As Air India attempts to build its low-cost carrier business through Air India express, Air India?s management would serve well to learn and imbibe the lessons from the most successful low-cost airline?Southwest Airlines. In the last 15 years, all major North American airlines have suffered at the hands of Southwest Airlines while Southwest itself has been spectacularly successful. From 1993 to 2008, Southwest Airlines expanded its revenues fivefold from $2.3 billion to $11 billion and its passenger miles fourfold from 18.8 billion to 73.5 billion. Southwest provided its shareholders an annual return in excess of 10% over this 15 year period, significantly higher than the return generated by any other competing airline. While there are several lessons to imbibe from the Southwest success story, the most crucial one is its pricing strategy. By diligently segmenting its market, varying its prices across the customer segments and meticulously communicating its brand value to customers, Southwest has cultivated the image of consistently offering lower fares.
Southwest follows an ?everyday low price? (EDLP) strategy by which it attempts to convey to its consumers the image that it consistently offers low prices across the various routes that it serves. To understand the EDLP strategy, let us contrast it to the high-low (HILO) pricing strategy pursued by several airlines. The HILO pricing strategy refers to charging significantly higher prices most times, but enticing consumers sufficiently through discounted prices on selected routes or days.
Segmenting is a crucial component of any pricing strategy. For example, airlines try to separate leisure travellers from business travellers by offering lower prices for advance purchase vis-?-vis purchases closer to the date of travel.
Recent research on airline pricing shows Southwest?s EDLP strategy comprises two key dimensions. First, the ?everyday? component, by which Southwest ensures that the prices are largely consistent over time in order to create a uniform and permanent belief amongst consumers. Second, the ?low price? component, through which Southwest creates the perception that its prices are on average lower than the prices of competing airlines. While both these components are important, Southwest emphasises the ?everyday? dimension much more than the ?low price? one. Most airlines charge high prices for tickets without weekend restriction and for tickets purchased closer to the date of travel. In these segments, Southwest assiduously cultivates its image of being an EDLP carrier by charging lower and more consistent prices than other airlines. Yet, for tickets that are purchased in advance as well as for tickets that involve a weekend stay over at the destination, Southwest?s prices are not as competitive. In fact, in routes where Southwest is highly entrenched, not only does it charge higher prices on average than competing airlines but it also pursues high prices consistently. Thus, Southwest nurtures the EDLP image to business travellers, who travel more frequently and therefore are likely to generate more repeat business. In general, Southwest engages in a similar form of price discrimination as other airlines, while ensuring that for any given customer segment and route it is perceived to offer the lowest and most consistent prices. Note that the key here is the ?perception? that it offers lower prices ?relative to its competitors.?
To implement this hybrid EDLP strategy, Southwest does not participate in online travel agent sites such as Orbitz or Expedia, which minimises its consumers? ability to compare Southwest?s prices with those of other airlines. Instead, Southwest?s user-friendly website offers its customers the easiest way to check schedules, prices and book tickets. Further, it builds technological solutions which render difficult online comparison of its prices to those of other airlines.
EDLP pricing offers several advantages to Air India. A consistent, competitive price leads to a more predictable, even demand which can enable better capacity utilisation. Greater capacity utilisation spreads the fixed costs over a larger base and therefore generates cost savings. By passing these cost savings to its consumers, Air India can generate customer loyalty and encourage frequent fliers to stay with it. A large, established base of frequent fliers increases entry barriers for other airlines since such travellers are reluctant to switch airlines.
For all its advantages, Air India needs to implement the EDLP strategy carefully to reap its benefits. First, Air India needs to streamline its operations and generate a favourable cost structure so that it can undercut its competition in at least some customer segments. Lowering prices dramatically before bringing operating costs under control would lead to price wars and bleed Air India red further. Second, Air India needs to optimally advertise its EDLP strategy to consumers. While inadequate advertising would fail to communicate the new price policy and therefore fail to create the necessary perception of ?consistent low prices?, too much advertising could lead to aggressive responses from other carriers and in turn unwinnable price wars.
?The author is an assistant professor of finance at Emory University, Atlanta, and a visiting scholar at the Indian School of Business, Hyderabad