The Airline Industry in the UK: Tailspin or Stratospheric?

Helen White and Priyanka Crasta

The University of Birmingham, UK

Abstract

The aviation market within the United Kingdom has been undergoing tremendous turmoil as
the established airlines battle it out with newer competitors. The new competitors are offering
an alternative version air travel service and in such a scenario it is important to understand
what is important to consumers and what they want from their air travel services. The
research described in this paper attempted to identify what consumers want and subsequently
establish the relative importance of key criteria.

This was achieved through quantitative primary research. Sixty-one respondents who had
travelled within the U.K. in the past year were surveyed. The research findings indicate that
there are four key purchase criteria: ‘price of the ticket’, ‘convenient flight times’, ‘distance
of airport used by the airline’ and ‘brand of the airline’. The relative importance of these
criteria was established using the full profile method of conjoint analysis. The subsequent
cluster analysis revealed that price was the most important consideration for 80% of the
sample while convenient flight times and brand name were important to 20%.

The findings establish that price continues to be the most important criteria for consumers
while making the decision to purchase an air ticket. Therefore, any operator who is unable to
reduce costs and consequently prices will find the future will get much tougher.

Keywords: UK Airline Industry; Conjoint Analysis; Cluster Analysis

Background

The airline industry has always been unique and fascinating due to its glamour, reach and
impact on the large and growing numbers of travellers worldwide (Chan, 2000). Over the past
30 years, worldwide passenger traffic growth rates have averaged 6.2%, nearly double the rate
of real growth in global gross domestic product (Costa et al, 2002). However, already ailing
from the economic slump of 2001, the industry was sent into a tailspin by the events of
September 11th, the war in Iraq and the spread of SARS. Having said that, although the
aforementioned events were unexpected and devastating they served to highlight certain pre-
existing flaws within the industry like continued over-capacity, excess hubs, high labour costs
and tax burdens (Mintel, 2003).

Additionally, in an industry where older, established airlines appear to be haemorrhaging,

some new low cost entrants present rare cases of continuing growth and increasing profits.
The question must be asked therefore, has the airline industry changed fundamentally? Have
travellers’ needs diverged or changed dramatically? Are some airline carriers tuned into
travellers’ needs while others are not? Or is it a situation where given different options,
travellers will trade off one aspect of the service being offered for another e.g. price? An
integral part of an airline’s evaluation of its overall strategy is gaining a better understanding
of the needs and wants of individual travellers. The research described in this paper sought to
provide this understanding by identifying the key criteria that form the basis on which
travellers purchase an airline ticket and to establish the relative importance of the criteria

Literature Review

The changes in the European airline industry started with deregulation in 1987 to 1997 (Janic,
1997; Pender and Baum, 2002; Stasinopoulos, 1993). The deregulation in Europe followed
similar changes in the aviation market in the United States, which started in 1978.
Deregulation or ‘liberalisation’ as it has been otherwise termed, involves the effective
removal of many of the regulations governing civil aviation which means that market forces
are allowed to operate more freely (Pender and Baum, 2002). While this means that the
government no longer subsidises unprofitable services, it also allows airlines (theoretically) to
fly wherever they want at airfares, which they determine (Janic, 1997; Pender and Baum,
2002). The deregulation of aviation in Europe protects airlines against discrimination on the
basis of nationality, allows the free operation of airlines within the EU nations and has
eliminated capacity sharing (Janic, 1997).

One of the key features of the deregulation was the relaxing of the regulations regarding route
entry and airfares (Pender and Baum, 2002). The most visible demonstration of these changes
in the European market is the establishment of a number of low cost or ‘no frills’ airline
companies (Mason, 2001). These airlines emerged in a market which was dominated for a
long period by cartels and pricing regulations and hence transformed the industry by flying to
a wider range of locations at substantially lower prices by cutting out the ‘frills’ (Mintel,
2003). Therefore, giving travellers a choice regarding the kind of flying experience they
desire and the option to forego some of the full service elements for a reduction in fare levels.
The success of these airlines is highlighted by the profit figures of easyJet which announced
an increase in pre-tax profits of 82% in 2001, and Ryanair’s market capitalisation overtook
that of British Airways (Piga and Fillipi, 2002).

In the U.S., full service airlines responded to competition from low cost operators by
introducing their own low cost subsidiaries. The three main full service airlines in the U.K.
responded similarly with British Airways (GO), Virgin Atlantic (Virgin Express), British
Midland (bmibaby) (Mintel, 2001). However, the low cost operations begun by full service
airlines are enjoying limited degrees of success with the low cost operator easyJet acquiring
British Airway’s GO and the closure of Virgin Express.

