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THE LIMITED AVAILABILITY OF CHEAP AIRLINE SERVICES AS A FUNCTION OF PRICING STRATEGIES IN THE INTERNATIONAL CONTEXT

Table of Contents
OVERVIEW
Cheap airline services generally imply long haul carriers that offer cheaper terms of travel as compared to conventional flights. The process of globalization has resulted in increasing international competition, which has greatly influenced the pricing strategies of different firms, including airlines. This study will use the cases of low cost airlines like Ryanair and EasyJet. Ryanair is one of the major low cost airlines in Europe. The pricing strategy of these low cost airlines will be explored through the review of hyperbolic price functions, which lead to the optimal price curve for different routes. The review of the pricing strategies also shows a major correlation between average fare amounts and the length of routes, the flight frequency of the given route, and the proportion of fully booked trips. Another important correlation is that, as the portion of the seats sold by the flight vessels at both departure and destination airports increases, the costs of flight tend to decrease (Bisignani 2006, p 45). The correlation between changing pricing to length of routes and the regularity of flights is negative. Conversely, with increases in competition, the discounts offered on advance fare increases. These airlines also employ a basic approach of eliminating certain luxuries, comforts, and the services, ordinarily associated with luxury airlines (Bisignani 2006, p 45). Some of the problems that come with the competition of these airlines, according to different customer groups, include the introduction of hidden charges, increasing concerns about the levels of safety and the comfort offered by the vessels.
INTRODUCTION
The desire to make airline services affordable and accessible continues to attract various approaches and strategies among different companies from different countries, across different periods. Studies show that the emergence of the low cost carriers during the mid-1990s led to significant changes in the airline industry, particularly within the United States and Europe (Chandler 2002, p. 4). Low cost airlines like Ryanair and EasyJet rose quickly within the European market, especially during the five years before 2002. The UK market has witnessed a very dramatic growth, where – during the 2001 summer, cheap airlines comprised of more than 22 percent of the short-flight capacity originating from London. The airlines were also present in 58 percent of the total 128 short distance routes operated from London (McCartney 2011). During the five year period between 1997 and 2002, the passenger seat capacity served from London had increased by 17 percent. Virtually all these changes and increases were linked to the presence of low cost flight vessels.
Some of the common characteristics of cheap airline services include reduced fare, point-to-point airline services, lack of seat assignment, secondary airport flights, lack of free meals or drinks, higher flight frequency, and short flights. These characteristics are usually conducted in various ways depending on the airline’s chosen operational strategy (Flouris & Walker 2005). Low cost carriers have entered and grown the markets, mainly through winning consumer confidence that the fares charged are highly reduced. The perception has been created through extensive advertising and the optimal use of public and corporate relations. For instance, Ryanair offers fares as minimal as one penny (exclusive of taxes), therefore resulting in the immense media coverage of these airlines, thus more support for their services. Two of the mentioned players, EasyJet and Ryanair have been very efficient in using the media appeal of their legal disputes with traditional airlines like Lufthansa and British Airways, which promotes their economical costs and services. Generally, cheap airline services are conducted in ways that show high levels of efficiency in terms of time and costs. The increased levels of efficiency are important, but it is possible that they are substitutes of some of the areas affected by the reduced fares, where they are available. While the media has aided these airlines communicate information regarding their low fares to the public, it has also paid attention to the availability of the very low fares services. Some accounts offer sketchy evidence of the limited coverage of the very low fares services. Other reports have explored the range of fares that a cluster of travelers may have offered for their airline tickets, leading to the claims that these airlines could only be regarded as ‘low fare’ airlines; in the case all their ticket rates are low. This study explores the availability of low fares in different markets, with reference to varied purchasing scenarios.
Aims and objectives of the study
The study aims at exploring the unavailability of low cost airline services due to the pricing strategies of low cost airline companies, within the competitive international market. A critical focus will be placed on the firm’s operating market positioning, which distances travelers from the services of full cost airlines, while at the same time offering services that are relatively as expensive as or more expensive than their services. Using the case studies of low cost airlines like Ryanair or EasyJet, the study will pursue the following objectives:

To identify the different pricing strategies used by low cost airlines to survive on the global market
To Explore whether the pricing strategies of these airline companies create technical unavailability of the low cost services
To explore the competitiveness of these airline companies, in the light of opportunities, challenges and threats from a multiplicity of perspectives

