Marketing of passenger transportation

Transportation marketing seeks to satisfy the needs and wants of the traveler by providing the right mix of services. To appreciate the difficulties involved it is necessary to consider the characteristics of supply of, and demand for, passenger transportation.

Characteristics of demand

The demand for passenger transportation has a number of characteristics, all of which affect the way a company markets. First, demand is instantaneous. For carriers there is great uncertainty as to what the demand will be on a particular day at a particular time between two points.

While past trends are useful they cannot be totally reliable. When demand is greater than supply, travelers are unhappy. By the time adjustments are made to supply more capacity, customers may have changed carriers or found an alternate means of transportation. The tendency, then, would be to provide more capacity than is needed. Overcapacity shows up in the load factor. In a perfect match of supply and demand, load factor would be 100 per cent. Anything less indicates the measure of overcapacity. The challenge in marketing is to create programs to fill each plane, train, ship or bus on each trip.

Overcapacity is the result not only of instantaneous demand but also of the variability of demand. Demand for transportation is not the same each hour of each day of each month. It shows what is known as "peaks and valleys". At certain times of the day or week or month there is great demand; at other times the demand is light. Yet sufficient planes, boats, trains, buses and terminal facilities have to be provided to cover peak demand. The result is that excess capital has to be invested, and this means that operating costs are increased. How should demand be priced? Should the peak traveler pay more than the off-peak traveler? Peak-load pricing states that those traveling at peak times should pay more for the extra capacity provided to meet peak demand. Some off-peak pricing is found in the airline industry and with passenger trains. Reduced midweek and night fares are an attempt at peak pricing.

Another characteristic of demand is that there is, in fact, more than one type or segment of demand for transportation. In its simplest terms, demand is either business demand or pleasure demand. The motivations, frequencies, and response to price are different. The motivation for the business traveler is derived; that is, the demand for travel exists because of the desire to do business in a particular territory. Demand for pleasure travel is primary; the motivation is to travel to a vacation spot. The distinction is important because derived demand tends to be affected more by factors external to the transportation industry. No matter how good the service between New York and Detroit, if business is bad in Detroit, travel demand may go down. A reduction in fares, for example, may affect primary demand but may not affect derived demand.

The business traveler travels more frequently than does the pleasure traveler. This makes this person very valuable to the airline. Frequent-flyer programs, which offer rewards based on miles traveled, have been targeted toward the business travel in an attempt to capture customer loyalty.

As mentioned above, derived demand may not be affected by changes in price. The company may absorb a fare increase as a cost of doing business. The business traveler may choose a more convenient, but more expensive, flight since the company and not the individual is paying for it.

In some situations people can substitute one mode of transportation for another (train for plane; bus for train, etc.). This affects the way transportation is marketed. Elasticity is the economic term for the sensitivity of travelers to changes in price and service. An elastic demand is sensitive to substitution; an inelastic demand is not. The extent of elasticity is dependent upon the price of the other mode of transportation and the type of demand. Pleasure travel is more price-elastic than is business travel; primary demand is more price-elastic than is derived demand. When people choose how to travel, the decision is made on the basis of price, prestige, comfort, speed and convenience. Amtrak could successfully compete with the plane on certain distances on the basis of several of these factors.

Competition also exists within one mode between carriers. Generally, prices and the speed of the journey are the same or similar amongst competing carriers. Carriers must then market on the basis of the factors mentioned above: prestige, comfort, and convenience. Often a small change in departure time can capture a significant number of passengers. This explains much of the congestion at airports at certain times; everyone wants to offer flights at what are believed to be the most convenient times for the traveler.

Still another aspect of demand is that some transportation modes offer more than one type of service. Passengers can fly economy, business class or first class; trains also offer various classes of service. The different types of service are in competition with each other. Airlines, for example, have to decide the proportions of first- class, business-class and economy- or tourist-class seats to offer on a plane. They then decide what additional services are necessary to justify the price differential (more leg room, better meals, free drinks, etc.).

Demand for transportation is also affected by the relationship between the price charged and the income level of the traveler. Pleasure travel is income-elastic; that is, the demand for travel is affected by changes in the traveler's income. Economists say that demand is elastic when a reduction in price results in more demand that will result in more revenue. (Revenue equals price times number demanded.) The company gains revenue because the increased demand brought about by a drop in price makes up for the reduced price. Similarly, an inelastic demand is one where a reduction in price results in less revenue generated. More passengers may be attracted but not in sufficient numbers to offset the loss of revenue brought about by the reduction in price. Pleasure travel is discretionary; that is, the traveler has a choice of whether or not to travel. An increase in price may mean the traveler will postpone the vacation.

Business travel is also influenced by the income of the corporation. Much business travel is essential; but some is discretionary. Businesses may turn to teleconferencing as a way of reducing the travel bill if costs increase too much.

Finally, the demand for travel makes itself felt in a demand for non-price items. The frequency of departures, the condition of the equipment, the service of the employees, on-time performance: the entire package is often more important than the price. Companies have to find out what is important to the different segments of the market they are going after (the list will be different for each) and seek to provide it.

