German Passenger Market. Present Challenges

Contents

Acknowledgements

Abstract

List of Abbreviations

List of Figures

List of Tables

1 Introduction
1.1 Research Objectives
1.2 Overview of the Study
1.3 Research Methodology

2 Strategic Airline Marketing
2.1 The Classical Marketing and the Marketing Management Process
2.2 The Marketing Mix Applied by Airlines
2.2.1 Product Policy
2.2.2 Price Policy
2.2.3 Place Policy
2.2.4 Promotion Policy

3 Applied Business Concepts of Airlines
3.1 Full Service Network Carriers
3.1.1 Marketing Mix
3.1.2 Advantages and Disadvantages
3.2 Low Cost Carriers
3.2.1 Marketing Mix
3.2.2 Advantages and Disadvantages
3.3 Regional Carriers
3.3.1 Marketing Mix
3.3.2 Advantages and Disadvantages
3.4 Leisure Carriers
3.4.1 General Characteristics
3.4.2 Marketing Mix
3.5 Interferences of the Business Concepts

4 Analysis of the German Passenger Airline Market – Porter’s Five Forces
4.1 Rivalry among Existing Competitors
4.1.1 Competition among Low Cost Carriers
4.1.2 Full Service Network Carriers and Strategic Alliances
4.1.3 Differentiation of Products and Services
4.1.4 The German Passenger Airline Market in Europe
4.2 Threat of New Entry
4.2.1 Entry Barriers through Slot Allocation Regulations
4.2.2 The Liberalization of European Air Traffic
4.2.3 Subsidies at Regional Airports
4.2.4 The Elimination of Further Subsidies via the Aviation Tax Act
4.2.5 Competitive Disadvantages Through Emission Trading
4.2.6 Relatively High Capital and Resource Requirements
4.3 Threat of Substitute Products and Services
4.3.1 Intermodal Competition by Road and Rail
4.3.2 Substitution Through New Media
4.4 Bargaining Power of Suppliers
4.4.1 The Power of Aircraft Manufacturers
4.4.2 The Bargaining Power of Airports
4.4.3 Global Distribution Systems
4.5 Bargaining Power of Buyers
4.5.1 The Number of Buyers
4.5.2 Switching Costs
4.6 Analysis of the Results of Porter’s Five Forces

5 The Demand within the German Passenger Airline Market
5.1 Business and Private Traveler in the Decision-Making Process
5.2 Development of the Passenger Demand in Germany
5.2.1 Development from 2001 to 2013 and Forecast
5.2.2 The Development of Business and Private Travel

6 The Case of Lufthansa and Germanwings
6.1 The Lufthansa Group
6.2 The Lufthansa Passenger Airline Group and its Business Performance
6.3 Business Performance of the Lufthansa Passenger Airline
6.4 The Subsidiary Germanwings and its Business Performance

7 The SWOT-Analysis applied for Lufthansa and Germanwings
7.1 The New Germanwings – a Strategy Change
7.2 Evaluation of the New Strategy in Accordance to the SWOT-Analysis

8 Conclusion and Recommendations

Appendix

List of References
Books, Book Sections and Videos
Magazine, Newspaper and Journal Article
Reports, Documents, Presentations, Emails
Websites

List of Abbreviations

illustration not visible in this excerpt

List of Figures

Figure 1: Interferences of Airline Business Concepts

Figure 2: Michael Porter's Five Forces Model

Figure 3: Market Share of Business Concept in Germany in 2011

Figure 4: Route Network offered by LCC in Germany (January of each year)

Figure 5: LCC Market Share in Germany in January 2013

Figure 6: FSNC and Strategic Alliances Market Share in Germany in 2011

Figure 7: Geographical Segmentation of the European Airline Industry Value

Figure 8: Attractiveness of the German Passenger Airline Market

Figure 9: Criteria for Transport Mode Selection

Figure 10: Decision-Making Criteria for Booking a Business Trip

Figure 11: Decision-Making Criteria according to Preferences

Figure 12: Annual Percentage Change of Passenger Volume (Arrivals and Departure) of Schedule and Charter Flights at Germany’s 22 most Congested Airports

Figure 13: Passenger Volume at German Airports According to Destination and Origin Respectively

Figure 14: Portions of Business and Private Travelers at the Cologne-Bonn Airport

Figure 15: Total Numbers of Business and Private Travelers at the Cologne-Bonn Airport

Figure 16: Lufthansa Passenger Airline Group - ASK and RPK from 2007 to 2012

Figure 17: Lufthansa Passenger Airline Group - Operating Result from 2007 to 2012

Figure 18: Lufthansa Passenger Airline - Number of Passengers

Figure 19: Lufthansa Passenger Airline - ASK and RPK in Millions

Figure 20: Lufthansa Passenger Airline - Operating Result

Figure 21: Germanwings - Number of Passengers from 2005 to 2011 in July

Figure 22: Germanwings - Load Factor from 2005 to 2011 in July

Figure 23: Germanwings - Operating Result

Figure 24: Development of the GDP in Germany and Forecast

Figure 25: Market Share of Existing Business Concepts

Figure 26: FSNC Supply According to Alliance Membership

Figure 27: The Lufthansa Group Business Segments - Share of the Operating Result and the Revenue in 2012