However, due to the fact that the low cost carriers are relatively new in the aviation industry,
there have been some doubts cast on the long-term future of these airline carriers. According
to Bingelli and Pompeo (2002), the only significant advantage that low cost airlines have is of
their lower labour costs, while being disadvantaged by a lack of market identity, thin
capitalisation and limited resources. Furthermore, the authors have expressed doubt about the
growth of low cost airlines and think that they will eventually hit a ceiling in their present
format. The difficulties faced by low cost airline carriers are demonstrated by the folding of
Debonair, AB Airlines in 1999 and Virgin Express in Ireland in 2001.

Another hurdle which low cost airlines are facing is legislation by authorities in the European
Union regarding compensation to passengers who have been inconvenienced due to delays
and cancellations, which will raise the costs of operation (Birmingham Post, 2003). Hence,
deregulation has transformed the European aviation industry, by removing many of the legal
restrictions that previously existed and has consequently increased the levels of competition.
This has made it even more important for the airlines to know what the needs and priorities of
their customers are. The following section examines the existing literature on the purchase
criteria important to consumers.

Consumer Purchasing Criteria

The act of flying is only part of a larger bundle of services provided to the air traveller
(Driver, 2001). When choosing a flight, passengers try to maximise their ‘air travel utility’
which is a function of such elements as ‘the market presence, quality of service, frequent flyer
membership, fare levels and travel restrictions, and schedule convenience offered by each
available flight’ (Proussaloglou and Koppelman, 1999).

Moreover, according to Akiva and Lerman (1985) the probability that an individual selects an
option is defined as ‘the probability that its utility is larger than the utility of all other
alternatives’. According to research carried out by Gilbert and Wong (2002), passengers
regard frequency of flights, timings, punctuality, good in-flight service and facilities, good on-
ground service and facilities, non-stop service and safety records as the key criteria upon
which travellers base their purchase decision. Due to changes in the industry structure in
Europe, travellers now have the option to choose the elements of their air travel utility they
consider the most important and the price they are willing to pay, or not as the case may be, in
order to obtain optimum satisfaction.

The airline market has traditionally been divided into the business and leisure markets.
According to Gilbert and Wong (2002) the three main reasons for travelling by air are
business, holidays and visiting family and friends. The product offered and price at which it is
offered is, consequently, tailored to suit the needs of these segments. Liberalisation and
privatisation of air transport in Europe combined with the entry of low cost carriers and
increased competition overall has led to a fall in the real cost of travel with air travellers
paying on average 70% less in real terms than they did 20 years ago. This has made the
leisure sector which constitutes the major part of air travel more price sensitive and
discretionary (Mintel, 2001). This is echoed by Proussalogou and Koppelman (1999), who
suggests that travellers make trade-offs in terms of convenience and service to get a low
priced ticket. However, research carried out by Collis (1998) on data supplied by IATA found
that passengers in North America, Europe and Asia favoured punctuality (65%) and
scheduling (52%) over price (37%). While this might suggest contradictory views, it may also
indicate a market which considers low prices to be the base criterion and has consequently
become desensitised. Hence, there appears to be some disagreement regarding the criteria on
which travellers base their purchase decision.

Traditionally, full service airlines have targeted their product at different segments by
segmenting their service into first class, business class and economy class. In the past, full-
service airlines have concentrated on the business segment as they have been the more
frequent flyers and consequently the more lucrative section of the market. The existing
literature seems to reflect this focus on the business market, with comparatively little research
being carried out on the leisure sector, consequently the review of the literature reflects this.

A survey of frequent business travellers reported four out of five were concerned with seat
size whilst no other comfort or service factor rated a mention by more than one in five (Collis,
1998). Mason (2001) found that there were three segments in the short-haul business market
with 40% of the market demonstrating price sensitivity, 19% seeking value for money and
41% who were uninterested in the price of travel. Business class passengers have higher
expectations of waiting lounges, convenient schedules and flight frequencies, loyalty and
frequent flyer programmes, than of quality service in relation to food and beverages,
individual attention by airline employees, prompt service and in-flight entertainment facilities
(Gilbert and Wong, 2002). On the other hand, research by Barclaycard (1998/99) noted that
fewer travellers perceived business class services as providing good value for money (24% as
compared to 27% in 1997), while 28% of the respondents had used low-cost airlines with
86% saying that they would do so again. Consumption of low cost airline services by business
travellers contradicts traditional perceptions of business travellers as placing high value on
frequency, flexibility, frequent flier programme awards and in-flight comfort. The research
described in this paper also examines whether there still exists a gap between the needs of
travellers flying for reasons of leisure or business.

