Analysis of Pricing and Distribution Strategy at British Airways
British Airways is the flagship airline carrier for United Kingdom, formed in 1974. With significant presence at Heathrow, Gatwick and London City with over 20 million people living within commuting distance.
BA has a fleet of more than 238 aircrafts in service as of March 2010 and flies to 41 different destinations in America, 9 in the UK, 67 in Europe, 16 in the Middle-East and South-Asia and 7 in the Asia Pacific region, carrying around 32 million passengers between 2009 and 2010 as well as operating a large air cargo business alongside.
BA, American Airlines, Cathay Pacific and Qantas form the Oneworld airline alliance which is now the third largest airline alliance group.
In 2011 BA merged with Iberia forming IAG with 408 aircrafts flying to 200 destinations and carrying 55 million passengers and allowing the two companies to enhance their presence in the market whilst retaining their own brands and allowing their customers to benefit from a larger network of travel (http://www.iairgroup.com/ 2011).
British Airways sees itself as a vital link for trade and investment, specialising in short to medium length international journeys which has seen revenue of ?8 billion in 2009/10. This figure is down 11% on the previous year due mainly to price of fuel and the recession. BA’s main activity revolves around passenger travel which accounts for 87% of 2009/10 revenue, supposed to 7% from cargo and 6% from other means. The acquisition of Iberia in 2011 has allowed BA to increase its capabilities in the cargo market and diversify their operations. Both companies float on the Spanish and UK stock markets as one under IAG, which floated in late January 2011 at 282p a share; this has dropped to a price of 224.3p per share as of 4th April 2011. The future for British Airways and IAG will be largely affected by its ability to weather the downturn, but with its promise of drastic expansion and a strong market share within the European market (3rd biggest by revenue) (www.bbc.co.uk/news 2011)
British Airways prices its products in a way that allows consumers to decide the level of services they want. For example return flight to New York, purchased online is ?376 in economy yet consumers pay a huge increase to ?2728 for the same flight, (www.britishairways.com 2011) but in first class.
BA’s premium and medium strategies offers superior quality for greater price allowing the airline to compete with other quality airlines such as Virgin and American Airlines, and base price on customer valuations – The price “is set higher than others to reflect better product quality and exclusivity.” (Brassington and Petitt, 2003: 1106). However in recent years the arrival of low cost carriers and economic turmoil forced BA into providing a low cost formula to remain competitive. The first step towards this was in generating ancillary revenues by introducing a fee per one way flight for passengers booking a seat in advance for all seats except first class. (GMID 2011) Even in the low cost formula, BA are still upholding their image of quality and good customer service as unlike the low cost carriers, where ancillary revenues are the money makers with food, drink and priority boarding all costing extra, BA still provide some level of on board service in the cost of their product.
Despite the introduction of a low cost formula, British Airways generally bases prices on perceived value of its brand, and aims to deliver product quality leadership strategy. (www.britishairways.com 2011) The executive club encourages loyalty to the airline and rewards consumers with double airmiles, priority boarding, additional baggage allowance and access to the BA lounge as well as giving the appearance of high quality and good value.
However BA recently lowered the price of their business class ticket due to the recession. It has been recognised the company has had to reduce the price of its business class tickets, to remain competitive alongside such competition as Virgin, who have helped battle down the price, along with it’s cliental that have become less willing to pay higher prices during economic hardship. This has help attract more customers, smaller businesses in particular, who are able to do deals and meet contacts around the world. (Times Online 2011). An excellent strategy that has allowed BA to get away from just large organisations and into the smaller/medium sized business market (GMID 2011) is their Face to Face campaign which, on submittance of a business plan, small/medium sized businesses can apply for free business travel.
The marginal cost of one more passenger is relatively small, as the majority of costs are largely in fixed costs of running the flight (cost of aircraft, fuel, airport duties etc.). According to Chris Tarry, transport analyst for Commerzbank Securities, BA’s selling cost per passenger in March 2002 was just 10.9% of its average ticket price (http://www.insights.org.uk 2011). This allows BA to sell tickets at lower rates when demand is less and higher rates during peak season. For example an economy class ticket to New York would normally be ?376 return but almost doubles over the peak bank holiday period of the Royal Wedding at ?616 (www.britishairways.com 2011). The airline aims to get as many people on the plane as possible, even at a lower price, and make some profit, than the plane taking of near empty and making a loss.
British Airways tickets are available to purchase from travel agents physical locations and online via their websites, and through BA’s dedicated website, travel shops and reservations staff. With e-commerce radically changing distribution strategies (Solomon et al, 2009), BA and various other airlines are trying to reduce costs to ensure they continue to effectively compete against other players within the airline industry and still provide each customer with their superior service by eliminating their use of various ‘traditional intermediaries’ (Solomon et al, 2009) within their distribution channels.