Figure 28: Operating Result of the Lufthansa Group’s Business Segments

Figure 29: Lufthansa Passenger Airline Group - Number of Passengers

Figure 30: Lufthansa Passenger Airline Group - Load Factor from 2007 to 2012

Figure 31: Lufthansa Passenger Airline Group - Operating Expenses in m€

Figure 32: Lufthansa Passenger Airline Group - Regional Market Share

List of Tables

Table 1: Classification of Airlines Operating in Germany

Table 2: Profiles of Private Travelers

Table 3: Business Segments of The Lufthansa Group

Table 4: SWOT-Portfolio Lufthansa Passenger Airline and Germanwings

Table 5: The Business Concept of the NGW

Table 6: Geographical Segmentation of the European Passenger Airline Market in 2011

Table 7: Market Share of Existing Business Concepts

Table 8: FSNC Supply According to Alliance Membership

Table 9: Lufthansa Passenger Airline Group - Business Performance

Table 10: Lufthansa Passenger Airline Group - Operating Expenses in m€

Table 11: Germanwings - Business Performance

1 Introduction

According to SHAW the success of an airline depends a lot on the applied marketing mix, which is the result of strategic marketing and the business concept of an airline.^[1]

Through the commencements of new acts, the liberalization of the passenger market as well as a change in demand, the market has always been in motion. New airlines have emerged and existing ones have disappeared due to different opportunities and threats. Consequently, the German passenger airline market has changed during the last decade from a Full Service Network Carrier (FSNC) shaped to a more and more Low Cost Carrier (LCC) dominated one.

The most current case for changing the business concept according to the recent market situation on the German passenger airline market, is the case of the Lufthansa Passenger Airline and its subsidiary Germanwings.

1.1  Research Objectives

Airlines apply different marketing strategies and thus different marketing mixes in order to tackle the everyday challenges of the German passenger airline market. The objectives of this paper are to give an overview of the recent situation of this market, and to prove the potential for success for the new business concept applied by the German airlines Lufthansa Passenger Airline and Germanwings in the sense of overcoming their weaknesses and to take roots.

1.2  Overview of the Study

In order to reach the purpose of this paper, the inductive research method is applied, which observes the general market and draws a conclusion at the end. Thus, the paper is divided into three major parts, which are the theoretical one, the analyses and the evaluation part.

Chapter two jumps directly into the theoretical section. It comprises information about strategic marketing in general and the marketing mix in particular. Furthermore, it applies the marketing mix to the passenger airline market. The third part describes the existing business concepts of airlines as a result of applied strategic marketing. It evaluates them according to different features and their potential success.

After the completion of the theoretical part, different analyses are applied in order to state the status quo of the German passenger airline market. In chapter four Porter’s five forces model is used to state the recent situation of the market itself. This tool gives the opportunity to evaluate the competition amongst the existing airlines, but also focuses on indirect competitors, which may also minimize the profitability of an airline. However, this tool only assesses the macro-environment of an airline and does not include information about the demand and the micro-environment. Consequently, further analyses are approached in the subsequent chapters. The recent demand and a forecast for the next years are discussed in chapter five and the performances of the Lufthansa Passenger Airline and Germanwings during the previous years are stated in chapter six.

Chapter seven combines the results of the aforementioned analyses in order to evaluate the findings and the just implemented business concept of Lufthansa and Germanwings. Finally, a conclusion is drawn and some recommendations are given.

1.3  Research Methodology

Secondary research was done on quantitative as well as on qualitative data according to each part. Thus, the theoretical part is mainly based on literature reviews.  For the analysis section, statistics were used additionally. These comprise statistics by German and European organizations (Arbeitsgemeinschaft Deutscher Verkehrsflughäfen, Verband Deutsches Reisemanagement e.V.  Deutsches Zentrum für Luft- und Raumfahrt e.V., etc.), suppliers (e.g. AIRBUS), airlines (Lufthansa, Germanwings, etc.), and the government.

2 Strategic Airline Marketing

2.1  The Classical Marketing and the Marketing Management Process

The meaning of the term ‘marketing’ has developed during the last 60 years. Originally, it used to describe the promotion and distribution of products only. Later the satisfaction of consumer needs in order to reach the company’s economic objectives became important. Next, a more complex process, including planning, coordination and control, was taken into account.^[2] Thus, a variety of definitions of ‘marketing’ with different core statements exist today. However, today’s markets are very complex and each component mentioned might lead to success or to failure to the same degree. In addition, many components overlap and can influence each other. Thus, another definition is needed. The AMERICAN MARKETING ASSOCIATION defines marketing as “the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large.“^[3] This definition appears to be the most current and most appropriate, since it covers the main facets of marketing mentioned above, and can be applied to products as well as services. Additionally, it does not only take into account customers and the company, but all existing stakeholders.

