Customer Perception of Cheap Fares and Its Implications - Case Study Example

Customer Perception of Cheap Fares and its Implications: A Case of EasyJet Student’s Name Course Name & Number Group Summer 2015 Instructor’s Name Date of Submission Word Count: 2,927 Table of Contents Table of Contents 2 Abstract 3 Introduction 4 Problem Statement 4 Significance of the Study 5 Scope of the Study 5 Literature Review 6 Study Methodology 8 Findings 10 Discussion 11 Conclusion 12 Recommendations 13 References 15 Appendix 17 Figure 1 17 Questionnaire on Customers' Perception of EasyJet's Cheap Fares 17 Respondent 1 17 Abstract EasyJet is amongst the fastest growing airlines in the world. EasyJet is a British low-cost cargo and passenger airline based in London. The airline was founded in 1995 but has since grown to become the largest airline in terms of the number of passengers carried. However, being a low-cost carrier, EasyJet normally charges low fares for its passengers as a way of attracting price conscious traveler to the airline. However, this pricing strategy is likely to prove detrimental to EasyJet performance in the long sun due to negative perception that customers have about the quality of products and services offered by low-cost airline. This report investigates the perception of travelers on the quality of services and products offered by low-cost airlines. The study will involve the involve providing participants in the study with a questionnaire to give their perception of the quality of services and products offered by the low-cost airlines. Customer Perception of Cheap Fares and its Implications: A Case of EasyJet Introduction EasyJet is amongst the fastest growing airlines in the world. EasyJet is a British low-cost cargo and passenger airline based in London. The airline was founded in 1995 but has since grown to become the largest airline in terms of the number of passengers carried. The faster growth that the airline has registered over the last few decades has seen EasyJet increase its flight destinations to more than 700 and flies in over 32 countries across the globe (Mayer 2007, p. 12). EasyJet employs about 8,900, which makes it rank amongst the largest employers in the European airline industry. EasyJet flies about 200 aircrafts consisting mainly of Airbus A319 and flown more than 65 million passengers in 2014. Currently, EasyJet is the second largest low-cost airline in the entire Europe, just behind Ryanair (Jones 2007, p. 75). Despite faster growth that the airline has registered over the years, EasyJet has had to face stiff competition from both domestic and international airlines. Among the major competitors of EasyJet are British Airways, Virgin Atlantic and Ryanair just to name but a few. Problem Statement Although EasyJet has been registering considerable growth since 1995, the airline faces a number of marketing challenges that might affect its performance it the future, key among them being cheap ticket prices that makes the EasyJet being perceived to offer low quality products and services. This report will investigate why EasyJet has been charging low prices and how charging low prices is impacting negatively on the company performance. Based on the findings, the report will provide recommendations for change to help EasyJet overcome this challenge. Significance of the Study There are different stakeholders that might benefit from this study. The first group will be the EasyJet as a company. By gaining an insight of how charging low ticket prices impacts negatively on how customers perceive the company, the airline’s marketing team will see the need to take a proactive and necessary action to overcome the challenges. The second group that might be affected by the study is the passengers using EasyJet as their airline of choice since the study will recommend changes to the company’s pricing strategy that might affect passengers using the airline in the future. The educators will also be affected by this study. By emphasizing to the marketing students the need to adopt an effective pricing strategy for a product or service, they will be able to transfer such knowledge to the workplace where they will be working in the future, thereby enhancing the performance of a company. Lastly, this study is also beneficial to other low-cost airlines other than EasyJet that also adopts a similar low fares as a way of attracting price conscious travelers to the industry. Accordingly, this report will help the other low-cost airlines understand how the low fares impact negatively on the way customers perceive the company and come up with effective measures of improving the image of their airlines. Scope of the Study This study is limited to the perception held by passengers that travel using EasyJet as to the low prices charged by the airline. The study, will however, be restricted to London area where the majority of the passengers flying on EasyJet are found. From the findings, the study will draw conclusions and provide recommendations for changes that need to be made to keep EasyJet competitive and sustainable in the long run. For the purpose of this study, low prices means that EasyJet is charging ticket prices below the industry average. Low-cost means airlines that adopts low-cost pricing model. Literature Review The airline industry is one of the most competitive industries in the world. This is particularly so in the U.K. airline industry, where the level of competition is getting stiffer as major airlines develop new techniques to enable them gains a competitive edge over rivals in the industry. The major U.K. airlines that compete for passengers include British Airways, EasyJet, Ryanair and Virgin Atlantic just to name but a