ASSIGNMENT 2 ND SEMESTER : ADVANCED SERVICES MARKETING 4 (ASER401) CHAPTERS COVERED : 7 AND 9 DUE DATE : 24:00 on 20 AUGUST 2013 TOTAL MARKS : 100

Transcription

1 Page 1 of 8 ASSIGNMENT 2 ND SEMESTER : ADVANCED SERVICES MARKETING 4 (ASER401) CHAPTERS COVERED : 7 AND 9 DUE DATE : 24:00 on 20 AUGUST 2013 TOTAL MARKS : 100 CASE STUDY : LOW-COST AIRLINES-VALUE- BASED COMPETION IN THE SOUTH AFRICAN MARKET INSTRUCTIONS TO CANDIDATES FOR COMPLETING AND SUBMITTING ASSIGNMENTS The complete Instructions to Students for Completing and Submitting Assignments must be collected from any IMM GSM office, or the relevant Additional Tuition Centre or can be downloaded from the IMM GSM website. It is essential that the complete instructions be studied prior to commencing your assignment. The following points highlight only a few important notes. 1) You are required to submit ONE assignment per subject. 2) The assignment will contribute 20% towards the final examination mark, and the other 80% will be contributed by the examination, however, the examination papers will count out of 100%. 3) Although your assignment will contribute towards your final examination mark, you do not have to earn credits for admission to the examinations; you are automatically accepted on registering for the exam. 4) Number all the pages of your assignment (e.g. page 1 of 4) and write your name and surname, student number and subject at the top of each page. 5) The IMM GSM requires assignments to be presented in a typed format, on plain A4 paper. Unless otherwise specified, this assignment must be completed within a limit of 3500 words, excluding the bibliography. Students who exceed the word limit may find that only part of the submitted assignment will be marked. 6) A separate assignment cover, which is provided by the IMM GSM, must be attached to the front of each assignment. 7) Retain a copy of each assignment before submitting, in case the original does not reach the IMM GSM. 8) The assignment due date refers to the day up to which assignments will be accepted for marking purposes. The deadline is 24:00 on 20 August 2013 for upload to the IMM GSM website. Late assignments will be accepted, but 25 marks will be deducted from the maximum mark if received after 24:00 on 20 August 2013 and up to 17:00 the following day, after which no assignments will be accepted. 9) If you fail to follow these instructions carefully, the IMM Graduate School of Marketing cannot accept responsibility for the return of the assignment. It may even result in your assignment not being marked. Results will be available on the IMM GSM website, on Friday, 4 October 2013.

2 Page 2 of 8 Answer ALL the questions QUESTIONS ARE BASED ON THE CASE STUDY Low-cost airlines Value-based competition in the South African market CASE STUDY ASSIGNMENT References are to the prescribed textbook: Wilson, A., Zeithaml, V.A., Bitner, M-J. and Gremler, D.D Services Marketing Integrating Customer Focus Across the Firm. Berkshire: UK. Please refer to the low-cost airlines case study that accompanies this assignment. Remember that the theory component of your answer contributes 20% to your mark while the application of the theory is worth 80%. Your assignment must be typed and should adhere to the general rules of the IMM Graduate School of Marketing pertaining to the style and format of assignments. QUESTION 1 [50] Guide the management team of a low cost airline on the process for setting customer-defined standards. The outcome of the consultative framework should be to develop customer standards with customers and not for customers. QUESTION 2 [30] Critique the relationship challenges that a low cost airline can face when dealing with its customer base. Ensure that each challenge is critically analysed and debated. QUESTION 3 [10] Critically discuss the benefits that both the customers and low cost airlines can receive from building successful relationships with each other. PRESENTATION [10] ASSIGNMENT TOTAL: 100