On the basis of BRUHN and MEFFERT, the marketing management process can be divided into four different main phases:

- the analysis of the current situation
- the planning phase
- the implementation phase
- the controlling phase

During the first stage, the macro environment is analyzed. Thus, all external factors, which have or might have an impact on the company’s performance, are identified. Additionally, the branch which the company is operating in is inspected. Therefore, research is done on the competition, the target groups, as well as on the supply. Last, but not least, the company’s current situation is analyzed and a future trend is given.

According to the research results of the first phase, marketing objectives can be defined. These objectives can be economic, such as the achievement of a certain turnover or a certain profit margin, or pre-economic, such as the change of the demand behavior.^[4] Additionally, MEFFERT mentions that marketing objectives might have a social or an ecological background as well.^[5] However, these objectives can also be considered as pre-economic objectives since by achieving them, companies again try to improve some economic results, such as the profit. Hence, the marketing objectives have to conform to the company’s overall objectives in order to be successful.

According to the set objectives, a marketing strategy is formulated in the next step. Among others, this includes the definition of the target segments and the target groups, which are supposed to be focused on in the future, as well as a framework for the marketing plan. On the basis of the marketing strategy the operative marketing mix can then be defined. This includes decisions on the product, the price, the promotion and the place/distribution (4 Ps).^[6] Different authors also extend this classical marketing mix of the four Ps to seven Ps in the service sector. Thus, additional decisions are made on personnel, processes and physical facilities.

The third phase of the marketing management process is the implementation phase. During this phase, decisions on how to implement the marketing mix have to be made. These include, for example, decisions on the distribution of responsibilities to the relevant departments and/or to certain people, decisions on the time frame, as well as decisions on the budget. As soon as all these decisions are made, the marketing mix can be realized. The last stage of the marketing management process, phase four, is the controlling phase. At this point, the achieved results match the before set objectives. Although controlling is stated as the last stage of the process, it needs to be done along all phases in order to be able to react to sudden changes at any time.^[7]

Each stage of the marketing management process can be sub-divided further; however, this paper is intended to analyze whether the current applied business concepts of airlines are strategically useful according to the market situation. As a consequence, only the marketing mix, which includes the operative tools product, price, place and promotion, will be broken down further.

2.2  The Marketing Mix Applied by Airlines

According to CONRADY, FICHERT and STERZENBACH, the marketing mix can be seen as the ‘heart‘ of the marketing management process.^[8] Additionally, SHAW describes the classical marketing mix as a ‘powerful model’ to be a successful airline.^[9] As a consequence, the four Ps (product, price, place, and promotion), or rather the airlines’ business concepts, play a major role for airlines and shall, thus, be described further in the following part of this chapter.

2.2.1 Product Policy

The product policy describes the way of analyzing the current products and the design of new ones. This includes all decisions that have to be made in order to establish a product or a service which can be offered on the market later on.^[10]

The classic product is a combination of different characteristics with the objective to satisfy certain customer needs. It can be tangible or non-tangible in the sense of services. As a result, the word ‘product’ in this paper always refers to services as well. In the classic marketing the product usually consists of the core product, which is supposed to fulfill basic needs only, and the augmented product, which is not essential but adds value to the product in order to satisfy additional needs.^[11] This description can be applied to tangible products, such as cars, easily. Here, the core product is the car, which fulfills the basic function of driving from destination A to destination B, and the augmented product could be the interior of the car, which is not essentially needed, but adds value to the product. This approach can be applied to services, such as hotel accommodations, as well. In this case, the core product is the night spent in the hotel itself, which meets the customer’s need of lodging. The augmented product could be a mini bar in the room, which again adds value to the hotel night by offering something that is not essential but nice to have. The combination of the core product and the augmented products allows the creation of unique products and, thus, the distinction from other products.

However, this product approach cannot be applied to any service. Airlines, for example, are not able to distinguish as strictly between the core product and the augmented product. Here the core product comprises the basic flight from destination A to destination B. Thus, the basic need of the customer is met. But there are many services coming along with the booking process already, such as the mode of payment, for example. These services are essential but not a part of the core product. However, they already allow for a differentiation from other products but yet are not augmented products. The customer has to purchase these services in order to use the core product. Augmented products of airlines are, for example, snacks, which are provided during the flight, or movies which can be watched on board of the aircraft. These services are not essential for the realization of the flight but add value to it.^[12]

The next section of this paper will give insight into the variety of components the airline product may comprise in order to achieve a sustainable competitive advantage. The main elements are the route network, the type of aircraft, the flight frequencies, and timings.^[13] Alongside a variety of other features are available. In relation to the point of realization, these can be divided into three different groups – pre-flight, in-flight, and post-flight features, which finally form the service chain. Pre-flight features are those that are used starting with the booking process to the point of boarding. They include services such as reservation, booking, payment, transfer to the airport, entrance to the terminal, and services that are offered at the airport (check-in, lounges, etc.). In-flight features are those realized during the flight, such as the catering, restrooms, and entertainment. After de-boarding, post-flight services can be used. These are, for example, the transfer to the next airplane, the transfer within the airport, a security check or a transfer to the final destination. All mentioned services may be components of the product or might be purchased separately depending on the product design of each airline. Additionally it needs to be said that the stated features only give an insight into the variety of services available. The list of existing services is much longer and is extended constantly.^[14]

The product planning can be divided into five categories, on which decisions have to be made. These are product innovations, product variations, product differentiations, product eliminations, and product diversifications.