few. Although competition in the U.K. airline industry is based on a number of parameters, most of the airlines currently compete based on the pricing. Morrison and Winston (2012, p. 23) noted that, with the increased demand for affordable travel options, most airlines are increasingly changing their pricing strategies by moving away from premium and expensive prices to offer customers cheaper traveling option. This has resulted in an upsurge of low-cost airlines that currently charge very cheap ticket prices for travelers. In the U.K. Ryanair and EasyJet are some of the major low-cost airlines that charge low prices for their products and services. Although these are some of the major low-cost airline in the U.K. EasyJet prices are relatively lower than those charged by Ryanair. For instance, whereas it cost a passenger £200.06 to travel from London to Berlin in Germany with Ryanair, it cost a passenger traveling with EasyJet only £151.99 to travel the same distance (The Telegraph 2001). These ticket prices are very low compared to what other airlines, such as British Airways charge for a similar distance. EasyJet and other low cost airlines have supported the low pricing strategy for a variety of reasons. Firstly, according to the marketing manager of EasyJet, the U.K. and other markets, where the airline operates has been experiencing a huge rise in the number of travelers looking for cheap and affordable travel option (Mayer 2007, p. 17). Therefore, the best way the airline to grab such price conscious customers was to introducer low-cost airlines. As a result, the airline has been able to charge relatively lower ticket prices compared to its rivals in the industry. The low prices charged have seen the airline register a huge increase in the number of customers wanting to travel with EasyJet (Jones 2007, p. 82). The increase in customer has effectively translated to a huge increase in profits. In fact, EasyJet attribute large number of passengers that it flies every year to the high demand for low prices that it charges that has given it a competitive edge over its rivals. According to stimulating effect, the low-cost carrier business model only works well when customers can be motivated to travel by charging low fares. In this respect, Doganis (2001, p. 32) noted that charging low fares can increase the market share of an airline by making it possible for travelers who would ordinarily not travel by air because of high fares to travel. For instance, EasyJet has been able to conquer a number of markets that were previously untapped by introducing low-cost airlines. For instance, EasyJet has reaped huge by introducing low-cost airline to Tanzania, where the airline currently command a huge market share by making it affordable for most Tanzania travelers to travel by air (Prisco and Nurse 2015). Nevertheless, Gross and Schröder (2007, p. 22) argue that the stimulating effect can only work well when the fare differential is huge enough. Despite the benefits that low-cost airlines, such as EasyJet derive by charging low fares for their travels, Gross and Schröder (2007, p. 22) argue that charging low fares can be counterproductive. Therefore, airlines should be very careful when adopting low pricing strategy. It particular, it has been noted that as much as low prices make an airline affordable to travel with, the image created by low pricing can hurt an airline (Reed 2015). The concern has been attributed to the fact that most travelers tend to associate low prices with low quality products and services. In this respect, to some travelers, especially the middle and high class, charging low fares means low quality products and services. Tacker, Fleming and Vasigh (2013, p. 14) argue that the low pricing strategy adopted by the low-cost airlines is not likely to be sustainable in the long-run. According to analysts, the huge fall in oil prices in the recent past has seen most airlines reduce their ticket prices to attract customers. However, the low prices might not be sustainable in the long run because of the dynamics of the pump prices that might shoot up. This implies that airlines that charge low prices for tickets might fight it difficult breaking even or making profits and might be forced to increase their prices to remain profitable. Therefore, in order for airlines to compete effectively, they must adopt a well thought out pricing strategy that not only attract customers, but also enable the airline to make profits so as to be able to maximize value for shareholders. Study Methodology Data Source In order to understand the perception of airline customers on the low prices charged by EasyJet, data was collected using a questionnaire. The respondent were given a closed formatted questionnaire which had multiple choice questions from which they were to pick one answer from the multiple choices provided. The participants were asked to provide their perception on the low prices charged by, airlines such as EasyJet. In particular, the participants were asked to provide an answer as to how they perceive the quality of products and services offered by EasyJet based on the low fares charged by the airline. The participants were also asked whether or not they have been driven to travel with the airline because of the low prices. Additionally, the participants were asked whether or not they will shift their loyalty to other airlines if EasyJet were to increase their fares. Sampling Technique The participants involved in this study were passengers who travel by plane most of the time. A sample size of 25 airline passengers was used for the study. The participants used in the study were chosen at random at major airports in the U.K. The airports from which the