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Passenger Perceptions and Understanding of the Low-Cost and Full-Service Airline Models in South Africa and the Implications for Service Strategy

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Passenger Perceptions and Understanding of the Low-Cost and Full-Service Airline Models in South Africa and the Implications for Service Strategy International Research Symposium in Service Management ISSN 1694-0938 PASSENGER PERCEPTIONS AND UNDERSTANDING OF THE LOW-COST AND FULL-SERVICE AIRLINE MODELS IN SOUTH AFRICA AND THE IMPLICATIONS FOR SERVICE STRATEGY A case study involving South African Airways, British Airways (Comair), Kulula.com, Mango and 1time Colin Diggines Senior Lecturer Centre for Business Management (CBM) University of South Africa (UNISA) PO Box 6948 ANSFRERE 1711 South Africa 0027124293940 0027826612847 [email protected] [email protected] Le Meridien Hotel, Mauritius, 24-27 August 2010 1 International Research Symposium in Service Management ISSN 1694-0938 PASSENGER PERCEPTIONS AND UNDERSTANDING OF THE LOW- COST AND FULL-SERVICE AIRLINE MODELS IN SOUTH AFRICA AND THE IMPLICATIONS FOR SERVICE STRATEGY ABSTRACT Purpose: The study, which duplicates a study conducted in Europe and Asia, was conducted to gain an understanding of the perceptions South African passengers have of the low-cost carrier model and the full-service carrier model and establish how these perceptions relate to choice of airline when deciding to fly. Design/methodology/approach: The research is exploratory in nature and used the survey method to collect data at Cape Town and Johannesburg international airports in South Africa. Passengers were interviewed with proportionate representation across the two full-service carriers, and the three low- cost carriers operating in the South African market. A service quality measurement instrument was added to the questionnaire to rate the perception of service delivered by each airline. Findings: It is shown that passengers have a limited understanding of the difference between the two models. Fare was an important issue for low-cost passengers, with full-service passengers indicating that quality and safety were more important than the fare. Although low-cost airline passengers have a highly favourable perception of low-cost airlines, they are highly price sensitive and would readily switch to a full-service carrier should the full-service carrier offer a lower fare. Passengers on full- service carriers are significantly less price sensitive, with a majority choosing not to switch to a low- cost carrier, even if the full-service carrier increased their fare by as much as 30%. Managerial implications: The findings of the study relate directly to competition between low-cost carriers and full-service carriers and have a direct bearing on airline marketing activities. Key areas that need to be considered by the low-cost airlines include their pricing strategies (and how they are communicated) and importantly, the design and implementation of their loyalty programmes. Originality: Limited research has been undertaken on the impact of the entry of low-cost carriers into the South African market. This research seeks to identify the South African flying public and the influences on their carrier choice decision to assist service providers in identifying and reaching their target markets. Key words: Low-cost airlines, Full-service carriers, price sensitivity, service quality, price perceptions, customer loyalty Paper type: Research paper Le Meridien Hotel, Mauritius, 24-27 August 2010 2 International Research Symposium in Service Management ISSN 1694-0938 1. Introduction Growth and expansion in the South African airline industry has been fuelled by the emergence of low-cost carriers over the past 7 – 8 years. Prior to this a number of so-called cheap fare airlines arrived and departed only presenting a short term irritation to the existing full-service carriers before they collapsed due to the aggressive competitive pricing strategies followed by the incumbent full- service carriers. The new generation of low-cost airlines however, presented a different challenge and they have been extremely successful in the saturated South African market. The characteristics of the low-cost model should have forced the traditional full-service carriers to reconsider their models and make the necessary adjustments to their strategies in order to compete more effectively in a crowded market. This should have included paying more attention to identifying and understanding the characteristics of their markets/customers and their perceptions and expectations of the services on offer. The aim of this paper is to compare passengers’ selection criteria between full-service carriers (FSC’s) and low-cost carriers (LCC’s) within the South African market. In this regard, a number of critical questions will be addressed: What is the level of understanding of the concept of a low-cost airline? How do the passengers perceive the two models in terms of the service offered? What are the main reasons behind a passenger choice of airline? What role does ticket price play in the buying decision for the consumer? This paper contributes to the literature by examining the differences in passengers’ perceptions between the two airline models in the South African market and thereby highlighting key issues to be considered when establishing pricing strategies for the services and developing their general product strategy including the development of loyalty programmes. 