Research questions

How do the different pricing strategies used by low cost airlines help them compete on the global market
How do the pricing strategies of low cost airlines create technical unavailability of their low cost services
How do low cost airlines compete, in the climate of opportunities, challenges and threats within the industry

Rationale of the Study
With the rapid changes related to globalization and the liberalization of trade, global firms are required to gain more competitive advantage. As a result, the competition across the international airline market is becoming significant to the management of low cost airlines. With that in mind, it is necessary to explore the pricing strategies of low cost airlines, that can help them gain competitive advantage within the market, and those that are likely to disfavor their survival. From the cases of major low-cost airlines in the European airline market, this study will explore the effect of pricing strategies on market placement and industry segmentation. The information drawn from the study, will inform the management of low cost airline companies, as well as offer pointers on areas that can help them maintain competitiveness as well as ensure that the welfare of customers is maintained.
LITERATURE REVIEW
Multiple studies have attempted to explore the manner in which low-cost carriers have affected the global airline industry. Academic inquiries have attempted to explore the different kinds of strategies employed by companies that entered the budget airline sector. Studies show that various strategies have been followed by a mixture of results by different countries and across different times (Mentzer 2000, p. 34). Generally, the literature shows that some companies have performed well while others have met a range of different challenges, which threatened their survival. However, the overall assessment indicates a positive trend of growth as companies seek the different ways of engaging the complex and diverse nature of the market. In this regard, it becomes necessary to explore some of the dominant themes that attend to the emergent, development, and challenges of cheap airline services across the globe (Buck & Zheng 2004, p. 72). Some of the dominant themes covered in the literature include strategies employed by cheap airline carriers, the impact of cheap airline carriers on economic systems, relative levels of market, challenges, performance, and criticism of some of the approaches applied.
Pricing strategies and marketing practices
According to some studies, low cost carriers opt for smaller planes in order to save on the maintenance costs (Koenigsberg, Muller & Vilcassim 2008). They also limit the amount of inner luxuries in order to make room for more passengers. There are no facilities like special rooms and the seats are also fixed such that there are no recliners on board. Some of these airlines have their personnel playing multiple tasks in order to save on the personnel wage bill. It is important to consider the fact that these airlines engage multiple processes of saving on costs in order to shield themselves from the possibility of the losses that might result from the mismatch between the levels of income versus operational expenditure. Other low cost airlines only operate on one-way basis in order to maximize amounts of trips. According to a study by Malighetti, Paleari and Redondi (2009), these companies do not rely on only these price cutting strategies, but also employ discriminating pricing to maximize their returns. The study gave the example of Ryanair, whose pricing policy focuses on the influence of the competitive economic context. For instance, the fares offered by the airline tend to increase until the very last bookings, before flight bookings are closed. In essence, this means that travelers are required to pay higher fares as the date of flight approaches (Koenigsberg, Muller & Vilcassim 2008). In the case of EasyJet, their pricing policy is quite unfavorable, as the prices of available seats increase by up to £10 as the time of departure draws closer. In a case where the demand for seats is very high, the increase in price is set higher than the ordinary £10, which leads to price differences in the range of £150 for a one way flight, above the lead in flight fare (Pels and Rietveld 2004).
Timing is also a matter of strategy since it involves the scheduling of flight programs during the hours that are not packed in order to avoid congestions, which often result in delays. In this area, Alamdari and Fagan (2005) pointed out that this strategy is likely to exclude certain groups of travelers. This is clear from the fact that these pricing strategies do not consider the different purposes of using the services. For instance, business travelers are likely to opt for higher cost airlines than their leisure counterparts, as waiting for the scheduled flight time may mean that they will be late for their business engagements or schedule (Levine, 2006). Others also tend to operate on an end-to-end schedule in order to avoid the inconveniences and logistical challenges involved in connections. Other scholars also associate low cost carriers with direct flights, which are normally cheaper to operate and waste significantly lesser amounts of time as compared to the other flights (Levine, 2006). For instance, in the case of Ryanair, its main business focuses on the connection between Ireland, England and other parts of Europe. According to Malighetti, Paleari and Redondi (2009, pp. 198) 49 percent of flights and 44 .2 of Ryanair’s routes start at Irish or British airports. In terms of the routes and flights, Italy is the only destination, apart from the British Isles served by Ryanair. Following this strategy of eliminating flight connections, which serve locations where there are no direct flights, is yet another limitation that may limit the availability of the low cost services (Salanti, Malighetti & Redondi 2012). Studies conducted on the relevance of direct flights and their comparative advantage have shown that most of the low cost flights spend lesser amounts of time between airports as compared to the other category of expensive airliners (Filar, Manyem & White, 2001).
These correlations between the pricing strategies of low cost airlines and low cost lines of other full cost airlines depict the real picture that passengers may pay higher costs while using low cost airlines as compared to using their full cost competitors.
Low Cost airline activity from London, summer 2001
Table 1: Low Cost airline activity from London, summer 2001
Source: (OAG 2001).
The table above portrays the activities of the low cost airlines used as cases for this study, Ryanair and EasyJet, as well as the low cost brand of KLM Air, Buzz and Go at the London market, summer of 2001. From the statistics, EasyJet is active in 14 routes, Ryanair in 35, Go in 20 markets and Buzz at 16 (OAG 2001). The average weekly frequency depicts the average share of the London market served (measure by capacity). EasyJet is depicted as having the highest frequency across all its routes, while Ryanair, generally, holds a bigger proportion of the market they operate from. From the table, Buzz and Ryanair prefer markets where there are less competitors, while Go and EasyJet, whose emphasis is the development of business-oriented markets, compete with more competitors within the markets they supply (Franke 2004).
Hoffman (2007) studied the manner in which Ryanair evolved from a troubled and low-key beginning to a position of regional dominance in the European market. According to Hoffman (2007, p. 46), the gradual growth of the process was made possible through a consistent pattern of innovation and the engagement of various processes, which were meant to engage meaningfully with the demands of the global market (Rae 2001). The study notes that Ryanair began with old and cheap flights that were regarded as cheap and without the levels of sophistication, which are associated with low cost airlines in most parts of the world. The desire to increase the value of their services and enhance their profile on the market was determined by the fact that most of the dominant players in the industry had raised the stakes of quality and therefore enjoyed competitive advantage on the score of quality (Rae 2001). In order to retain its hold on its market niche, it became necessary for the company to develop strategies that would help it balance between costs and value. Other studies point out that the desire to curve strategies around the principle of total quality management underpinned the development and transformations that took place in Ryanair within the space of time of a decade (Brock, 2000; Pender & Baum 2000). Following these adjustments to meet the competition of their competitors, especially those offering higher standard services, the airlines resorted to adjusting their flight prices with regard to the availability of travelers. For instance, when there is a higher rate of bookings in a day, they will raise their prices, so they can deter more bookings. However, on days when the inflow of bookings is low, they will reduce the rates, so as to encourage more bookings (Malighetti, Paleari and Redondi 2009).
Table 2: Low Cost airline fares from London
 