Supply characteristics

Just as the marketing of transportation is affected by the characteristics of demand, so too is it influenced by the supply characteristics.

The supply of transportation is unique in several distinct ways. First, the transportation industry is a capital- intensive industry. Terminals and equipment cost a great deal of money. The costs are also "indivisible", airlines cannot put "half a plane" in the air if the plane is only half full. Because the industry is capital-intensive and because much of the capital is borrowed, most of the costs of running a transportation company are fixed; for example, interest on the debt must be paid in full regardless of the number of passengers and revenue. This puts a great deal of pressure on management to fill seats that would otherwise be empty. This may affect both promotional and pricing decisions.

Related to this previous point is the fact that transportation costs are "sunk" with few alternatives. This means that the cost of a plane is "sunk" in that the company has incurred the cost of buying it. It is up to the company to generate revenue to pay for the aircraft. It is not like a light that can be turned off, thereby saving money. The plane also has few alternative uses. It can fly; it might be possible to sell it as a unique type of restaurant, but essentially all a company can do with an airplane is fly it. This puts additional pressure on the company to use the resource (the plane) rather than have it sit idle. Hence, the large amounts of sunk costs also mean that there is a tendency to use old equipment rather than invest in more modern (and more expensive) equipment.

Another characteristic of transportation supply is that, although demand is instantaneous, supply is not. There is a long time between planning for a piece of equipment and placing the order for it; between placing the order and receiving it; and between putting it into service and scrapping it. Thus, while demand can shift very quickly, it takes a great deal of time to adjust supply. A company must live with its mistakes for a very long time.

Because of the high level of fixed costs, the incremental costs of operation are small. Incremental cost is the cost of adding one more unit. The running cost of adding another passenger car to a train, another bus to a route, or even a plane between two points is small compared to the cost of the actual piece of equipment. If a plane is scheduled to fly anyway, the cost of an additional passenger is incredibly small with the mere charges of an extra meal and some services. This means that, above a certain point, it makes economic sense to reduce the price charged in order to get some revenue coming in. This is the rationale behind discount fares. Airlines can predict, based on past records, how many seats on a particular flight will sell within a week before the flight. People who book within a week before a flight are usually business people. Assume, for example, that on a particular flight 80 per cent of the seats will be bought at the regular fare in the last week before the flight. This means that the airline can sell up to 20 per cent of the seats at a discount for people who will book and pay more than seven days before the flight departs.

Still another characteristic of transportation supply is that it cannot be stored for future use. A grocery store can sell a can of dog food today or tomorrow or next week. Every seat on a plane or train or bus must be sold only on that trip. The sale that is lost today is lost forever. This puts additional pressure on management to sell, sell, sell.

Transportation services must be available on a continuous basis. Travelers expect the same level of service whether it is day or night, summer or winter, whether the plane is full or almost empty. Because transportation is expected to be reliable on a continuous basis there is little opportunity to cut costs for inferior service at odd hours. This adds to the cost of providing the service.

Finally, there is the problem of labor. In transporting people the company takes on a great responsibility. Often the service, whether in operations or in maintenance, is offered 24 hours a day. Employees must be equally alert no matter what the time. Strict rules regulate the amount of time that pilots, drivers or operators can be on duty at any one stretch. The FAA limits pilots to 30 hours of flying in any seven-day period. Airline pilots are also paid well for their skills. Thus, although the operating costs are small compared to the sunk costs, they can still be considerable. A further complication is that there is little opportunity for the substitution of capital for labor. This is, after all, a service business.

Marketing has the task of ensuring that there is sufficient demand to utilize fully the supply of equipment and facilities. It must also ensure that there is enough of the right kind of supply to meet the demands of the passengers. Just as demand influences supply, so too does supply influence demand. The demand for vacations to Jamaica will influence a decision to operate flights to Jamaica; however, the existence of flights to Jamaica at times and prices appropriate to the market will stimulate demand. Marketing brings supply and demand together.

Marketing strategies

In marketing, the offerings of the company are known as the four p's: product, promotion, place and price. In tourism it is appropriate to change the "product" to "service" and "place" to "distribution".

Service. Service refers to getting the ideal mix of services to satisfy existing or potential customers. This means offering transportation at the right times, in the right kinds of equipment, while giving a level of service before, during, and after the journey that will meet the needs of the customer, while making a profit.

Most carriers use a linear route structure; that is, the equipment travels from one point to another, turns around, and travels back. In the airline industry most fuel is used at takeoff and landing. Also, the speed of travel by plane is only appreciated on longer flights. Thus, for reasons of cost and customer benefit, jet aircraft operate in the most efficient manner when they fly on long hauls. A piece of equipment may, however, make an intermediate stop. While this increases the time and fuel costs, it can add significant additional revenue.

The airlines also operate what is known as a hub-spoke concept. Airlines have identified several major cities that serve as hubs (as in hub of a wheel) for them. Smaller towns serve as the spokes of a wheel connected to these hubs. Airlines attempt to have passengers fly into their hub city on a smaller or commuter plane for connection to a larger plane for travel to their ultimate destination. Colorado Springs, Colorado in the US is a spoke for the Denver hub (on Continental), which is itself a spoke city for St Louis, Missouri which is a spoke (on TWA) for London.

