A dissertation

3.3. Methodology

In gathering information, discrepancies were found within the same airline website. When these discrepancies were identified, they were resolved by calling airline ticketing agents. In several cases, we were able to further clarify the underlying motivations driving the debundling trends through interviews with airline managers. These interviews underscored the importance of examining current and historic debundling trends in the context of prevailing market conditions. Thus, when interpreting these trends, it was often helpful to include information pertaining to carriers not included in the detailed product assessment analysis.

Due to the many changes carriers are making to their fee structures, it is possible that some of the information obtained from the websites will change rapidly. Nonetheless, a comparative analysis based on this information provides important insights into how different carriers are approaching ancillary revenues and, consequently, enables one to infer likely policy and customer service implications.

3.4. U.S. Airline Market Characteristics

It is important to note that the four largest network carriers use a round-trip pricing strategy whereas the two smallest network carriers use a one-way pricing strategy. Round-trip pricing enables carriers to segment the market through offering lower prices to (predominately price-sensitive leisure) customers who travel over a Saturday and/or spend more than two days at a destination. Travelers who do not meet these criteria are more likely to be time-sensitive business travelers who are willing to pay more for their airline tickets. One-way pricing occurs when customers receive separate price quotes for their departing and returning itineraries. It is interesting to observe that the two smallest network carriers, US Airways and Alaska Airlines, despite their “legacy” characteristics, use one-way prices. It is also clear that when the United-Continental merger is complete, US Airways will be in a unique (and possibly difficult) position – substantially smaller than the network carriers with a pricing structure that mimics low cost carriers (which is better for targeting leisure customers), yet with a strong international presence (which is better for targeting business customers).

The next four carriers in the table (Southwest, AirTran, JetBlue, and Frontier) represent large low cost carriers. A smaller low cost carrier, Virgin America, is also included to illustrate how some new entry carriers operating under the low cost model are attempting to differentiate themselves from Southwest Airlines. The first thing to notice is that Southwest Airlines dominates the low cost carrier market, and in fact has a greater number of daily flights than US Airways and Alaska Airlines. None of the low cost carriers are part of international alliances, and the number of international destinations served is small. This is because the equipment types typically operated by the low cost carriers can only fly short distances without refueling, which effectively limits the international markets that can be served to destinations in Canada, Central America, and the Caribbean. Interestingly, the number of destinations served by the four largest low cost carriers is approximately the same, which implies the key difference among these carriers is flight frequency. The low cost carriers differ in the number of non-alliance partners, with the two largest – Southwest and AirTran – leaning towards being independent (although partners within Canada and Mexico are seen as highly valuable).

The different mix of business and leisure customers served by these airlines is also clearly observed by comparing their frequent flyer programs. Table 3.2 summarizes the different flyer categories among those carriers in Table 3.1 that provide one or more elite levels (those carriers not shown have only one flyer category). The number of tiers, yearly qualification criteria (expressed as a minimum number of flight segments and/or qualification miles), and bonus mileage percentages are shown. Clearly, network carriers are targeting business customers and are designing their programs such that the most elite members feel particularly valued. On United and Continental, for example, the highest level of memberships is by invitation only, and the specific qualification criteria are not public. The top elite level among the low cost carriers is equivalent to the second elite tier of the network carriers.

In the context of the recent debundling phenomena, the design of elite tiers is particularly relevant, as higher elite levels represent customers who travel more frequently (and typically generate a large percentage of a carrier’s revenues). Further, network carriers that serve a large number of domestic and international destinations are better able to attract these frequent travelers. This is often accomplished through corporate volume agreements in which a carrier offers a discount to a corporation in exchange for the corporation directing a minimum number of trips to the carrier. Due to the presence of these high-valued customers and the ability of network carriers to attract a larger proportion of these customers, network and low cost carriers have adopted different debundling strategies. Specifically, as seen in the next section, many of these elite customers are exempted from paying fees.