Innovations describe the creation of new products and services, which have not previously been on the market yet. Product innovations, if successful, are known to be the most profitable ones. However, there is always a chance of failing. Additionally, the creation of new products is costly in terms of resources needed.^[15] According to the mentioned definition, product innovations are fairly rare in the passenger airline industry, though CONRADY, FICHERT and STERZENBACH argue that the product of the LCC, which is described in chapter 3.2, is an innovation.^[16] However, this is an entirely new concept comprising more characteristics than those of a single product. It takes into account all of the four Ps at once. Thus, the concept itself cannot be seen as a product innovation, but the product of this concept may. It is an innovation since it only combines the core product, which is the flight, and services, which are essential for flying, such as the booking process, for example.

Additional innovations, which were introduced to the German market lately, are, for example, the provisioning of internet access on board of the aircrafts.^[17]

Product variations describe the change of characteristics of existing products in order to react to market changes or to eliminate product errors, whereas the product in general stays the same. Consequently, the product remains up-to-date and satisfies the current demand. By modifying the product, the number of products stays the same.^[18] Within the passenger airline market products are modified regularly by adjusting flight schedules, varying catering components, etc.^[19]

Another way of changing the product portfolio is the product differentiation. Here, an additional product extends the existing portfolio in order to saturate different market segments than the ones that are already served. Product differentiations are, like product variations, used to react to market changes and to make profit of arising potential, such as new target groups for example.^[20] Within the passenger airline market booking classes are a well-known example for a product differentiation, where different target groups are addressed, such as business travelers via the business class and leisure travelers via the economy class. The offered classes may, for example, vary in the size of the seats, the catering or the media provided during the flight according to what the targeted customer requires.^[21]

Furthermore, products can be eliminated from the existing product portfolio. Reasons for this might be, for example, the insufficient congruity with the current demand or high costs.^[22] The product elimination can thus be seen as the opposite of the product diversification. Consequently, the example which was used for describing product differentiation can also be used for describing product eliminations within passenger airline market.^[23] Here different booking classes can be eliminated in order to stop addressing a certain target group.

Contrary to MEFFERT’s four components, CONRADY, FICHERT and STERZENBACH mention a fifth component, which a decision can be made on - the product diversification. It also describes the expansion of the current product portfolio by products which are either related to the existing ones (horizontal diversification), which are a part of the supply chain (vertical diversification), or which are not related to the existing products (lateral diversification). All three kinds of product diversification can be applied by airlines.

Air cargo, for example, is a case of horizontal diversification. Here the airline offers an additional product, which is similar to the existing ones, but can use conjunct resources, such as the aircrafts. Purchasing a catering company would be an example of vertical diversification. When a company, which usually operates in a totally different field of business, starts to operate in the passenger airline market, it is considered a case of lateral diversification.^[24]

2.2.2 Price Policy

The price policy covers all decisions that have to be made on the fare that is charged for the final product. This includes, for example, decisions on discounts as well as on payment and delivery conditions in accordance with the overall marketing strategy of the company.

In most cases price policy aims to maximize the profit. However, there is a range of other objectives that companies try to achieve nowadays. These comprise objectives regarding the company itself, such as an increased cost recovery, full employment or a stable position in the market, and objectives regarding the position in the market in general, such as the winning of new market segments and new customers, or the creation of a certain image.^[25]

The price policy offers a wide range of strategies and instruments to find the right price for the offered products. However, not all of them can be used at any time to the same degree for any product or service due to different characteristics. This also applies for airlines. Their products consist of typical service characteristics. They are, for example, not storable and the production and the consumption take place at the same time, which means that the core product expires after the production, which in this case is the flight. The price building process of airlines therefore is very complex and depends on many factors, such as the point-of-sale, the target group, the season, etc. However, to keep it simple, it can be said that in general the price policy process can be divided into two phases. The pricing process, which indicates the fare levels for each product, and the revenue management, which states how many seats are to be sold at every level. Since this paper looks at the status quo of airlines business concepts and its effect on the customers only, it will not consider dynamic pricing strategies and the revenue management process in detail. Furthermore, it will not take into account, whether prices are based on the costs, the competition, or the value.^[26]

The pricing process of airlines can be divided into two main stages. First of all a price level has to be set. It has to be decided whether prices are supposed to be on a low, a medium or a high level. The low price strategy is also known as promotion price strategy. It is usually used to sell a simple product with a few added services only. This strategy usually does not need much promotion since the low prices are promoting the product themselves. The high price strategy, in comparison, also known as premium price strategy, requires more promotion. This strategy is mainly used for selling more complex products, which include the core product as well as a range of augmented products. All price levels in between are known as medium price strategies.^[27] Some authors argue that airlines mainly apply the two major strategies; the premium price strategy or the promotion price strategy.^[28] However, today such a strict separation is nearly impossible since the price levels vary just as the products of the airlines do. There are prices available at a low, a medium and a high price level as well.