2. Background The low-cost airline model has been in existence around the world for many decades. However, it is only since the late 1990’s that it has really sprung to prominence as a successful model that has made waves around the world. Airlines like Southwest in the USA, Easyjet and Ryanair in Europe, and Air Asia in Asia are generally considered the trailblazers of the modern day low-cost model. The basic premise of the low-cost model is that the airline cuts out all the unnecessary costs and frills from its product offering and thereby minimises its cost of operations and offer it more scope to offer competitive fares. Some of the most common cost savings include using the internet as the main distribution and booking system, eliminating free food and drink onboard, careful selection of the most appropriate airports and aircraft, no business class, and non-participation in alliances or other cost generating programmes. These carriers have over the years evolved to a point where they are Le Meridien Hotel, Mauritius, 24-27 August 2010 3 International Research Symposium in Service Management ISSN 1694-0938 unbundling their products and services and offering the passenger the option to purchase those components that they require. As the model has evolved some low-cost carriers have added the option of a number of frills like frequent flyer programmes in order to generate additional loyalty and revenue. The vast majority of the so-called low-cost carriers are evolving into this new hybrid model (Kretschmer, C. 2008). In 2001, kulula.com was the first low-cost airline to enter the South African market. They achieved immediate success and grew the market by as much as 8%. South African Airways’ response to this was aggressive pricing tactics, which proved to be unsustainable and unsuccessful despite their dominant position in the South African airline market. The success of kulula.com in an already saturated market led to the arrival of additional low-cost carriers in the form of 1time in 2004 and Mango (a South African Airways offshoot) in 2006. In the context of the South African market, seven major domestic airlines operate in South Africa. These include the full-service carriers British Airways (operated by Comair) and South African Airways, the low-cost carriers kulula.com, Mango and 1 time, and the smaller regional carriers SA express and Airlink. A number of smaller charter airline companies also operate but fall beyond the scope of this study. In terms of airports Oliver Tambo international airport (ORTIA) is the air transport hub of Southern Africa, handling 17.6 million passengers in 2009. Cape Town International is the second-largest airport in South Africa and the third largest in Africa handling 7.725 million passengers in 2009 (Air transport intelligence, 2010). The arrival of the low-cost model in South Africa presented a number of unique challenges to the incumbent full-service airlines. Important decisions had to be made on how to respond to the low- cost carriers’ way of doing business and their appeal to the broader South African flying population. The low-cost carriers also had a number of crucial issues to tackle if they were to succeed in a market dominated by South African Airways. Each operator had to identify an effective way to compete in the market without resorting to full-out price wars, which would have damaged them all. From a business and a marketing perspective, a logical option would be to identify specifically who the flying public is and what their needs are. This needs to be taken back a step to firstly establish the consumers’ understanding of the concept of a low-cost carrier and their perceptions and expectations linked to the model. Once the marketer has an understanding of these issues, they will be in a better position to identify how to compete in the market effectively. Whilst a number of studies (O’ Connell & Williams, 2005; Park, 2003; and Turner, 2003.) of this nature have been conducted in Europe, the USA and Asia, the work in this field is lacking in the South African context. An attempt to directly Le Meridien Hotel, Mauritius, 24-27 August 2010 4 International Research Symposium in Service Management ISSN 1694-0938 apply the findings of the foreign studies to the South African market will invariably lead to failure as there are a number of unique circumstances and conditions in this market that need to be accounted and adjusted for. To gain this greater understanding of the South Airline passenger market requires that they be surveyed on their levels of understanding, their perceptions of the services on offer as well as the determinants and influences on their choice of airline or decision to travel. The concept of perceived service quality and the model of total perceived service quality were introduced by Gronroos in 1982.
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