Globally 20% of British Airways tickets are now sold via ba.com, with 54% of these online bookings accounting for their total short haul sales stated by docstoc (2010). It’s recognised from these statistics that the convenience of purchasing airline tickets online is attractive, due to the ability to securely acquire a flight ticket without leaving the comforts of your own home, as well as that purchasing tickets direct from BA.com is significantly cheaper than leading travel agents, for example an economy class ticket flying from London to New York can be purchased for ?368 straight from BA where as Expedia offer the same flight for a staggering ?432.10. However, there is still an area of the market who enjoy purchasing their airline tickets from travel agents physical locations, this is due to travel agencies providing the customer with the same options as to the airline website itself, in such areas as seat preferences, along with the additional personalised service which the customer is able to discuss the range of options available to them when booking all areas of their holiday, be their hotel or hire car. An attempt to create a more direct distribution channel process, BA also provides the recognised ‘travel agent’ service options to its customers, through offering a range of hotels, car rental and various other holiday package choices.
The various options available to consumers when purchasing BA airline tickets are either through travel agents, or alternatively buy their ticket straight from the BA website, travel shops and reservations staff. It’s seen that prices do vary depending on where tickets are purchased, for instance if a consumer were to purchase their ticket directly from BA’s website, they would commonly pay a lower price, due to the direct business to customer distribution channel, eliminating the need for BA to pay commission to travel agents which is ‘traditionally between 8% and 10% of the ticket price’ (tourism insights, 2002) and for the use of Global Distribution Systems (GDS). GDS is used by airlines to sell flights, through connecting both the airline and the travel agents to sell the tickets. Airlines pay GDS to connect them to travel websites and travel agents to enable their flights to be sold via these organisations, GDS segment fees average at around ‘$10 to $12 per booking’ (tourism insights, 2002). With BA’s distribution costs accounting for 16%-17% of the cost of selling each ticket, no wonder they want to reduce distribution channels to help become more competitive in the growing low fare airline industry, especially due to the ‘travel and tourism industry fast becoming the biggest growth industry in e-commerce payments,’ (docstoc, 2010).
Overall it is clear that British Airways are aiming for a much more direct distribution channel. They are investing huge amounts of money in improving their online services to try to encourage people to buy online rather than at the extra cost of the middle man travel agent. This also allows the airline to gain vital information about their consumers and their wants and needs, allowing the company to differentiate and target their services appropriately. This will ensure they enhance their competitive market position, through enabling them to provide special offers to different customers, for example in the form of special discounts, special seats with more leg room and passes for their lounges, allowing them to build better relationships with their customers. The high growth in e-commerce selling in the travel and tourism market is further proof of how important it is for BA to perfect this particular method of distribution. The lower costs from eliminating a middle man, including both online and shop based agents will also allow the firm to appear more competitive in comparison to low cost carriers (LCCs).
The introduction of ancillary products and reduction in price of business class tickets has been key in promoting the price competitiveness of the airline alongside the strong brand image of quality and reliability. The low marginal cost of an extra passenger also gives the airline the ability to lower costs depending on the demand for their product at the time of year; this means that BA can offer their business clients lower prices when it is not peak season such as school holidays.
Conclusion and Recommendations
By providing more ancillary goods and a reduced cost of the seat, BA will give consumers the options of what they want and become more competitive with the LCC’s, who are extremely popular for short haul flights. For example providing the option to charge extra for food and drink or extra baggage on short haul flights as well as an all inclusive option.
Many of the LCC’s only distribute tickets online. To uphold BA’s strong brand image it’s important for them to stay accessible through other distribution systems as many of their more wealthier cliental who spend the most via business and first class tickets, may desire a travel agent. By marketing their online travel agent services they may be able to increase their current 20% online distribution. This will provide a more direct channel to their customers allowing them to market events such as the BA January sale, flights to cheaper destinations and cheaper times to fly that consumers may otherwise be unaware of.
Marketing the executive club more effectively to new customers and ensuring that by being a member, consumers actually receive some benefits, they’re likely to remain loyal and recommend the airline.
BA could also improve their services by providing questionnaires to passengers. For example, on long haul flights when consumers are more likely to fill them in, and providing a reward – such as a draw for a bottle of champagne. By doing this the company will be able to find out if consumers choose them for their prices, customer service, quality or the routes that they operate under and use this to market the company accordingly.
It is clearly important for BA to remain competitive with the LCCs by providing an alternative to the high quality and high price product they currently provide but still keeping their high quality image and providing a service that current, loyal customers expect. Effective online distribution and optional ancillary products are key in achieving this alongside accurate customer research from current and potential consumers. The airline should continue to use their low marginal costs to their advantage when promoting the airline to businesses and off peak travellers.
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Tourism insights (2002) The Changing Face of Airline Distribution [Online] http://www.insights.org.uk/articleitem.aspx?title=The+Changing+Face+of+Airline+Distribution [Accessed: 6th March 2011]