Additionally, the “No Frills Concept”, also known as the “A La Carte Pricing”, has become more important recently. It allows the airline to sell the core product (the flight from A to B) separately and to achieve additional revenues by selling further services. These revenues are called ancillary revenues (see chapter 2.2.1).

Once a decision on the price level is made, a price differentiation takes place. This means that the same product is offered for different prices at the same time. Through price differentiation, the pricing process can get very complex depending on the overall business concept of the airline. Price differentiation is done in order to skim the highest possible consumer’s surplus. However, the willingness to pay varies from target group to target group depending on different factors. Thus, a differentiation within the passenger airline industry is usually done related to the flight schedule, the location where the flight is purchased, the customer status (student, business traveler, leisure traveler, etc.), and the quantity of flights purchased.^[29]

2.2.3 Place Policy

The place policy covers all decisions that have to be made regarding the distribution of the products from the producer to the final customer or the intermediary. Thus, the word ‘place’ can also be replaced by the word ‘distribution’.^[30]

In the context of the place policy an entire distribution system is designed, whereas the final design depends on a number of different factors against the background of the objectives and the concept of the business. These are, for example, the availability to the customers, the height of the costs, the controllability as well as the adaptability of the distribution channel and the achieved yield by each product sold.^[31]

The design process can be divided into two steps. First of all, decisions have to be made on the vertical structure. It has to be decided whether products are supposed to be sold directly to the final customer, or whether one or several intermediaries are supposed to be in between (indirect distribution). In the case of indirect distribution, further decisions have to be made on the number of intermediaries, on the kind of intermediaries, and on contractually conditions if necessary.

Secondly, decisions need to be made on the horizontal structure of the distribution channel, which includes decisions on the width of each step (intensive, selective and exclusive market concentration) and the depth of each step of the distribution channel (type of business).^[32]

Airlines use different ways to sell their products to their customers. Direct distribution mainly happens via websites, call centers, ticket offices at airports and cities as well as via selling points for employees. On the other hand, indirect distribution mainly takes place via travel agencies (online and offline), tour operators, and consolidators.^[33]

Global Distribution Systems play a major role for airlines. These are computer based reservation systems, which combine products and services of different service providers, such as airlines, hotels, and car rentals. They are operated independently and on a worldwide basis. These systems enable the user to compare the products offered by different suppliers and to purchase them easily. Yet, they make the distribution of tickets easy, they also make them more expensive, since the airlines have to pay fees in order to use them.^[34]

2.2.4 Promotion Policy

The promotion policy covers all decisions that have to be made in order to communicate information about the company and its products, to increase the awareness and to achieve the company’s overall objectives in return.

Within the promotion policy a separate strategy has to be formulated according to the overall communication objectives. The strategy includes, for example, decisions on the communication budget, such as the amount and its distribution, as well as the communication instruments on which the budget shall be spent.

Since this paper is supposed to evaluate the final result of the promotion policy of an airline, which is a part of its business concept, it will have a further look at the most common communication instruments, which matter to airlines most, only.^[35]

The Corporate Identity plays a significant role in the promotion policy of an airline. The term refers to the identity of a company, which is supposed to express the company’s portrait externally and internally based on a pre-defined mission and a pre-defined image. It comprises the following items:

- the Corporate Design, which describes the visual appearance,
- the Corporate Communication, which describes the usage of different communication instruments,
- the Corporate Behavior, which describes the working behavior of all employees, and
- the Corporate Culture, which comprises norms and values defined by the company.

The communication in general can be divided into indirect and direct communication. Indirect communication happens via tools, such as classical media advertising (e.g. television and radio commercials, advertising on print media), sponsoring (e.g. of people, soccer clubs, organizations), or online advertising. Whereas indirect communication is available to a high number of people and addresses the audience by chance, direct communication reaches a smaller amount of people, but can ensure to reach them by addressing them directly. Direct communication includes instruments, such as newsletter, dot mailer, and telephone marketing.

Furthermore, frequent flyer programs play a significant role within the passenger airline market. These programs are instruments of the customer relationship marketing, which reward the traveler for flying with the airline. These programs are mainly used by FSNC but have enjoyed more popularity among other carriers as well, lately.^[36]

The list of communication instruments applied within the passenger airline market could be extended indefinitely. However, in order to draw a picture of the promotion policy within the business concept of an airline, the named items shall be sufficient.

