Customers and Demand
Characteristics |
Current situation |
Future trend |
Segmentation of customers |
The 2 main groups of buyers are:
These 2 groups are quite different. Non-business buyers travel for private purposes (e.g. family, leisure purposes). They are usually more price-sensitive and are less powerful as buyers. Business travelers travel for business purposes (e.g. business trips). Their market power is higher, however they are also less price-sensitive because their trips are often more important and urgent. The concentration of non-business travelers is much lower than the concentration of the airline companies. The concentration of business travelers is higher than the concentration of non-business travelers because there is a smaller amount of companies (than there is private people) and because some of these companies are quite big, however their concentration is still lower than the concentration of the airline companies. |
It is likely that these two groups of customers will remain relatively the same in the future. |
Does a buyer's purchase volume represent large fraction of typical seller's sales revenue? |
Most buyers (all non-business clients and most business clients) purchase in very small volumes that are a tiny fraction of the airlines’ total revenue. The volumes purchased by big companies is more significant, however they are still not big enough. Even one big company cannot significantly influence the airlines’ revenue. |
The majority of business clients are planning to reduce their travel budgets, so in the future they will buy in smaller volumes4. Thus, the buyers’ purchase volume will make up a smaller fraction of the airways’ revenues in the future. It is harder to predict the purchases of non-business clients as this greatly depends on the macroeconomic situation in Russia (level of income) and on the presence of substitutes |
Switching cost |
Switching costs are costs that customers face when switching from one firm to another. In markets such as the airline market where repeated purchases are common and where customers get bonuses and discounts for being loyal to a particular airline, switching costs may be substantial. But in Russia there are limited discounts and bonuses for permanent customers the costs of switching from one provider of airline flight to another are relatively small.5 Moreover sometimes they aren’t any possibilities of switching the provider for customer, as there are lack of competing airlines on many routes. |
The switching costs might increase in the distinct future due to the fact that Russian airline companies can develop and increase different bonuses programs, for example discounts according the amount of flying miles. But it is uncertain whether these bonuses programs will develop to a level that will significantly increase switching costs. |
Can buyers find substitutes for industry's product? |
This depends on the travel route and the price of the substitute products. At present, railway transportation seems to be the main substitute for air transportation. When it comes to travelling on routes, the length of which does not exceed 500-700 km, railway transport is able to perfectly substitute air transport. This happens because at such distances overnight railway trips are very convenient (they take not more than 8-10 hours at night) and because, despite the speed of airplanes, clients spend quite a lot of time on travelling to and from the airport (which is usually located in the suburbs) and because the check-in may often take quite a lot of time. At longer distances (e.g. from St. Petersburg to Vladivostok) railway transport is not a very good substitute for air transport because it takes too much time to travel by train. Not many non-business clients are likely to switch to railway transport in this case and, probably, no business client will even consider this option. |
The chance of buyers to find a substitute for air travel in the form of railway travel in the short-run will probably remain the same. The travel by railway will continue to remain an available option. However, because the Russian Railways company is persistently increasing the fares, the railway transport is unlikely to become a much more attractive option than air transport. However, as more high-speed trains are introduced, the availability of substitutes may increase in the long-run. |
Price elasticity of market demand |
The elasticity is overall moderate and depends on the route and the type of client. Demand for air travel services is less elastic for routes where there are fewer substitutes. For example, there are few substitutes for trips from Moscow to the Far East. However, trips from Moscow to St. Petersburg can be substituted by travelling by train or even by bus. In this case, elasticity is higher. |
Elasticity of demand should, in general, increase in the future. This is explained by the fact that there should be more substitutes to travelling by air in the future. There are plans to build high-speed railways in Russia. For example, by 2007 it is planned to build a high-speed railway that will connect Moscow and St. Petersburg. There are also plans to buy and operate more high-speed trains (similar to Sapsan and Allegro) in Russia6. This means that railways will be able to substitute airways more successfully and elasticity of demand for air transportation will increase. However, as the prices for train tickets in Russia rise, the elasticity for air travel may fall. Also, new roads are been built in Russia. As more high-quality roads will be built, there will be more opportunities to travel by cars and buses to remotely located places. As a result, elasticity of demand for air travel will increase. Overall, considering all the above mentioned factors, we suppose that elasticity of demand will increase in the future. |
Price elasticity of demand for typical firm |
The elasticity of demand for a typical airline is high for those flights which are offered by several different companies (e.g. the flight from St. Petersburg to Moscow). The loyalty of customers to a particular company is quite low since most of them offer a very similar service. If one company decides to lower the price, it is likely that the demand for its tickets will increase significantly, especially if there are many other companies offering a similar flight (in this many customers of other companies will switch to this company). However, price elasticity of demand for a company may be low if there are few other companies that organize a particular flight. In this case, the customers don’t have a choice as there is a limited number of alternative offers available (if any). |
As the number of airlines in Russia is likely to decrease, it is likely that the level of competition will also decrease. Therefore, elasticity of demand for each firm will also, in general, reduce. |
Price elasticity of various customers |
Non-business travelers are likely to have a more elastic demand for air travel. They very often travel for leisure purposes and, if the travel becomes more expensive, they are likely to travel less. The elasticity of demand of business travelers is lower. There are business trips that cannot be avoided and that have to be made even if the price for air tickets goes up. |