Methodology

The primary research included a pilot study which identified key purchase criteria from a
sample of 30 respondents. Following the pilot study, a full survey was undertaken using
conjoint analysis as a structural basis. 539 questionnaires were emailed to respondents and 67
responses were received (11% response rate). Of these, 6 had to be excluded due to missing
values. Email surveys enabled a wider geographical spread than would otherwise be possible.
Surveys were distributed with the use of a list in the Bedfordshire, Hertfordshire and
Buckinghamshire regions of the UK. The target respondents were people who had travelled
within the UK in the last year and who did not work for an airline. The sample was a non-
probability convenience sample due to the need to identify the appropriate group of travellers.
(The research was limited by its sample size and thus may not represent the UK market as a
whole.)

Conjoint analysis was chosen as a method of analysis, as it allowed respondents to consider

alternative scenarios as choices for air travel. The full profile approach was chosen with the
use of a ‘fractional factorial design’ which meant that not all possible combinations needed to
be considered by all respondents. Nine scenarios were used. The additive model of conjoint
analysis was adopted as this assumes a more straight forward approach to combining the part-
worth evaluations of each attribute level. Four attributes were identified from the research
each with three levels or part-worths. For purposes of reliability Spearman’s rho, Kendall’s
tau and Pearson’s correlation were used.

Following the conjoint analysis, a cluster analysis was conducted to see if there were any
specific groupings of respondents based on the four attributes. The agglomerative
hierarchical clustering method was used and two specific clusters were identified.

Results and Conclusions

The mix of respondents was balanced between males and females (50%) of each, between
income categories and between age groups. Forty eight per cent had travelled for holiday
purposes, 31% for business purposes, the remaining 21% travelling to visit family and friends.
Seventy two per cent of those surveyed had travelled more than three times within the year.
Reviewing the full profile conjoint analysis, the most preferred profile was scenario 8: Price:
20% below average; Distance to airport: between ½ to 1 hour away; Brand name: acquainted
with; Convenient flight time: ideal time. The results of this section of the analysis indicated a
very good fit for reliability with Pearson’s R and Kendall’s tau being 0.999 and 0.944
respectively indicating that the respondents were consistent in their preferences.

Examining the attributes individually, the respondents considered price to be the most
important criterion (31%). The second most important attribute was convenient flight timings
(28%). The respondents rated distance of the airport to the point of commencement and final
destination as the third most important criterion (21%) and the brand name of the airline
(20%) as the least important criterion. The differences in the mean scores were confirmed as
being statistically significant using the Friedman test.

Additionally, the research sample was divided between respondents who had used a full
service airline and those who had used low cost airlines in order to find out if there were any
differences in their perceptions of the relative importance of the key purchase criteria. The
majority of respondents had used a low cost airline (70%) while 30% used a full service
airline. A Mann-Whitney statistical test was used and the results indicated there were no
significant statistical differences between the two groups as the possibilities were well above
the acceptable limits (i.e. less than 10% chance of being wrong). Hence, it can be concluded
that the respondents had similar perceptions about the relative importance of the key purchase
criteria irrespective of the type of airline they travelled by.

Two clusters were identified from the cluster analysis. Cluster one represented 80% of the
sample and cluster two represented 20%. The most distinguishing criterion separating the two
clusters was price. One cluster was very price sensitive and the other was not price sensitive.
For the second cluster convenient flight times and brand were more important. Hence, a
‘price’ and ‘reputation/convenience’ division between the two clusters was identified. These
two did not, however, correspond directly to full service and low cost travellers. However,
74% of the travellers in the price sensitive cluster were low cost travellers.

In conclusion, the research has identified two distinct groups of travellers, price sensitive and
non-price sensitive travellers. However, these two clusters do not necessarily correspond to
full service and low-cost travellers. There was also no distinction as to whether the purpose
of travel was business or leisure. The criteria appear to be equally important for both.
Recommendation to the industry is offered in the form of confirming that providing low price
travel is important to travellers particularly as the number of trips per year increases. But also
that there is still a distinct market for the less price sensitive traveller who is more concerned
with reputation, convenience and comfort.

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