3 Page 3 of 8 Low-cost airlines Value-based Competition in the South African airline Market Introduction An interesting development in the South African airline industry was the introduction of kulula.com, a low-fares airline to the market. Currently the low-cost airline market consists of three competitors, namely kulula.com, 1time and Mango. Let us take a look at these three airlines that compete for market share in this dynamic market. Kulula.com Kulula.com forms part of the Comair/ British Airways group. Comair Limited started in 1946 and signed a franchise with British Airways in 1997 to use the British Airways brand name in South and southern Africa. Currently the Comair/British Airways group flies between Johannesburg, Cape Town, Durban, Port Elizabeth, Lusaka, Harare, Windhoek and Victoria Falls. The directors of Comair realised in that there was a gap in the market for a low-fares airline, especially after the demise of various airlines catering for this segment such as Sun Air. kulula.com was introduced in August 2001 with a limited number of flights daily between Johannesburg and Cape Town. Passengers suddenly had a drastically cheaper option to fly between Johannesburg, Cape Town and Durban. Airfares of R400,00 per one-way trip between Johannesburg and Cape Town rocked the established airlines such as South African Airways, starting a price war with customers being the main beneficiaries. The mission of kulula.com kulula.com's mission statement is not the run-of-the-mill statement that you find in the annual report of most companies. It reflects something of the corporate culture of the airline. The mission statement is irreverent and humourous reflecting the image of a down-to-earth company. The mission of kulula.com reads as follows: Mission statement of kulula.com To our superhero customers and staff we dream of being: The easiest around this means that not only can people fly with kulula.com, they can hire a car, get a room or book a chauffeur-driven cab to the airport. We will always aim to provide the easiest way to pay, and above all, the easiest to afford. Simple we don't complicate things. We don't use high-and-mighty language and overly wordy descriptions. We get to the point and that's that. Totally honest this means we tell it like it is. We're not shy of being straight and down-to-earth. There is no bullshit. There are no hidden costs. What you see is what you get. Great fun we help people lighten up. Smiles and jokes are free. We always want to be genuinely friendly and provide the right environment for our staff's natural talent to shine. Safe and professional at no time is our dedication compromised. Our most important principle is 'safety first'. Inspirational wherever possible, we provide our staff with the best opportunities to develop their skills, and take their abilities to new heights in the service of our customers.

4 Page 4 of 8 We are more than an airline we re an entire travel experience. Wherever our customers see the kulula.com brand, they can expect these values. Services offered by kulula.com kulula.com offers three services to its customers: flights between the major destinations in South Africa, hotel reservations and car rental. The logo of kulula.com flights includes the slogan Now anyone can fly, thereby appealing to the widest possible target market. The kulula.com/cars service was launched in August The two services complement one another. When passengers buy a return air ticket from kulula.com they may also rent a car. kulula.com also offers a reasonably-priced shuttle service to and from the airport. In January 2004 kulula.com announced the acquisition of four McDonnel-Douglas 82 airplanes with an up to 30% slash in fares to the destinations Cape Town, Port Elizabeth, George and Durban. The executive director of kulula.com, Novick explained at the time that the 30% cheaper rates (e.g. the airfare between Johannesburg and Durban is R199,00 one-way) was due to the savings on the new airplanes, which are 30% cheaper to operate than the older Boeings s. In 2007 kulula replaced its fleet of McDonnel-Douglas 82 airplanes with Boeing s adding additional seats per year. 1time 1time is the second privately owned low-fare airline that started operating in February It consists of the strategic business units (SBUs) namely 1time Airline, 1time Charters and Aeronexus Technical that maintains the aircraft. A reason for the startup of1time was the low aircraft acquisition cost due to the aftermath of the September 11, 2001 disaster in the USA. There was also cost savings due to the use of a standardised fleet of aircraft. The management was also convinced that the domestic market which had grown by 70% over the past five years, will grow even faster as only 10% of South Africans are currently travelling by air. On 22 January time was launched and commenced with operations a month later, on 25 February. The name, 1time ( one time ) is a slang word meaning for real!, this name was chosen to echo the South African essence of the airline. 1time ensures it follows the objectives and targets of the Aviation Transport Charter. One such objective of the Aviation Transport Charter is to include a targeted 25% black empowerment shareholding, 1time has seen to this as Mogwele Investments (a black empowered partner represented by Sipho Twala) owns 5% of 1time. 1time has three main partners also referred to as its leading and preferred suppliers. These include Avis rent a Car, City Lodge Hotel Group (1time passengers have the advantage of between 5% and 20% off rack rates) and AA Travel Guides (offers a real time booking service with Bed and Breakfasts and Guest Houses). Each partner has a visible link from 1time s Website and vice versa. Originally, 1time flew between Johannesburg and Cape Town; now (including the aforementioned route) the airline also operated return flights from Durban, East London, Port Elizabeth and George. The growth of the airline was far greater than 1time had expected. 1time carried its th and th passengers on 27 June 2004 and 19 October 2005 respectively. It now carries an average of