Destination
6 weeks
5 weeks
4 weeks
3 weeks
2 weeks
1 weeks
1 day

Barcelona
£       142.33
£ 157.07
£ 156.56
£     150.98
£ 160.18
£     170.17
£     226.16

Belfast
£       79.39
£     81.17
£     79.28
£       79.95
£     86.01
£       98.56
£     132.52

Copenhagen
£       174.42
£ 181.00
£ 181.00
£     181.00
£ 181.00
£     182.54
£     251.00

Brussels
£       79.78
£     79.83
£     81.60
£       75.00
£     78.94
£     101.56
£     143.56

Dublin
£       96.11
£     96.75
£     87.00
£       85.89
£     88.78
£     105.76
£     162.73

Glasgow
£       69.22
£     68.77
£     70.28
£       72.04
£     76.14
£       89.82
£     126.20

Madrid
£       111.88
£ 125.03
£ 129.57
£     126.14
£ 137.68
£     148.82
£     223.77

Nice
£       105.61
£ 107.08
£ 102.10
£       96.58
£ 103.19
£     115.67
£     154.31

Palma
£       186.92
£ 194.89
£ 204.70
£     199.11
£ 204.46
£     201.96
£     256.09

Shannon
£       120.66
£ 119.56
£ 116.18
£     121.94
£ 121.82
£     122.67
£     128.42

Venice
£       147.84
£ 144.30
£ 139.84
£     145.63
£ 142.59
£     142.95
£   147.81