In order to create a successful marketing mix, all components are designed in accordance with each other. They are all set to harmonize and to fulfill common objectives. Now that the processes of creating the components were described in short, this paper will have a look at the status quo of existing airline marketing mixes in the sense of business concepts.

3 Applied Business Concepts of Airlines

Airlines apply business concepts according to their marketing strategy. These concepts differentiate in their marketing mix. They may have different product, different price, different distribution and/or different promotion strategies. The following pages will demonstrate the existing business concepts and their characteristics. However, it needs to be said that there is a wide range of concepts defined according to different criteria. According to these criteria CONRADY, FICHERT and STERZENBACH distinguish between three groups, which vary in their capacities as well as their flight plans. The first group consists of Full Service Network Carrier, Regional Carrier (RC), Leisure Carrier (LC) and Low Cost Carrier. These carriers operate on a fixed schedule and the seats are mainly sold separately.^[37] RUPERTI as well as DOGANIS, in comparison, separate this group into three components only. They do not classify RC as a separate business concept. However, since these carriers distinguish from the other concepts in some crucial criteria, they shall be stated as their own business concept.^[38]

The second group of carrier includes the concept of Business Aviation and Executive Charter. These airlines operate upon demand and all seats of one aircraft are sold to one client. The third group only contains one business concept, which is called Air Taxi or General Aviation. These carriers operate on demand and the seats of an aircraft are sold separately.^[39]

The four carriers of the first group are known as the classical business concepts.^[40] They dominate the German market^[41] and shall, thus, be taken into further account only. The second and third groups have become more important during the last years^[42] and are named for the sake of completeness, but they do not play a further role for this paper.

Until the nineties, within the first group of carriers only three major business concepts were mentioned – Full Service Network Carriers, Regional Carriers and Leisure Carriers. Each concept was homogeneous in itself and, thus, easy to differentiate.^[43] Later on another business concept occurred, the concept of Low Cost Carriers. It was still easy to separate from the others. However, a strict separation of today’s existing business concepts is almost impossible, since the characteristics overlap in many cases. Some authors even say that the business concept of the LCC can be differentiated again into a low fare concept and a no frills concept. Whereas the low fare concept focuses on the price, but still adds augmented services to the basic product, and the no frills concept focuses on the basic product only.^[44] Yet, this paper is supposed to focus on the classical concepts only in order to create a clear picture of the basic concepts.

3.1  Full Service Network Carriers

Full Service Network Carriers can be divided into Mega Carrier or Major Carrier, Continental Carrier, and Flag Carrier according to their market position and to their political status. Mega or Major Carriers are the market leaders seen from a commercial point of view. They are operated privately and serve intercontinentally. Some organizations even state a certain turnover, which has to be achieved by an airline in order to reach the status of a Mega Carrier. They are the leader of global alliances^[45]. Flag Carriers, in comparison, are partially held by the government, which in return can implement its politics and achieve different goals, such as the provision of jobs or different routes. Through subsidies, Flag Carriers are usually able to hold their leading position, even though they are most likely not known for achieving their market leadership through their operations. Continental Carriers are usually smaller and operate on selected routes only. They play a secondary role for global alliances.^[46]

The concept of FSNC is known as the oldest airline business concept. Most of the biggest airlines worldwide, such as Emirates, Lufthansa, or United Airlines, are operating as FSNC. They usually serve line hauls in hub-and-spoke-systems^[47] to domestic, continental, and intercontinental central airports, which are located in big cities and offer intermodal connections as well. Besides, some FSNC approach to regional airports, too. The aircrafts are usually built by the two market leaders Airbus and Boeing and offer a capacity ranging from 130 to 800 seats. The fleet of an FSNC is known to be heterogeneous due to different distances, which need to be flown, and shifts in demand, which need to be tackled. Business and private travelers are their target groups, whereas business travelers build the core target group.^[48]

3.1.1 Marketing Mix

In addition to the basic product, which is the transportation from destination A to destination B, FSNC offer different products and services along the value chain attracting their target groups. These services include, for example, catering and the transportation to the airport. For this reason they are not only named Network Carriers but also Full Service Network Carriers.

On continental routes they usually offer two different booking classes, which are the business and the economy class, whereas on intercontinental flights a third (first class) and sometimes even a fourth class is added.^[49]

According to the products and services added and the different booking classes a variety of different prices is available. The price per flight per person depends on factors, such as the point of time of booking and the point of time of travel, the target group and the chosen distribution channel. Usually the prices range on a higher level and comprise most of the components included in the product. Thus, no extra fees occur. However, it has also become common that FSNC try to achieve additional revenues through offering extra services, which are not part of their product.

FSNC use many channels to distribute their products. These are mainly Global Distribution Systems, which are used by travel agencies and travel management companies. Furthermore, they sell their products via the internet and call centers. Their objective is to achieve a high availability of their products and to attract all people belonging to their target group.