Service must be provided on the right kind of equipment. Equipment has two facets that must be matched: identifying the operating costs of one piece of equipment over another while offering equipment that will attract the traveler. One example is the Concorde. While this supersonic aircraft could draw passengers because of its speed and unique shape, the operating costs are so high that the potential market is relatively small.

Scheduling is a major marketing weapon for carriers. Traveling from point A to point B leaves little opportunity for differentiating one company or carrier from another. Offering departures at times most convenient for the passenger is one way to do this. Unfortunately, everyone wants to do this. The result, certainly in the airline industry, is severe congestion at the most popular times. Generally speaking, the demand for business travel peaks on Monday mornings and Friday afternoons. It is also heavy during the morning and early evening hours during the week, Monday through Thursday. The demand for pleasure travel peaks on Friday evenings, Sunday afternoons, and early evenings.

Service can also be altered by such things as upgrading the quality of the interior of the vehicle. Tie-ins with other modes are possible, such as fly/cruise or rail/drive.

Promotion. The subject of promotion will be dealt with in greater detail toward the end of the book. However, several points can be made now. Promotion can be seen as the communications link between carrier and passenger.

It is the responsibility of the carrier to communicate its message effectively. If the passenger has not understood the message, it is the fault of the carrier. To this end, it is important that clear promotional objectives be defined. These objectives should identify which target markets are to be reached, what tasks have to be done to reach the markets, who is to perform the tasks, and when they have to be completed. It is vital that the promotional theme be synchronized with the marketing plan, which, in turn, must be consistent with the overall objectives of the carrier. Carriers may, for example, feel that in order to meet their financial targets they must emphasize "quality" and "service". Thus, the way to reach the target is to stress quality and service. These concepts become the essence of the marketing campaign. As part of that plan, communicating the ideas of "service" and "quality" to the public becomes the promotional objective.

Distribution. Distribution involves the mechanisms by which passengers can obtain the information they need to make a trip choice and, having made that choice, that they can make the necessary reservations. Direct distribution occurs when passengers get in touch with the carriers directly. Indirect distribution is when the sale is made through an intermediary.

This latter procedure takes four forms. First is the emergence of independent companies to handle all aspects of travel. It might involve a wholesaler who arranges the specifics of a tour, for example; or it might be a retail travel agent who serves as an independent distributor for a wholesaler or carrier; it may even be a wholesaler-retailer who packages its own tours or who buys packages from other wholesalers for distribution.

A second method of distribution is the marketing of tourism either regionally or nationally. Countries, provinces and states promote travel to their particular destination. This effort supplements the marketing plans of the carriers. In some cases the marketing effort of the carrier can dovetail with that of the destination.

A third method is the coordination of marketing plans by various private-sector companies. Tie-ins between airlines and hotels, or bus lines and various attractions, are becoming more prevalent.

Finally, there is the movement toward vertical integration. Airlines have moved in to take control of hotels and car-rental agencies. This has been an attempt to develop a "one-stop travel shop" experience for the traveler. The strategy recently backfired for United Airlines, which formed Allegis, an amalgamation of airline, hotel and car- rental companies. Under stockholder pressure, United was forced to divest itself of the non-airline parts of the company. This subject will also be dealt with in greater depth later.

Price. When the majority of airline passengers once consisted of people traveling on business and those who were rather wealthy, the airlines felt that the demand for travel was inelastic. That is, if prices were reduced, any increase in number of passengers would not produce more revenue. Because of this and a fear that open pricing would lead to price wars that might result in bankruptcy for smaller airlines, airline pricing was closely controlled. Pricing was a reflection of operating costs. The average costs of carriers serving particular markets were calculated and a reasonable return on investment added to come up with the price that could be charged. With deregulation a new era has come to pricing in transportation in general and in the airline industry in particular.

Three economic concepts are important when looking at pricing alternatives. These are the ideas of "differential pricing", the "contribution theory", and the "incremental concept". Differential pricing is the concept that there is not one but many demand curves. A separate demand exists for coach than does for first-class; separate demands exist for travel from Denver to New York than from New York to Denver. As such, carriers can calculate how price- sensitive demand is in one particular class or on one particular route and price accordingly. The demand for business travel, for example, is probably less sensitive to price changes than the demand for pleasure travel on that same route at that same time. A higher price can be charged where demand is inelastic.

The idea of contribution theory is that prices should be set at the level that contributes most to paying off fixed costs while still allowing traffic to move. The fare charged might be low on a route where the demand is elastic; higher where demand is inelastic. In effect, segments of the market that are price-inelastic are subsidizing others that are price-elastic. How low should the price be? Low enough to ensure the passenger travels while contributing as much as possible to paying off fixed costs.

Tied to the ideas above is the incremental concept. Incremental costs are those incurred by running an additional service. The operating costs of a particular plane or train are its incremental costs. Each fare should cover its incremental costs while contributing as much as possible to fixed costs and also ensuring that the traffic moves. It is up to management to analyze each route and each segment of the market and set prices accordingly.

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