Source: (Salanti, Malighetti and Redondi2012) (Compilation from Ryanair, EasyJet, and Go air fare websites).
The table above shows the fare, and time of booking relationship.
Different studies point out that the progress and growth illustrated by Ryanair among other low cost airline services was basically a manifestation of the different processes that impact negatively on certain aspects of the industry. These studies point out claims of the stringent rules that often deny customers the choice of other alternatives, regardless of the fact that, in the long run, most of the low cost airlines turn out to be expensive. It is important to perceive the strategies employed by these airlines, as some kind of a totality in market positioning (Pleul 2008). Essentially, these strategies deny the customers some of the privileges and comforts that are often associated with airline travel (Salanti, Malighetti & Redondi 2012). On this score, it makes sense to determine some of the issues that relate to the specific criticisms leveled against Ryanair with regard to their strategies and practices. Some of the issues involve complaints that the airline fails in the areas of customer care and the resolution of disputes relating to the provision of services. The handling of luggage is one of the issues that have been featured in the criticisms leveled against the airline (Minkova 2012).
The availability of low cost airline services is limited by the restrictions imposed on the sales of tickets, as the airlines only specialize in the sale of one-way tickets. Therefore, in the case that a passenger required a return ticket, they are required to buy two different one-way tickets (Ring and Doring 2009). This pricing policy reduces the availability of flexible return tickets, which are preferred by certain classes of travelers, especially those on business visits. This limitation depicts that the services of low cost service airlines limit their customer population to the services that favor them, and not those that the customers would prefer, which implies a level of service unavailability (Piga and Filippi 2002). However, among low cost airlines like EasyJet, which specializes in the service of business destinations, service flexibility is offered at a charge. In this case at a cost of £10, a passenger is allowed to change their travel to another flight, based on whether there is an available space on the preferred flight. As a result, these limitations, especially in the long run, increase the costs met by the passenger, to the level that they would be better off, had they opted for full cost airline services (Piga and Filippi 2002).
According to Blaha (2003), other causes of the unavailability of the services of low cost airlines include the restrictions imposed on the timings of bookings. An example here is the case of Go, during the spring of 2001. The timings included a ticket which could only be purchased at least five days before the date of the flight (Blaha 2003). There was also a package called the Supersaver and saver tickets which were only offered to passengers who were willing to accept only a return-only ticket (Minkova 2011). Another restriction of the availability of the low cost services includes the limitations imposed on rebate arrangements, where these airlines may require that the passenger offers an upgrade fee or that they get a proportion of the original price. In essence, all these ticketing plans make it very difficult for business travelers to use the services of these airlines, and limit other classes of travelers who may be limited by their timings (Jones 2005).
RESEARCH METHODOLOGY
Research design
            The study will employ a descriptive research design to collect data on the topic of study. As such, the case study viewpoint will be employed to bring into the light, the contextual usefulness of the research problem. Since a descriptive research study employs both quantitative and qualitative data, it is considered primarily in the study. Creswell (2008) points out that a descriptive research design is highly wide-ranging, thus very dependable for exploring empirical inquiries from a wide range of social scientific issues. From the usage of a case study approach for the current study, it will be easier to explore the link between the conceptual framework of the study and the real-life context in the international market (Buck & Zheng 2004, p. 72). For this reason, the study will be highly susceptible to high credibility and reliability in the area of information accuracy. The study will also incorporate an analysis of the airline services industry using Porter’s five forces analysis. The framework of analysis will determine the competitive nature of the market and the viability of its value for purposes of investment. The five forces include competition, the threat of substitute product, threat of established rivals, the threat posed by new entrants, the bargaining power of suppliers, and the bargaining power of customers (Roy 2011).
Target Population and sampling
            The target group for this study will include the consumers of low cost airline services internationally, particularly those in the European market. Particularly, the study will explore the views and the access to low cost airline services, among the low cost airlines service consumers. The information to be collected from the consumers of these services will include the level of access to the services, the flexibility experienced as well as the unavailability of the services to the customer population. Additionally, the study will explore the pricing strategies of the target airline companies, where the marketing executives of the airlines will be interviewed. Additional information will be drawn from the websites of the different companies: fare rates, flight schedules and flight routes and established airline networks. During this study, both marketers-end and consumer-end data will be used to offer insights on the success factors determining the competitiveness of airline companies internationally, as well as the limitations that result from different pricing strategies.
Sampling procedures
