Financial Implications of Relationship Marketing in Airline Business

Financial Implications of Relationship Marketing in Airline Business

Hasan Dinçer (Istanbul Medipol University, Turkey), Ümit Hacıoğlu (Istanbul Medipol University, Turkey) and Aydın Özdemir (Beykent University, Turkey)
DOI: 10.4018/978-1-4666-7484-4.ch025
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Abstract

Relationship marketing promises a change from vendor, product and price centered marketing concept to a new people, long-term relationships and value centered marketing concept for airline companies in search of a messiah who will rescue them from bleeding to death because of monopolized supply market, duplicated services, financial crises, heavy pressure of competition and low profit margins. In this chapter, definitions and short background of relationship marketing are revised by focusing on components of the concept and relations with customer loyalty, customer value and basic notions. A glance at the airline industry takes place with a focus on relationship marketing and airline business on the basis of implication aspects such as frequent flyer programs, global distribution systems and internet. Specifically, domains of relationship marketing concept on the airline business are analyzed in detail specific to cost and profitability balance.
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Introduction

Technological change brought by globalization, the pressure of population growth, inflation, and hard competition have forced companies to stand strong and sustain their activities in the middle of a high flow rate. In order to stand strong in the middle of this flow rate, companies have to strengthen their roots which are their customers.

While in the beginning of the century production was the center of industrialization in 1900’s the center of companies turned into sales. In 1950s companies started to diversify their marketing applications and marketing centered companies started to appear. 1990s was the beginning of new experience in other words the beginning of customer era. (Palmatier, 2008, p.12). Nevertheless, increase in diversity of service and goods, distribution, dazzling increase in price and communication opportunities and hard competition conditions increased the amount of accessibility for service and goods for all income levels. Competition caused by goods and service inflation has increased the quality of goods and service relation in this area. It is very common to reach and experience desired goods easily both by virtual or real communication channels. In this marketing atmosphere formed by conditions that we stated above customers desire to buy the feeling of “satisfaction”. Customers replaced the meaning of goods and service. Therefore marketing has to take customer relations into consideration instead of goods and service (Kotler& Keller, 2009, p.14).

It is very difficult for companies to find new customers in global arena, besides losing their customers is a matter of life and death for them. Looking from another aspect, it means that if companies want to have more advantages than the others it depends on their long life relationship with their customers. Today’s business world is based on relationship with customers not the operations. All these marketing conditions have changed and evolved marketing literature, so relationship marketing has taken over. (Payne, Christopher, Clark, & Peck, 1999)

Marketing success of companies is related to their customer relations and their ability to be different from their competitors. Considered from this aspect the strategy of having long life relationship with customers and relationship marketing has become the center of marketing strategies. Relationship marketing which puts customers in the center of marketing takes customer loyalty as the most important factor for profitability. It is accepted that value given to customers and their loyalty will give competitive priority to companies in long term period. Gummesson describes this new process as “interaction and joint value creation” (Gummesson, 2002).

Relationship marketing is not a program to be implied in current marketing programs; on the other hand it means change in whole business strategies. Basically, trust and relations web which have been main principles of trade in eastern societies are applied to western trade principals which are based on distrust and solid engagement. (Gummesson, 2002) Product and seller based trade and marketing have lost power in nowadays world. Companies started to explore and institutionalize customer centered marketing which was taken from eastern societies.

The purpose of this article is to put the clock back the formula which has a potential of creating customer retention, customer loyalty and customer value and as result of this chain is to create profitability for airlines. As a result, according to Berry’s expression “the spirit and heart of relations marketing is based on customers when they become customers” (Gruen, 1995, p.449).

Key Terms in this Chapter

Pareto Principle: At the beginning of the century, first, it is mentioned by an Italian economist Vilfredo Pareto in order to formulate unequal distribution of wealth and resources in Italy. He finds out that twenty percent of the people owned eighty percent of the wealth. So, this was the base of so called 80/20 principle. Lately in 1940s, Joseph Juran, working on the theory of “vital few and trivial many” studied Pareto’s work and named it as Pareto Principle. He applied Pareto's observations about economics to a broader body of work.Juran's observation of the “vital few and trivial many” states the principle that %20 of something always are responsible for %80 of the results.

Relational Coordination: Relational coordination is a research model which is developed and proposed by Gittell in 2002. The model is used to assess organizational coordination in four airlines in the United States. The idea of relational coordination is based on the interactive nature between both relationships and communication in business environment. A higher level of relational coordination will then affect organizational outputs as in efficiency and quality in operations. Relational coordination can be used for measuring and analyzing the communication and relationships networks through which work is coordinated across functional and organizational boundaries.

European Volcano/Ash Cloud Crisis: In 5th of April 2010, the volcano Eyjafjallajökull in Island started eruption and massive and dense volcanic ash clouds caused to stop air traffic in busiest air space of the world. All flights from or to major European airports have stopped and millions of passengers to be stranded in airports. This was the largest air traffic shut-down since World War II in Europe. IATA estimated that during this closure (5th to 21st of April, 2010) 100,000 flights were cancelled in total, and 10 million people stranded or unable to board their flights. According to IATA data Airlines lost 1.7 Billion Dollars, and Airports lost 250 million Euros. Specifically, low cost carriers which have inter Europe flights had the worse hit comparing to legacy carriers. Low cost carriers cancelled %61 of their flights. Besides, 75% of European and 30% of total worldwide airline capacity was cut during this period.

Word of Mouth: WOM is an expected marketing outcome which becomes a marketing technique also by oral or written recommendations made by a satisfied customer to the prospective customers of a product or service. It is accepted as the most effective form of promotion. As a marketing tool WOM is an interactive process such that customers are collaborating with the business, product or service for which they have derived enough satisfaction that they are willing to speak out about it and even recommend it to others

Life Time Value: LTV is a way of measurement that can be defined as the net profit attributed to the entire future relationship with a customer. In other words, LTV is the financial value of a customer relationship, based on the present value of the future cash. This measurement focuses on long-term value of their customer relationships and defines the upper limit of spending to acquire new customers.

Deregulation: Airline deregulation is the process of removing government-imposed rules and restrictions mostly on financial structure of airlines and slot rights, pricing and operational regulations of airlines. The term was born with “1978 Airline Deregulation Act” when control over air travel industry passed from the political to the real market and today it is identified with liberalization acts in sector. Deregulation process in USA also triggered the deregulation acts all over the World and helped to shape of free market conditions.

Low Cost Carriers: Low-cost carriers or low-cost airlines are airlines offer comparatively low prices but offer fewer comforts such low leg rooms, no on board meals. LCCs charge for all extra services such as meal, baggage. LCCs mostly has dense schedules for specific destinations with high turn around rates or prefer not to fly major airports. Especially after 9/11, LCCs had their golden age. In order to keep fleet costs low they use single type of aircraft. Southwest, Ryanair, and Easyjet are leading LCCs.

Kotlerist Marketing Concept: The concept named as also the marketing mix or 4P Concept. According to Philip Kotler, Marketing is defined as a social and managerial process by which individuals and groups obtain what they need and want through creating, offering and exchanging products of value with others is known as Marketing. The base of marketing is defined as exchange in this concept. Price, product, promotion, and place are major components. The four Ps can be expanded to the seven P's or eight P's according to different nature of services. Kotler also explains marketing as a social process.

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