travelers were selected for the study include Heathrow, Gatwick, Manchester and Luton Airports. Each member of the study team was tasked with the responsibility of distributing to sample members. For confidentiality purposes, the respondents were not required to identify themselves by name, but were instead required to fill in the question are and return it in a closed and stamped envelope to the study team. Effective control measures were used to ensure that there is no duplication of responses. Statistical Methods Data collected during the study was tabulated using a simple statistical technique. The collected data was then analyzed on the basis of the percentage of response. The percentage of response was arrived at by dividing the total number of responses to each of the questions by the total number of participants who responded to the questions. With regards to the first question, the response percentage of the perception of respondents on the quality of airline services and products based on low fares was reported and the same was done with the other questions. Study Limitations The study might be limited by a number of factors. Firstly, getting the respondents willing to take their time to fill in the questionnaire might prove a challenging endeavor. This is because some respondents chosen at random might declined to take their time to answer to the survey questions saying they were too busy. The second limitation had to do with collecting the data using questionnaire. Since questionnaires need to be brief and precise, this means that some important questions might to be left out that may affect the overall result. Additionally, the use of statistical sampling technique may affect the study outcome by introducing subjectivity elements during data analysis and interpretation stage. Nevertheless, the study team has taken all the necessary measures to overcome the limitations. Findings All the responses returned were assumed to be from regular airline travelers. The respondents were also requested to provide their income level to be able to see if the income level also influences the perception of airline customers as regards the prices charged. Out of all the respondents surveyed, 90% of the respondents stated that the low prices charged by airlines, such as EasyJet make them doubt the quality of the products and services offered. The respondents were categorical to state that they equated the low prices to low quality products and services (figure 1). These respondents argued the airlines are charging low prices because they try to cut costs, which in effect compromise the quality of services and products offered. On the second question, the 70% of the respondents, particularly the price conscious travelers stated that they have been driven to travel by airlines charging low fares because of their inability to travel with airlines that offer quality services and products but charge high fares that they cannot afford. Regarding the third question, the opinion was divided according the social class as 90% of respondents from the upper class status cited that they will remain loyal to EasyJet even if they raise their fares as long as the price increases translates to an improvement in the quality of products and services offered by the airline. However, 30% of the price conscious respondents said that they will look for a cheaper airline if EasyJet were to increase its travel fares. On the last question, 90% of respondents stated that they look at product and service quality, as well as fares when choosing the airline to travel with. Table Showing Survey Result % of respondents that perceived cheap fares to low quality 90% Respondents driven to EasyJet by cheap fares 70% Respondents who will disassociate with EasyJet if it increases prices 30% Respondents that look at quality of product or service and fares when choosing an airline 90% Discussion The finding of the study it became apparent that the prices charged by the airlines has a huge influence on how customers perceive the quality of services and products offered. According to the findings, a whopping 90% of the respondents stated that they doubted the quality of services and products offered by airlines that charge low fares. This is because they believe that low fares translate to low quality products and services (Doganis 2006, p. 6). This is in line with the observations that have been made by researchers that have observed that most low-cost airlines offer low quality services and products because they minimize their budgets. This implies that, as much as low-cost airlines are interested in attracting a huge number of customers by charging low fares, they must not compromise the quality of services and products as a result (Reed 2015). In fact, as noted by Kernchen (2007, p. 31), charging low prices only works best for the airlines when the prices are greatly differentiated. The study also found that about 70% of the travelers are driven to travel by low-cost airlines because of affordability of their fares. However, from analysis, it becomes clear that these passengers travel with low-cost airlines because they cannot afford to travel with expensive airlines that offer quality services and products. This implies that, if they were capable of travelling by expensive airlines, they would do so to enjoy quality products and services; instead of using low-cost airlines that are cheap but offer poor services and products. Additionally, it becomes clear from the study that, the majority of the respondents are willing to remain loyal to low-cost airlines even if they increase their fares as long as they improve the quality of products and services offered. This implies that, as much as travelers