Communication takes place online as well as offline. FSNC also use a variety of methods to promote their products. There is no particular approach to be named. Additionally, they offer frequent flyer programs.^[50]

3.1.2 Advantages and Disadvantages

FSNC usually benefit from strong brands, which they have developed over years through their economic or their political status. Besides, they usually dominate in their hubs. Consequently, FSNC have strong negotiating power, and high market awareness. Additionally, they are able to bind their customers by frequent flyer programs. Through their heterogeneous fleet they are able to adjust their supply according to the current demand in the long run. However, since FSNC usually have a fixed schedule, which they have to adhere to by law, they cannot adjust to a change in demand immediately as LC can do. Additionally, their heterogeneous fleets lead to high maintenance costs and to complex processes.

FSNC usually target both business and private travelers with a variety of different products. This mixture again leads to complex processes, which come along with high costs affecting the fares.^[51] Thus, FSNC have to cope with high cost and the emergence of new business concepts, which offer the same core product for less money, such as LCC (sub-chapter 3.2).

3.2  Low Cost Carriers

The business concept of LCC is the newest one. It was first approached in the eighties by an American airline and introduced to the European, including the German, market during the nineties. LCC have gained in importance ever since.^[52]

The idea of LCC is to offer a basic flight from destination A to destination B in a point-to-point-system excluding additional services, such as catering and luggage, at low fares. They usually operate continentally but might offer domestic flights as well. Their fleet usually consists of one aircraft type only, offering a capacity of 150 to 250 seats each. They mainly approach regional airports, which are located close to metropolitan regions. LCC target private travelers, but due to an increasing price sensitivity of business travelers, this target group has become more important for them during the last years as well.^[53]

3.2.1 Marketing Mix

The product of LCC includes, as already mentioned, the basic flight from destination A to destination B only. Services, such as luggage, catering and child entertainment are not included, but can be purchased separately. Thus, the clients themselves can decide what they want to be included and do not need to pay for services, which they do not use. The aircrafts usually have one transportation class only and seats are arranged narrow to each other.

LCC mostly differentiate from other carriers through their low prices. They offer low fares, which cover the basic flight only. Additional services, such as costs for the chosen mode of payment, luggage, catering or the reservation of a seat are not covered by this price, but can be purchased additionally. Thus, LCC are able to offer a low price, but can still achieve additional revenues through selling additional services. These revenues are called ancillary revenues. Furthermore, flights are only available for one price at a time but it changes over time. The closer the time of departure, the higher the price gets.

In order to reduce costs, products and services are usually sold directly via their own website and/or via their own call centers. Additionally, promotion activities are fairly simple but usually state the main message of having low fares available.^[54]

3.2.2 Advantages and Disadvantages

LCC achieve their business objectives mainly through comparative cost advantages against their competitors. These cost advantages are realized through a variety of different factors. They operate with homogeneous fleets and narrow seating within the aircrafts. The products are kept very simple and there is only one price available at the time. Furthermore, LCC approach to smaller airports, where the airport fees are low and the ground handling is fast due to little services and little complexity (e.g. a small number of airlines). More costs are saved due to direct distribution. Thus, retailers do not have to be paid and complex distribution channels do not have to be maintained. The same applies to promotion activities, which are kept simple (e.g. no frequent flyer program). Nevertheless, the business concept of the LCC also has some disadvantages. Whereas a homogeneous fleet may save costs on the one side, it is very hard to react to shifts in demand on the other side due to a fixed seating capacity as well as a fixed mileage that can be flown by the aircrafts only.^[55]

3.3  Regional Carriers

Regional Carriers usually operate in a point-to-point-system connecting destinations with less traffic. Additionally, they serve as feeder for FSNC (e.g. Lufthansa CityLine serves Lufthansa) by functioning between decentralized airports and their hubs. RC have a fleet of fewer and smaller aircrafts than FSNC since they only operate domestically and continentally. Each aircraft offers a capacity ranging from 19 to 120 seats. Thus, they can also approach regional airports. Mainly business travelers use this kind of carrier.^[56]

3.3.1 Marketing Mix

Products and services offered by RC depend on the size of the aircraft, which again depends on different factors, such as the demand on a certain route or the length of it. On smaller aircrafts only one booking class is available, whereas on bigger aircrafts up to two are provided. These products and services are priced at a higher level and mainly distributed via call centers or the carrier’s own website. Promotional activities are rare since RC are usually well known among their target group and do not have to compete with other airlines on the same routes.^[57]

3.3.2 Advantages and Disadvantages

RC try to combine some of the FSNC’s and some of the LCC’s advantages in attempt to minimize the overall disadvantages. For example, they operate with less heterogeneous fleets than FSNC, but still have more than one or two aircraft types within their fleet. They are thus able to react to changes in demand, but can also keep maintenance costs at a lower level. Furthermore, RC approach to smaller airports with lower airport fees than FSNC, which allows them again to save costs. Additionally, RC can benefit from their mother companies reputation, which again saves them costs due to a less intensive promotion. Besides, they serve as feeder for their mother company’s, which again saves costs due to a less intensive promotion. However, such a high dependency on the parent company also brings some risk along. RC rely on the mother company’s performance as well as on its reputation. If the mother company fails, the RC is at risk of failing, too.

