The own fare from their own pockets.

The airline industry is made up of different groupsof buyers therefore it is important to segment your customers properly, beforeaccessing their bargaining power.

Airline industry divides buyers intodifferent segments and each segment has different bargaining power according totheir level of need. We have discussed five of these segments here: The businesstraveller segment: The business-class segment is the most important segmentof airline industry. In this segment, traveller doesn’t pay his own fare but itis paid by employer for which he/she is travelling for. This segment requireshigh quality service. They cannot predict the timing of their travel in advanceand they have to travel more frequent. Therefore price is inelastic for thissegment which means buyers have less bargaining power.1 The leisuretravel segment: The leisure-travel segment consist of those customers whohave to pay their own fares and they travel through economy class.

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They travelat vacations with their family or alone to tourist places. This segment iselastic to price, which gives them high bargaining power. Any increase in faremay result in the negative demand for airline services.2 The personaltravel segment: This segment has one aspect similar to leisure-travelsegment in which customer pays their own fare from their own pockets. On the contrarycustomers have tighter timing and route constraints which requires service likebusiness travellers segment.

E.g. emergency travels brought up by some familymatters. Bargaining power is considered to be low in this segment as quality ofrequired services is high.3 Thereligious travel segment (Hajj, Umrah, Christmas): The religious-travelsegment consist of those customers who travel for purpose of religiousobligations. They travels in huge numbers and at specific dates. They cantravel through  economy and businessclass and mostly they pay more than usual because of busy flights schedule forthose specific dates.

Since they have no other substitute to travel on thosedates, they are vulnerable to higher prices which means their bargaining power islow.4 The guestworker travel segment: The Guest-workers segment consist ofthose customers who are away from their homes and working in foreign countries.Their employer pays for their travels but unlike business class they travelthrough economy section of flight. They travel annually or at time ofemergency. Since this segment does not require high services they have moderatebargaining power. 5Cargo segment: The air-cargo industry consist ofcustomers who are sending their shipments from point A to point B via airlines.The air-cargo industry accounts for only 1% of whole cargo industry, but thevalues it transports, is worth 35% of whole industry.

They are valuablecustomers for airline industry and for growth prospect this is key segment.Goods they are transporting is valuable commodities and requires uniqueservices e.g. Capacity considerations (volume, weight, hazmat, anddimensional), highly controlled transport, direct routing and reliability.

Since it requires premium service to transport such good, airlines are charginghigh price and the customers have less bargaining power.61.2. Variables influencing bargaining power of buyers:   Thereare various factors which have a significant impact on the bargaining power ofbuyers. Therefore, we divided them in 5 following segments:  Product andservices: The airline Customers have ahigh bargaining power because there is no much product differentiation amongdifferent airlines.

Almost all airlines are providing the same services.Therefore, airlinecompanies always try to get competitive advantages over other companies, whichincludes greater legroom, on flight entertainments, on ground services. They dothat in order to differentiate themselves from others and justify price theyare charging.

7 Onlineportals: With the evolution of online ticket bookingapplications, now buyers have easy access to different prices over internet.More informed customers have high bargainingpower as they can compare different airlines online and choose optionsaccording to their need.8  Low switching cost: The Airlineindustry has low switching cost which gives customer opportunity to utilize lowswitching cost opportunity and switch to other airline, where they gethigh value. Thereare factors such as frequent flyers miles and flag carrier which has theireffect on switching cost. Airline usually provides free miles to overcomeswitching of customers, however this has not deterred customers from switching bylarge extent.9 Price sensitivity: Price sensitivity is anotherfactor which is influencing airline industry.

Now the customer is gettingaccess to online prices through different agencies portal therefore if they seeany price difference among same product or service, they will switch to cheapestone. Previously, business-travelers segment was not price sensitive but nowcorporate are booking travel tickets and they are pushing price competitionhigher for this class too.10 Distance: Distance between destinations is divided into threecategories according to availability of substitute: First one isdistance up to 400 km. Here bargaining power of buyers are high for bothtravelers and cargo clients, as they have more substitute, like trains, buses,trucks or own cars. So buyers can choose from different substitute which givesthem high bargaining power. This means that airline has to compete not onlyamong themselves but also between substitutes.11The secondcategory distance is up to 1.000 km.

In this category competition remains sameamong substitute and between airlines but preferences of buyers are changed.They need more comfort for this much distance, but they still have choice ofsubstitute like trains and buses, which gives them moderate bargained power.But cargo clients still have high bargained power as they can still rallyaround available substitute for transportation.12 The lastcategory distance is above 1.000 km. In this category level of competitionchanges in substitute and between the airlines, both travelers and cargoclients have low bargaining power in this.

They find less airline and onlyinternational airline to travel and transport cargo, bargaining power becomefrom high to low. They don’t find any feasible substitute to travel this muchdistance. Let’s take example of Dubai airport, if you want to travel from Dubaito Pakistan you can only find a few airlines to travel with, so traveller don’thave much choices.13 1.

3. Recommendations Airlines should provide more on-flight services to justify higherprice on business class customers. As business class is becoming more pricesensitive, airlines should have more comfort level on the business classes,which can create differentiation between business class and economy class widerand justify the price charge from them.

Airlines should bring innovation in their product lines todifferentiate themselves from competitors. They can use vertical integrationstrategy by working with agencies (ticket booking agencies), online portals(tourist agencies) and with hotels (tourist destination places) to create moredemand for their services.Airlines should remove, unnecessary services(which can cost more and add less value) from their airline to provide cheapflights to economy class travelers.

They should take early morning and latenight cheap slots at airport terminals to reduce the cost further.


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