5 Page 5 of 8 passengers per month while operating a fleet of 10 aircrafts. The media coverage (outdoor, TV, radio and press advertising) that 1time received upon its launch was outstanding. This publicity assisted 1time to generate forward sales that were above the airline s forecasts. Since 1time entered the market in 2004, the market has grown from 7,5 million to an estimated 12,5 million passengers in 2007 (increase of five million passengers over a three-year period). 1time has assisted in making low-cost air travel available to all those who need to travel between any one of 1time s destinations. Its target market includes, business travellers, leisure travellers as well as those travelling to visit friends and relatives (VFR). The airline has had an innovative approach with its marketing campaign and has introduced on-board advertising, the first of its kind in South Africa. This type of advertising medium conveys tailored messages, via the back of 1time s seats and on the tray tables, to its on-board passengers, which compliments the travel environment. Not only are tray tables used, the in-flight trolley s and overhead bins etc are also used as well as full or partial aircraft branding and on-board promotions. At the end of 2005, 1time launched South Africa s first branded aeroplane, this was made possible by collaboration between the airline and Nando s. A Nando s advertisement was branded as the background of the plane; this plane is named the Peri Plane. 1time also has an aeroplane branded by Orion Telecoms and its latest new aeroplane will be branded by Avis Rent a Car, its car rental partner. Mango South Africa s third no-frills, low-cost airline, Mango, was launched in October 2006 and its first flight took off on 15November Mango is owned by South Africa s national carrier, South African Airways (SAA). Mango received its start-up funds from SAA in the form of R100 million loan. Low-cost competitors kulula.com and 1time accused Mango of using taxpayers money from SAA to subsidise its operations and that Mango would not be obliged to be profitable. During the first week of operations, Mango was selling flights at the low price of R169,00 per one-way ticket and to celebrate its first six months of success; Mango had a promotion whereby it sold a number of tickets at only R1,00 per ticket. Kulula.com accuses Mango of only doing this because it is being subsidised by South Africa s National Carrier, which is a government enterprise. The competing low-cost carriers feel that this is unfair and that it puts extra pressure on them. Mango s chief executive, Nico Bezuidenhout, said that the extent of SAA s involvement was the R100 million shareholders loan and that Mango has complied with competition regulations. Bezuidenhout stated that Mango could afford to charge so little because of the fuel efficiency of the s, which are at least 10% cheaper to operate than other aircraft and the seat density of these Boeings is 186 sears compared to the seat density of its competitor s aircraft (157 seats). He also alludes that Mango has high aircraft utilisation of 12,5 hours a day which helps keep costs down, compared to kulula.com and 1time who operate fewer hours per day. Mango is leasing four Boeing s from SAA, but so far neither Mango nor SAA have disclosed the fees that Mango is paying SAA for the use of the planes, except to say that its market-related. Contributing to the success of Mango is the fact that the carrier has an average load factor of about 80% which compares well with its competitors. Also, Mango won Africa s Best Budget Airline at the World Travel Awards (WTA) in Abu Dhabi in the United Arab Emirates and Mango also won the

6 Page 6 of 8 top Travel and Tourism category of 2007 s PRISM awards. SO despite what critics say, Bezuidenhout opines that Mango is here to stay and make a positive contribution to the domestic economy. Mango s commitment to making low-cost air travel more accessible to all South African s is evident by the partnership formed between Edcon (the massive fashion and lifestyle retail chain) and Mango. Edcon is the brand owner of Edgars, CAN, Boardmans, Legit, Prato, Red Square, Temptations, Jet, Jet Mark and Jet Shoes. This partnership enables Mango to offer more affordable flights and more convenient ways to pay for flights for its customers who have a store card of one of the Edcon retail chains mentioned above. This is done by allowing 4,2 million account holders to be able to purchase air travel from Mango s call centre or from Guest services counters ar airports using the various retail account cards issued by Edcon brands. Mango also has partnership with Vodacom (Vodacom credit holders receive discounts when flying with Mango), Tempest SIXT (a car rental company who awards Mango travellers generous savings) and the Southern Sun Hotel Group (offers Mango flyers preferential rates). The three low-cost airlines, i.e. kulula.com, Mango and 1time hold a market share of 30% of all flights taking place in South Africa.. The role of price elasticity of demand The fundamental theory of price elasticity of demand provides an economic explanation why passengers are interested in flying with low-fare airlines and why these airlines are in a position to charge these low fares. The price elasticity of demand refers to the percentage change in the quantity demanded from a change in the price. If a decline of 50% in the price results in an increase in demand of 100%, we say that the price is elastic within the price range. This is the price principle being followed by kulula.com in its assault on the South African market. What is further of interest is the fact that these airlines are following the same strategy as some of the now famous European and American airlines such as Ryanair and Southwest Airlines. These two airlines are following a powerful combination of low airfares and good service to win the hearts and minds of passenger) and can be described as value-based players in the airline industry. Additional reasons for success for a low-cost airline include Strict cost control (especially in operations, technology and marketing) Well targeted marketing methods A flexible and fast Revenue Management Component (the management of revenue managers to promptly and accurately tune the yield of any flight). Value-based players' competitive edges The power of value-based companies are centred in two areas, namely having a cost advantage in the airline industry and in the relentless way in which this cost advantage is pursued. Their second strength is based on the potency of the shift in consumer perceptions regarding the quality of the service that they offer. These two aspects will now be discussed in greater detail:

