Airline Seat Is Shifting To Demand-Driven Commodity
<B>Airline Seat Is Shifting To Demand-Driven Commodity</B>
It seems pretty clear that the airline seat has become a true commodity as defined by James and Gilmore in their 1999 book, "The Experience Economy." As it becomes a commodity, brand and quality have less impact on carrier choice by travelers, and price increasingly becomes the primary product-differentiation criteria. If brand or quality of product had been driving differentiation in the airline seat marketplace last year, the Big Three should have sustained growth rates comparable with other carriers.
Yet year-end 1999 airline financial reports, viewed on an annualized basis, show they did not. United, American and Delta had, effectively, negative capacity ratios. American's traffic was up 2.8 percent on a 3.8 capacity increase; Delta's traffic was up 1.5 percent on a capacity increase of 1.9 percent; and United traffic was basically flat (about .07 percent) on a 1.5 percent capacity increase. Essentially, each had a negative traffic-to-capacity ratio.
Meanwhile, Southwest had a 16.1 percent traffic increase on an 11.2 percent capacity increase, yielding a 4.9 percent positive capacity ratio. Continental and Northwest also had double-digit growth at 11 percent on positive capacity ratios of more than 1 percent.
Not only did the Big Three not have comparable double-digit traffic growth rates, even where there was increased capacity among them, the traffic-to-capacity ratios were negative (as compared with, for example, Southwest, Continental or Northwest). Given that some combination of the Big Three serves most significant destinations, along with some combination of the other carriers, and that the Big Three tend to offer comparable quality products at only marginally higher prices, significant growth by the other carriers would appear to be primarily in marginal price differentiation. There is hardly a better definition of a commodity product!
The era of rapid dissemination of digital information also is changing the airline economic model from supply-driven by the airlines to demand-driven by buyers/travelers-- even in the face of limited supply. Even at 70 percent load factors, there remains sufficient alternative air availability to so many U.S. destinations that the traveler is just a mouse click away from an alternative travel solution. While supply-driven brand marketing may draw an initial first-look loyalty, the ability to serve the demand-driven need is enabling buyers to obtain alternatives, based on price, time convenience, airport choice or whatever need the buyer desires.
These are particularly important aspects to monitor in the distribution channel. The historic airline distribution model is built around the supply-driven economic model, i.e., point of origin, destination, carrier(s), time and then price. That model is as true of the people within the process as it is of the technology products that served the process.
In a demand-driven model, the aspects of the buyer selection model tend to reverse, i.e., destination and price tend to precede origin and time, all of which precede carrier in the mind of the buyer. A reversed demand-driven mindset and the resulting information structure plays havoc with the existing GDS, whose query language (i.e., agent keystroke entries or their automated equivalents in the Internet GUI interfaces) and the internal logic structures within the database storage systems are based on the supply-driven model. Not only is the software that serves the vendors out of sync, but so too is the mental logic of those who use it.
After some 50 to 60 years of selling and buying air transportation in a supply-driven model, perhaps the single biggest challenge the travel industry confronts today is the mental transformation required by the evolving Internet induced demand-driven model. The issue is not just a change in habits, but a complete reversal of role relationships, demands, needs and expectations.
<I>Richard Eastman is president of The Eastman Group Inc., Newport Beach, Calif.