[...]

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^[1] Shaw (2011), p. 6.

^[2] Meffert (2012), p. 10-12.

^[3] American Marketing Association (2007).

^[4] Bruhn (2012), p. 37 ff.; Meffert (2012), p. 20.

^[5] Meffert (2012), p. 21.

^[6] Bruhn (2012), p. 47-49; Meffert (2012), p. 21.

^[7] Bruhn (2012), p. 47-49; Meffert (2012), p. 21.

^[8] Conrady, Fichert, and Sterzenbach (2013), p. 418.

^[9] Shaw (2011), p. 6.

^[10] Meffert (2012), p. 385.

^[11] Meffert (2012), p. 387.

^[12] Conrady, Fichert, and Sterzenbach (2013), p. 419.

^[13] Shaw (2011), p. 5.

^[14] Conrady, Fichert, und Sterzenbach (2013), p. 422-425; Shaw (2011), p. 190-197.

^[15] Meffert (2012), p. 396-399.

^[16] Conrady, Fichert, und Sterzenbach (2013), p. 420.

^[17] Opfermann (2012).

^[18] Meffert (2012), p. 446 f.

^[19] Conrady, Fichert, and Sterzenbach (2013), p. 420.

^[20] Meffert (2012), p. 446.

^[21] Conrady, Fichert, and Sterzenbach (2013), p. 421.

^[22] Meffert (2012), p. 454.

^[23] Conrady, Fichert, and Sterzenbach (2013), p. 420.

^[24] Conrady, Fichert, and Sterzenbach (2013), p. 420-425.

^[25] Meffert (2012), p. 466-470.

^[26] Conrady, Fichert, and Sterzenbach (2013), p. 362; Belobaba (2009), p. 73.

^[27] Meffert (2012), p. 493.

^[28] Conrady, Fichert, und Sterzenbach (2013), p. 354.

^[29] Conrady, Fichert, und Sterzenbach (2013), p. 354 f; Meffert (2012), p. 499 f.

^[30] Meffert (2012), p. 543.

^[31] Conrady, Fichert, und Sterzenbach (2013), p. 439 f.

^[32] Meffert (2012), p. 550.

^[33] Meffert (2012), p. 441-445.

^[34] Schulz (2010), p. 264-265.

^[35] Meffert (2012), p. 606 f.

^[36] Conrady, Fichert, and Sterzenbach (2013), p. 453-463.

^[37] Conrady, Fichert, und Sterzenbach (2013), p. 224-226; Pompl (2007), p. 104.

^[38] Ruperti (2012), p. 60 f; Doganis (2010), p. 131 f.

^[39] Conrady, Fichert, and Sterzenbach (2013), p. 224-226; Pompl (2007), p. 104.

^[40] Ruperti (2012), p. 61.

^[41] Deutsches Zentrum für Luft- und Raumfahrt e.V. (2012).

^[42] Conrady, Fichert, and Sterzenbach (2013), p. 225.

^[43] Groß and Schröder (2005), p. 11.

^[44] Gross (2007), p. 13.

^[45] A strategic global alliance is a cooperation of different airlines. Its goal is to achieve better results in pre-defined business fields (e.g. frequent flyer programs, code sharing). [Conrady, Fichert, and Sterzenbach (2013), p. 278 f.].

^[46] Conrady, Fichert, and Sterzenbach (2013), p. 229; Pompl (2007), p. 101 f; Ruperti (2012), p. 104 f.

^[47] Two different types of route networks exist. The hub-and-spoke-system, which has one central airport, the so called ‘hub’, through which all remaining airports of the system, the so called ‘spokes’, are connected. And the point-to-point-system, which also includes several airports, which are all connected with each other through direct flights. In comparison to the hub-and-spoke-system, the number of routes within the point-to-point-system is higher [Conrady, Fichert, and Sterzenbach (2013), p. 200 f.].

^[48] Conrady, Fichert, and Sterzenbach (2013), p. 226-230.

^[49] Pompl (2007), p. 105; Conrady, Fichert, and Sterzenbach (2013), p. 228.

^[50] Pompl (2007), p. 105; Conrady, Fichert, and Sterzenbach (2013), p. 229.

^[51] Conrady, Fichert, and Sterzenbach (2013), p. 227-230.

^[52] Doganis (2010), p. 131.

^[53] Conrady, Fichert, and Sterzenbach (2013), p. 236; Pompl (2007), p. 106 f.

^[54] Conrady, Fichert, and Sterzenbach (2013), p. 239 f.; Pompl (2007), p. 110 f.

^[55] Conrady, Fichert, and Sterzenbach (2013), p. 241 f.

^[56] Conrady, Fichert, and Sterzenbach (2013), p. 231-232.

^[57] Conrady, Fichert, and Sterzenbach (2013), p. 231-233.