After deregulation the federal government no longer told airlines where to fly, how much they must charge, or protected their profitability. New carriers were launched, and legacy airlines had to respond.
- First they found a way to compete on price
- Then they found a way to differentiate their product
Right on the cusp of deregulation American Airlines launched a huge ‘branded fare’ initiative — the super saver fare. The insight was that they could compete with discount pricing on the same planes they were already flying. They had extra seats taking off empty and they could sell those seats at a discount to match the fares of their new competitors.
- They could do it with lower costs, since they didn’t need to start a new airline to offer these fares. This was new revenue at the margin for them.
- They could keep these cheap tickets from undercutting the expensive fares they were selling with restrictions, things like 21 day advance purchase requirements and Saturday night stay rules that business travelers wouldn’t be interested in.
Major airlines could compete on price, but when they were offering the same prices which would a customer choose? The frequent flyer program was born. This was the most successful marketing innovation in history.
Initially meant to just get customers to stick around for a less convenient flight out of loyalty to a brand, the programs became profit centers in their own right. Most companies see marketing as a cost, but the airlines have turned marketing into their highest margin business. All they needed to do to make sense, though, was to turn a commodity product (an airline schedule) into one customers had a preference for.
Ultra low cost carriers eventually threw a monkey wrench in all of this. Airlines lost their pricing power when competitors started selling their cheapest fares without Saturday night stay requirements or advance purchase. That’s where basic economy comes in, it’s the newest attempt to separate business travelers from leisure travelers in the fares airlines offer.
The other major differentiator was the loyalty program. The former head of oneworld frequent flyer program Malaysia Airlines Enrich warns that frequent flyer program devaluations are driving customers into the arms of low cost competitors. Airlines need to differentiate themselves, then, on product and brand because they aren’t going to win at a game of simply low fares.
Spirit Airlines and Frontier are going to have lower costs than American and United. American and United need to earn a revenue premium for their product.
[T]oday there is a real drive within the industry and with the traveling public to want to have really at the end of the day low cost seats. And we’ve got to be cognizant of what’s out there in the marketplace and what people want to pay.
The fastest growing airlines in the United States Spirit and Frontier. Most profitable airlines in the United States Spirit. We have to be cognizant of the marketplace and that real estate that’s how we make our money.
We don’t want to make decisions that ultimately put us at a disadvantage, we’d never do that.
United’s President Scott Kirby, meanwhile, believes the schedule is the product and simply offering fights will attract business (he refers to adding flying and attractive United’s ‘natural share’).
What they are missing is that the conventional wisdom that passengers only care about schedule and price turns out to be wrong.
Delta, at its investor day on Thursday, revealed that they believe brand is key to the revenue premium they’re attracting — and also key to growing their co-brand credit card. Delta isn’t offering a valuable frequent flyer program, but customers have been sold on the brand which entails friendly employees, reliable flights, and a marginally better inflight product than U.S. peers.
Three slides from the airline’s deck make this point clearly.
And by the way JetBlue founder Dave Neeleman plans to run his new startup airline differently as well though in his case I’m a bit more skeptical than most about the overall model.
Legacy airlines can’t out-Spirit Spirit. They shouldn’t try to be Spirit. Delta attributes their success to developing a strong brand that attracts customers — premium customers, and future premium customers — and that matters because any airline can offer schedule and price for a period of time, so that cannot be the competitive advantage of anyone but the low cost provider of seats.