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Airline Industry: Heading to value differentiation

Price differentiation of an airline company has been implemented so far on the means of absorbing the consumers’ willingness to pay for the same service, an economy class with frills. In this way, not much price differentiation existed on the value of services as the distinction made was only between economy and business class. This distinction of services was too steep to keep out many consumers that would be available to pay for the price of a ticket with no frills and lower quality of services.

The surging penetration of budget airlines has urged traditional air carriers to rethink their strategies. So far, Lufthansa, Singapore Airlines and KLM are the few major airline carriers to have successfully implemented differentiation of their services, through low-cost brand subsidiaries, but even these have not done it extensively to reach the long-haul market. Now, it is IAG, the parent company of British Airways, looking to extend this model by entering the market of low-cost long-haul carriage with Level, a newly-born subsidiary announced in March 2017. This may signal the beginning of a new era in the airline industry.

Particularly, reducing prices is an unviable solution for operators either in the matters of transforming to low-cost carriers or even more by keeping the same level of services. As there is not much space above the break-even point, a mix of business models is a better option.

In addition, the long-haul market is crucial for non-budget airlines. Firstly, after the appearance of low-cost airlines which have grabbed a large share of domestic flights and short-haul international flights, the revenues of major airlines are significantly dependent on long-haul flights. Not only this, but legacy carriers have historically enjoyed large profit margins as they did not face competition from budget airlines. Consequently, it is inevitable for full-service carriers to differentiate their price through different value of services, which entails operating low-cost brands in the long-haul market.