AIRLINE SEGMENTATION STRATEGY

Prof. V.V.R. Shastry

Team members:
Aniruddha (326):  
Pushkaraj (307):  
Rohit (348):           
Amruta (308):        
Rekha (350):         
Nitin (341):             

Marketing Management - Assignment 03 1

The strategy of a modern airlines

• In the olden days, airlines didn’t segment their markets.It soon became clear that passengers differ in their
expectations. Business travellers value convenience, comfort and service,while,leisure travellers were
more interested in lower price,
• A carrier flying from London to New York, using a 300 seater plane and anticipating an average load factor
of 80%, if it pursues an un-differentiated strategy-one class plane-the management can charge a highest
price of $250 TO AChIEVE A 80% OCCUPANCY RATE.The variable cost for the airlines was $20 per
passenger and the fixed cost is $50,000per flight.
• However to the mrktng mgmnt,it is obvious that while a price of $250 already begins to lose the business
of low budget travellers,business people and the more affluent people would be willing to pay much more
for superior service and comfort.
• The result was that the airlines moved to the differentiated strategy whereby they offered 3 levels of
service on the plane;economy,business and first class at very different price levels.
• To get the same 80%occupancy level,the prices are respectively $250,500,and 1000 per passenger while
the variable costs are$20,40 and 100 per passenger. It is estimated that the fixed cost would go up by 10%
to accommodate the changes in the aircraft to provide the desired comfort to the upper 2 classes, each of
them taking 50% of the additional amount.It is also estimated that the business class pssengers wd be 3
times the number of first class and economy passengers wd be double the business class occupants at 80%
plane loading factor.

Marketing Management - Assignment 03 2

Airline---contd.
• The consequences are to massively enhance the revenue and the profitability for the airlines. In addition,
the strategy better meets the needs of all customers by offering the values that the particular type of
passenger prioritizes
• And this example of airline segmentation is exactly analogous to the strategies pursued by most of the
sophisticated cos of today!
• You are requested to calculate the profits, the profitability, the revenues and the costs incurred in both
the strategies, for the full plane, for each class and per passenger in each class, assuming in both cases the
plane is 80%loaded.Pl find the break even point in both.

• Discussion q’s
1. List all benefits of segmentation to all stakeholders of the airlines
2. Who all could be the beneficiaries
3. Do u think any segment is subsidizing for any other segment? If so who to whom? If not, why not? What
do u understand by absolute satisfaction and relative satisfaction? Do u think that there is a possibility
that any class may feel relatively dissatisfied although absolutely satisfied, When wd that happen? How
wd mgmnt prevent it?
4. When can segmentation go wrong? How to avoid segmentation from going wrong? What precautions to
take?
5. What segmentation bases or variables, did the management consider in segmenting the market for
airlines. How do they differ from those segmentary market for
a. Refrigerators or A/C
b. Software Service or Ice-cream

Marketing Management - Assignment 03 3

 Strategy 1 : Single Class of Passengers

Plane
Available Variable Fixed Cost Price Per Revenue Costs Profit Profitability Break Even BEP %
Seats Cost seat Point (BEP) Occupancy
240 20 50000 250 60000 54800 5200 8.67% 218 91%

Per Passenger
Available Variable Fixed Cost Price Per Revenue Costs Profit Profitability
Seats Cost seat
240 20 208 250 250 228 22 8.67%

Marketing Management - Assignment 03 4

 Strategy 2 : Segmented Class of Passengers
Plane
Available Variable Fixed Cost Additional Total Fixed Price Per
Seats Cost Share Fixed Cost Cost Share seat
Economy 144 20 30000 0 30000 250
Business 72 40 15000 2500 17500 500
First Class 24 100 5000 2500 7500 1000
Total 240 50000 5000 55000

Revenue Costs Profit Profitability Break Even BEP %

Point (BEP) Occupancy
Economy 36000 32880 3120 8.67% 131 91%
Business 36000 20380 15620 43.39% 39 54%
First Class 24000 9900 14100 58.75% 9 38%
Total 96000 63160 32840 34.21% 179 75%

Per Passenger
Available Variable Fixed Cost Additional Total Fixed Price Per Revenue Costs Profit Profitability
Seats Cost Share Fixed Cost Cost Share Seat
Economy 144 20 208 0 208 250 250 228 22 8.67%
Business 72 40 208 35 243 500 500 283 217 43.39%
First Class 24 100 208 104 313 1000 1000 413 588 58.75%

Marketing Management - Assignment 03 5

 Economy Class Break Even Analysis
Variable Cost Fixed Cost Total Cost Revenue Profit

40000
BEP = 131

20000
Rs

0
1 11 21 31 41 51 61 71 81 91 101 111 121 131 141

Seats

-20000

-40000

Marketing Management - Assignment 03 6

 Business Class Break Even Analysis
Variable Cost Fixed Cost Total Cost Revenue Profit

40000

BEP = 39

20000
Rs

0
1 11 21 31 41 51 61 71

Seats

-20000

Marketing Management - Assignment 03 7

 First Class Break Even Analysis
Variable Cost Fixed Cost Total Cost Revenue Profit

25000

15000

BEP = 9
Rs

5000

1 6 11 16 21
Seats
-5000

-15000

Marketing Management - Assignment 03 8