Elasticity of demand should, in general, increase in the future. This is explained by the fact that there should be more substitutes to travelling by air in the future |
Price discrimination (actual and potential) |
We can speak here about the existence of price discrimination in the Russian air transport market, for example given the many different rates that exist in a voyage to the same place. To expand the sales market airlines resort to price discrimination. They prescribe different prices for different customer groups. Diversification of prices takes three basic forms, depending on the income of the buyer, consumption and service category. Rates for air travel can also be differentiated by day of week (weekdays lower than in the non-working) and on public holidays. Customers who are less sensitive to prices pay more. Price discrimination is a significant instrument in increasing the revenue. It allows airlines to extract a higher amount of consumer surplus. |
The price discrimination will stay the same in the near future as it brings advantages not only to the players of the market, but is also attractive to certain customers. |
Versioning (actual and potential) |
The versioning includes 1. Design: simple vs. luxury 2. Functionality: basic vs. extended . Airlines offer different classes of routes: business, normal etc. There are such new classes as “premium economic class” and “touristic premium class”, offered by Transaero7 Moreover there are airline companies of different classes. The functionality may also vary. The basic service is the actual flight. On some flights, customers are served with food, while on some others they are not. Furthermore, they may be additional services, such as TV or newspapers. In this case, we are dealing with services with extended functionality. |
As the demand for internal routes isn’t growing a lot, the situation nowadays might remain the same in the near future. We can also predict that the versioning can increase via one company, not inside the whole market. For example a low-cost company might offer a version of a luxury flight. |
Bundling and Tie-ins (actual and potential) |
Some airlines offer bundled products of services and flights. Consequently, they are called full service carriers8 The bundling may include insurance, such services as free taxi, set of meal (the offer depends on the class), newspapers etc. Indeed such services are stated to be included in the price, and once they are offered one can’t refuse and should pay for the full set. The potential bundling may include two – way ticket fee, which will be twice cheaper than one way flight or “one price per two tickets” etc. The potential bundling may also include additional entertainment activities on and off board: free internet access in the airport, DVD watching on board etc. The idea behind bundling is that it attracts customers which have different preferences (and thus are ready to pay a different maximum sum for each element, e.g. for some customers the most valuable thing is the actual flight, while for others the opportunity to watch TV on board is more important, maybe if there was no TV, they would prefer to travel using some other transport) buy all elements of the bundle and thus bring generate revenues for the airlines.
There are also tie-ins in the industry. Once the passenger bought the ticket and is on board of the plane, he has no choice but to buy some goods and services from the airline (e.g. food if it is not included in the price of the ticket). Airlines take a certain advantage of this, for example they charge quite high prices for the products and services that they sell on board. However, because not so many customers are ready to pay for the extra tie-ins, most revenue still comes from the sale of tickets and not from the sale of tied-in goods and services. |
Air transportation companies might realize the marketing effect of bundling and extend the existing bundling service packages especially in the business class of air carriers. Moreover cross-industry might develop fast, for example ticket purchases and credit cards, as it is takes place in the world air transportation market. We can also add here that in case of growing popularity of tourism via Russia, there can be bundling packages which can include air transportation from one place to another, hotel stays, excursion etc. The bundling packages might be similar to those offered by touristic agencies (trips to Egypt, Turkey etc.) Also the business airline company may start to use more extended bundling packages by offering taxi services. They can also include hotels stay, local restaurants and local sightseeing. |
Are prices negotiated on each individual transaction or set as take-it-or-leave-it" for all transactions? |
In most cases, the price is fixed and applies to most transactions. There are prices for different air services which are published online. This means that services at these prices are offered to all potential customers. Sales to corporate clients may however differ. For example, Aeroflot has offers for corporate clients which are based on exclusive prices9. In this case, corporate customers have an opportunity to bargain for lower prices |
This situation is unlikely to change in the future. Non-business buyers are likely to be offered the same prices which can be easily obtained from the Internet and from other sources (which can, however, differ depending on the loyalty to the airline or on the day of the week). In order to attract big business customers, airlines are likely to continue to offer exclusive packages to different companies. |
Do buyers pose credible threat of backward integration? (for B2B) |
No, such possibility is almost equal to zero. Most buyers do not have the necessary resources to carry out a backward integration (e.g. non-business customers). Some large corporate clients may theoretically possess this opportunity, however it seems to be not viable in the economic sense. Buying out an airway company is expensive and also leads to an unnecessary diversification of the buyers’ business |
The threat will remain very low in the future. It is very unlikely that anyone will decide to buy out an airways company only for travelling purposes. |
Does product represent significant fraction of cost in buyer's business? (for B2B) |
In this case, we are discussing the business clients. This fraction depends on the company. It is high for some businesses (e.g. oil & gas business) and low for other businesses (e.g. taxi business). Obviously, for companies that spend a lot on air travel an increase in the price for air tickets may be very harmful and they may attempt to prevent such an increase. |
For most businesses, this fraction is likely to increase in the future. The world is becoming increasingly globalized. This means that the role of traveling also increases. Therefore, businesses will need to travel more and more every year. The prices and services offered by airlines will play an increasingly significant role for them. |