are looking for affordable airlines, they only do this because of their inability to afford expensive aircrafts (Kernchen 2007, p. 36). This raises questions as to whether or not low-cost airlines will survive the competition in the airline industry if they continue charging low prices but offer poor quality services and products. Conclusion Based on the literature and findings, a number of conclusions can be made. In this respect, it emerged that there has been an increase in the number of low-cost airlines. This is particularly so in the U.K., where there has been a trend towards low-cost airlines. The low-cost airlines have been reaping huge because of the low fares that drive a huge number of price conscious customers to the airlines. However, as found out during the research, charging low fares can prove detrimental to an airline. The study found that most travelers associate low fares to poor quality services and products. The study also found that the majority of travelers who use low-cost airlines that charge affordable fares only do so because of their inability to afford to travel using expensive airlines that offer quality products. This implies that, for low cost airlines such as EasyJet to remain competitive, they have no option but to enhance the quality of their services and products even as they continue charging affordable prices. Recommendations Based on findings and the conclusion drawn, a number of recommendations are made. Firstly, because traveler associate low travel fares with poor quality products and services, EasyJet should consider enhancing the quality of its services and products. In this respect, the management of EasyJet should strive to ensure that it improves the quality of its services and products by bench marking with some of the large airlines, such as British Airways. Secondly, EasyJet should consider increasing the prices of tickets to enable it get enough money to improve the quality of services and products. This is because, based on the findings, the majority of respondents said that they were willing to remain loyal to the airline even if it increased its fares as long as the increase also result in an improvement in the quality of services and products delivered. Therefore, EasyJet should not be scared of losing customers by increasing its fares. Nevertheless, EasyJet should ensure that it not charge too expensive prices than its competitors. Instead, the fare increase should just be a little and competitive. Charging competitive prices will make customers perceive the airline as providing quality services and products, which will help enhance the airlines performance. However, more research needs to be done to determine whether low-cost airlines will be sustainable in the future. As it stands now, there is an increased trend towards low cost airlines with opinions divided among scholars as to the sustainability of the model. Such research will help airlines that intend to introduce low-cost airplanes to understand the risks and opportunities before introducing low-cost airlines. References Doganis, R 2001, The airline business in the twenty-first century. Psychology Press, New York, NY. Doganis, R 2006, The airline business. Psychology Press, New York, NY. Gross, S., & Schröder, A 2007, Handbook of low cost airlines: Strategies, business processes and market environment. Erich Schmidt Verlag GmbH & Co KG, Berlin. Jones, L 2007, EasyJet: The story of England's biggest low-cost airline. Aurum, London. Kernchen, N 2007, Marketing differences between traditional airlines and low-cost airlines in Europe. GRIN Verlag, Berlin. Mayer, F 2007, A case study of EasyJet and the airline industry. GRIN Verlag, Berlin. Morrison, S., & Winston, C 2012, The evolution of the airline industry. Brookings Institution Press, New York, NY. Prisco, J., & Nurse, E 2015, Tanzania offers cockpit view into Africa's soaring low-cost airline industry, CNN 19 August, viewed 3 September 2015 http://edition.cnn.com/2015/08/19/travel/tanzania-aviation-fastjet/ Reed, T 2015, American's too-low pricing hurts the airline industry, analyst says. The Street 3 August, viewed 3 September 2015 http://www.thestreet.com/story/13240568/1/americans-too-low-pricing-hurts-the-airline-industry-analyst-says.html Tacker, T., Fleming, K., & Vasigh, B 2013, Introduction to air transport economics: From theory to applications. Ashgate Publishing, Ltd., Oxford, UK. The Telegraph 2001, British Airways v the low cost airlines: how they compare. The Telegraph 30 July, viewed 3 September 2015 http://www.telegraph.co.uk/finance/newsbysector/transport/8671925/British-Airways-v-the-low-cost-airlines-how-they-compare.html Appendix Figure 1 Questionnaire on Customers' Perception of EasyJet's Cheap Fares Respondent 1 Top of Form 1. How do you perceive the quality of products and services offered by EasyJet based on cheap fares charged High Average Poor 2. Have you been driven to travel by EasyJet because of the low fares? Yes No 3. Will you shift your loyalty to other airlines if EasyJet were to increase fares? Yes No 4. Between low fares and high product or service quality, which do you consider most when choosing an airline to travel with? Quality Fares charged Both Bottom of Form Top of Form Bottom of Form Respondent 2 1. How do you perceive the quality of products and services offered by EasyJet based on cheap fares charged High Average Poor 2. Have you been driven to travel by EasyJet because of the low fares? Yes No 3. Will you shift your loyalty to other airlines if EasyJet were to increase fares? Yes No 4. Between low fares and high product or service quality, which do you consider most when choosing an airline to travel with? Quality Fares charged Both Read More