Aviation Economics Analysis, Vol.1: Why should airlines build “unique” services? Is that a “must”?

Yes.

The reason why I want to write this topic is because of the Ramen meal I had at noon today. The meal is full of “Japan” elements, though not in design, as many Japanese restaurants have done similar approach, but the service: from reception to delivery, the communication between the waiter, from waiter to chef, are all in Japanese. With the Japanese posters on the wall, I can feel the “Japanese Ramen” not only from noodle and soup. After this unique experience, I would like to eat here again, even without an advantage on price. (as this article can be called as: Enlightenment from eating Ramen)

Just like Spotting, feasting has some “feel” in it

That got me thinking about airlines’ situation today. By analogy, every airline is a restaurant. These restaurants fall into two general categories: One type is hotels that serve a wide variety of dishes, with many “chefs”. Their different specialties can cover the needs of customers precisely, but because chefs come from different unions, a higher wage is needed. The other is a restaurant with a limited menu and only one “chef”. Although the “chef” may not be able to accurately meet the needs of every customer, the operating costs of the restaurant will be very low for there’s only one chef.

To make the analogy clear, hotels are what we call “Full Service Carriers”, which meet the needs of different routes through a diverse fleet, and develop “high-end services” such as frequent-flier programs and lounges through a strong support system. Restaurants are “Low Cost carriers,” which reduce operating and maintenance costs through a single fleet, resulting in relatively Low fares. (by chef, I mean fleet).

Typical Full-Service Carrier, Xiamen Airlines

If only there were two airlines in China, one called “full service” and the other called “low cost” in terms of broad categories, there would be economies of scale (in theory). So why are there so many airlines?

“But in fact, there are many airlines.”

Here are the reasons. In essence, what the airline provides is “displacement + service”, which is highly substitutive. Customers can choose the airline according to the price and service. This can explain price-sensitive travelers who do not care about the service. In order to tackle with this idea, OTA appear. OTA (online travel agent), such as C-Trip, reduces the search cost of consumers, especially those without significant airline preference, by summarizing the ticket data of various airlines to give consumers a platform for price comparison and booking.

Typical Low-Cost Carrier, AirAsia

Hence, if Airlines couldn’t impress travelers by some unique system, so that they are willing to pay more compare to other similar Carrier, Airlines would end up into a price war and cannot harvest passenger loyalty, therefore have little chance to earn by “brand”. So, how to improve such bargaining power by brand?

‘For me, an amateur enthusiast, the A380 of Singapore airlines has a brand bargaining price of 200-400 yuan compared with the 330/787 of Air China. In other words, I am willing to spend 200-400 yuan more to take the A380 under the same conditions.’


Unique service, of course. Getting consumers to pay for unique services is an effective way to improve brand bargaining. Personally, the type and in-flight meals have a greater impact on me: ice cream, Haagen-Dazs or Magnons will give me more willingness to pay. For frequent business travelers, the ability to lie flat in a business class, the availability of a lounge, and the shower in the lounge may have a higher weight.

From another point of view, the implementation of unique services is in the “Differentiation” of airlines. If all consumers are judged by price alone, then with the airlines in perfect competitive market, the profits of the airline industry will be significantly reduced, and the quality of service will be on same trend. To differentiate one’s airline from others by “unique service”, is to assume that there is more than just one “price-sensitive” criterion. This is a significantly more realistic and now widely accepted hypothesis. Differentiation widens the dimension of competition, taking into account the services offered by airlines.

To sum up, unique services help airlines define themselves, win brand bargaining, and ultimately generate revenue economically and create a unique service culture culturally, two birds, one stone.


Thoughts When Translating:

This is the very first analysis on Aviation Economics. The “Differentiation” is the problem I’ve researched quantitively in CTB on Nov-Feb, 2018-2019. As I was an amateur on blog, simply reviewing my research seems to be a bit hard. But currently the situation has changed: now I write 2000 Chinese once I have some “feelings”. Nice to see improvements!

Oct.31th, 2019
Translated & Published Mar.18th, 2020

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