7 Page 7 of 8 Cost advantage Ryanair, for instance, charges lower fares by departing from lower-cost airports (e.g. departing from Gerona, which is 60km from Barcelona while the national carriers depart from the Barcelona city airport), utilising aircraft more optimally by flying them more hours a day, keeping labour cost low, distributing tickets online and providing no in-flight frills. In South Africa the trend of utilising secondary airports is still in its infancy with Lanseria now being positioned as an alternative to Johannesburg airport. The financial and operational performance of Ryanair during the period 2001 to 2007 is depicted in Table below (this data refers to the financial year ending 31 March of the relevant years): Finance Year Net profit (in millions) 401,4 301,50 268,10 226,60 239,40 150,40 104,50 Net margin (%) 17,93 18,12 20,33 21,09 28,42 24,09 21,44 Operational Statistics Passengers (in millions) 42,51 34,77 27,6 23,13 15,74 11,1 8,10 Passenger load factor Table 12.1: Financial and operational performance of Ryanair Table 12.1 clearly shows the decrease in net profit during the period. One of the reasons for this decline is the drastic increase in fuel prices and increased competition. Novick, the CEO of kulula.com, confirms that this cost advantage in South Africa as they 'sweat the assets (airplanes)' flying six sectors a day on the route Johannesburg to Cape Town utilising the planes 12 to 14 hours a day.' kulula.com furthermore does not have additional services that cost money such as frequent-flyer programmes, offering meals on-board, pre-seating customers and paying commission to travel agents and tour operators. Southwest airlines in the USA is following the same approach and the cost advantage of Southwest Airlines is explained in the excerpt below: The cost advantage of Southwest Airlines Low costs have given Southwest Airlines in the USA the competitive advantage of having the America's lowest fares. This advantage has created a phenomenon known in the airline industry as the 'Southwest effect'. Airports served by Southwest have lower average fares than those that are not because competitors feel compelled to match Southwest's fares. A shift in the quality perceptions that they offer Although passengers flying with Ryanair cannot reserve seats in advance, the quality gap between Ryanair and British Airways (the official UK carrier) is perceived to be narrow, regarding aspects such as service, convenience and the buying experience. Similarly, in South Africa Novick, CEO of kulula.com, states that safety standards are

8 Page 8 of 8 non-negotiable and that kulula has a strong customer base and a strong brand.kulula.com also won the ACSA-Airports Company's award for best domestic airline in 2002 strengthening the positive quality perception of customers. Value-based airlines attract large numbers of passengers with the winning combination of low prices and 'good enough' quality. With the large number of passengers these airlines obtain economies of scale, which translates into superior productivity increases, something which is unattainable by traditional airlines. As can been seen both Southwest and Ryanair have a major advantage regarding cost-per-available-seat-mile (in both instances more than 30%). With this saving they can offer the cheapest possible fares, thereby generating above-average customer loyalty as well as profitability, which in turn generates a virtuous cycle whereby the company can charge even lower fares, open up more routes, and stimulate even more traffic. Another reason for the success of Southwest lies in the treatment of the personnel of the airline. Management believes that when employees are treated well, they will treat customers well, creating a beneficial situation for all stakeholders. This does not mean that the personnel get fat pay cheques. In fact, Southwest Airlines wages are generally lower than those of competitors but the company sweetens the deal by making stock options available to employees, enabling them to benefit from the airlines' financial success. What further endears Southwest to its employees is a nolayoff policy, even in the darkest days after September 11 (the bombing of the World Trade Centre in the USA). kulula.com is following the same approach as Southwest Airlines in as far as it keeps employees happy by giving them the freedom to perform their jobs to the best of their abilities. Summary The aviation industry in South Africa was for decades monopolised by the state carrier South African Airways. The earlier introduction of no-frill airlines was not a success for various factors. However, it would seem that the most recent cut-price airlines are providing more stringent competition to the state carrier and other national carriers. Only time will tell if kulula.com will be as successful as its European and American counterparts in this respect. (Source: Cant, M. & Machado, M., Marketing Success Stories. Cape Town: Oxford University Press,)