            During this study, the sampling procedure used will be stratified sampling. Based on this sampling procedure, the population of study will be grouped into different strata, based on their similar characteristics. In this case, the loyal customers of the case study airlines will be grouped into different classifications, depending on the duration they have been using the services of the companies, from their respective points of use. These groups will be grouped into the following: 0-6 months, 7-12 months, 13-18 months and > 19 months. From the different classifications, a sample of 10 participants will be randomly selected to be explored during the overall study sample. Therefore, the study sample will be composed of 40 participants, who will be studied actively, during the study. The sample is convenient, as it is manageable in the area of data collection.
Research Instruments
            The major instruments used during the collection of data for this study will include interviews and questionnaires, for the collection of primary data. The questionnaire will constitute both structured and semi-structured questions, so that the instrument can help the research collect comprehensive data. According to Marczyk (2005), questionnaires are highly effective and efficient data collection tools, as they guarantee the collection of timely, complete, and reliable information. Through the use of both structured and semi-structured questions, participants will be offered the opportunity to present valuable insights to the study. The structured section of the questionnaire will explore consumer perceptions and preferences regarding the services of low cost airlines. Additionally, price sensitivity regarding the services of the airlines will be explored through the questionnaire.
Besides the use of questionnaires and the search of secondary data from the airline’s websites and publications, a phone interview with the marketing executive of the airlines will be a vital source of information on the marketing strategies adopted and the counter effects of the strategies. The marketing executives of the airlines were considered the most suitable interviewees for the study, as they will offer first-hand information on the value-added services of the airlines, as well as the pricing strategies used in the past.
During the interview, issues of customer value will be explored. The strategies that the airlines employ to ensure that customers remain satisfied with the services delivered will also be covered during the interview. Additionally, the challenges faced by the airlines, during the process of delivering price-differentiated services will also be explored through the interview. Through these steps, it will be easier to develop answers to the research questions of the study. The major implements to be used during the study include paper, a pen, a voice recorder. These tools will be used to capture useful points.
The primary data collected through the survey and the interview will be complemented by the secondary data drawn from the airline companies’ websites, as well as other company publications. These publications include annual reports and company reviews. The sources of secondary data will be determined on the basis of their relevance to the topic of study. In order to ensure that the credibility of the inferences from the study will not be compromised, the selection of the sources will depend on its reliability. Through that, the accuracy of the study will be enhanced. Generally, the incorporation of primary and secondary data will improve efficiency in answering the research questions, as well as offer reliable information on the topic.
Data analysis
Since most of the data to be explored during this study is of a qualitative nature, a reliable data analysis model will be employed. In this case, coding will be the major data analysis mode, where each of the three research questions will be offered a specific code (Marczyk 2005). Afterwards, a data reduction strategy will be employed, where the frequencies of occurrence of each variable will be noted on the scoreboard. The strategy will be employed to ensure that accuracy is maintained during data analysis.
Timetable of study
Considering the wide nature of this study, a lot of time will be required, in order to execute the study proposal effectively. The first stage will include the drafting of the study proposal, which will be verified by instructors. The drafting and the verification is expected to take about one week, starting from 15th – 22nd of January 2013. After the go-ahead for the study is offered, I will resume the writing of the final literature review part. This part may take about two weeks. The stage aims at providing the researcher with relevant knowledge and concepts on the pricing strategies of airline companies. By doing so, the next step of the study will be easier: conducting the empirical study, as the information on the literature review will offer guidance to the field study.
After the empirical study, data collection will be started, making use of both interviews and questionnaires in the areas of study. Due to the complexity of the participant groups for the study, the section will take place within a period of six weeks. The data collection stage will be preceded by data interpretation, where the results will be evaluated on the basis of existing literature in the area of study. The stage will take about one week, after which the researcher will sent the compiled results to the instructor for oversight of the progress of the study. After the instructor offers comments regarding the study, I will proceed with the drafting of the project. The drafting of the project will take about two weeks. The overall timeframe for the study is summarized in table 3.
Table 3: Timetable of Study

Activity
Period
Starting
Completion

Drafting of Research Proposal
1 week
15th Jan 2013
22th Jan 2013

Submitting proposal to the instructor
1 week
23rd Jan
30th Jan

Drafting the Literature Review
2 weeks
31st Jan
14th Feb

Data gathering
6 weeks
15th Feb
29th Mar

Data analysis
2 weeks
30th Mar
13th Apr

Data Evaluation and interpretation
1 week
14th Apr
21st May

Sending interpreted data to the instructor
1 week
22th May

Drafting other chapters of the study
2 weeks
27th May
11th June

Submitting the draft of the project

12th June

Submitting the completed project

19th June

 
 


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