Loyalty Programs in the Airline Industry After 2008 Dissertation

Introduction

The ultimate goal of marketing is to be able properly target products to the consumers who want to buy them. As such, in order to create sales for certain products or services, what is needed is to examine the current market and customers and determine why a product or service is not selling and revise strategies accordingly in order to target the correct market segment or to encourage buying behavior.

Professor John Zang from the Wharton School of Business explains that companies in such situations can approach their relationships with consumers through the use of “a systematic, rigorous process of segmentation, targeting and positioning” which should result in the company being able to determine which consumer segment to approach and how to properly position itself to create sales and maximize profit. Traditionally, in the case of the airline industry, this has taken the form of loyalty programs in order to encourage customer patronage of particular carriers (Huang & Zhang 2011, pp. 1045-1056).

Based on the work of BagchI & Li (2011) which examined the implementation of loyalty programs within various markets, it can be stated that a loyalty program is a structured marketing effort meant to encourage loyal buying behavior for a particular service or product (BagchI & Li 2011, pp. 888-901). It is utilized as a means of increasing sales by ensuring that a client/customer will continue to come back to that particular company in order to patronize what they are selling (García-Gómez, et al. 2012: pp. 547-561).

Normally, the medium utilized when it comes to loyalty programs comes in the form of loyalty cards, reward cards, advantage cards or other similar cards which ensures consumers can avail of a certain discount when shopping at a particular store or in some cases “points” which can be accumulated and redeemed later on for a prize (García Gómez et al. 2012, pp. 492-500; Murthi, Steffes & Rasheed 2011, pp. 5-13).

For the airline industry, loyalty programs come in the form of frequent flyer miles wherein a certain number of miles per year (i.e. 25,000, 50,000, 100,000 etc.) that are accumulated with a carrier become redeemable as either a free trip, a hotel stay, or can be exchanged for various goods or services (Gundala, Jack, & Gomes 2012, pp. 35-50). Other iterations of loyalty programs as seen in the case of United Airlines in the U.S. come in the form of seat upgrades from Economy to Economy+ to even allowing loyal passengers to have preferential treatment when it comes to seat selection (Gundala, Jack, & Gomes 2012, pp. 35-50).

One common theme seen through the loyalty programs of airline carriers is that the benefits accrued through such programs increase based on the amount of miles flown with that airline. Since there are a certain amount of miles that need to be flown to be eligible for certain benefits, this encourages customers to stick to a particular airline over a prolonged period of time in order to avail of them (Drèze & Nunes 2009, pp. 890-905).

The work of Liu and Yang (2009) which examined airline loyalty programs over the past 2 decades reveals that while they have been an effective means of maintaining consumer patronage, the changing landscape of the airline industry has resulted in considerable doubt over the continued effectiveness of such loyalty programs (Liu and Yang 2009, pp. 93-108). Liu and Yang (2009) refers to several events which have caused the effectiveness of loyalty programs among carriers to be doubted, these refer to:

• the 2008 financial crisis which changed consumer attitudes and behaviors regarding airline travel
• the advent of no frills, low cost budget carriers which have become an increasingly popular method of air travel
• increased fuel costs for airlines which have increased ticket prices for legacy carriers
• cutbacks in the benefits obtained from loyalty programs resulting in fewer incentives to be loyal to a particular airline.

It is based on such events and the subsequent effect they have had on air travel at the present that the future of loyalty programs should be called into question. As such, this paper will attempt to answer the question: are loyalty programs still an effective method of maintaining consumer patronage in the current airline industry?

Background of the Study

There are distinctly two types of carriers within the aviation market today: legacy carriers and low cost carriers (Beirne, 2004: 30). Legacy carriers are composed of some of the oldest airlines within the industry today or are a result of subsequent mergers and acquisitions over the past 2 decades (ex: United Airlines, U.S. Airways etc.) (Blurring the boundaries, 2011: 58). Low cost carriers on the other hand have actually come about rather recently and are defined by their no frills, low cost, and above all lean business models that emphasize savings for clients (Chacon & Mason 2011: 271-290). While LCs (Legacy carriers) continue to be the dominant form of travel, LCCs (low cost carriers) have been noted as continuing to eat away at their market share due to recent trends in consumer purchasing behavior wherein affordability has been at the forefront of their purchasing decisions given the nature of the current financial environment (which is still reeling from the 2008 financial crisis) (Chia-Mei, 2009: 237-256).

LCs have attempted to respond to this shift by developing their own low cost alternative which lasted between 2001 to 2007 with various incarnations of LCCs under the legacy carrier brand, however, these carrier failed to be competitive enough compared to traditional LCCs since they were still under the business model of LCs and thus were subject to the same spiraling costs resulting in their closure by mid 2007 (Stapleton, 2008: 1; Waguespack Jr et al. 2007, pp. 59-71). The end result of such a situation was that LCs realized the necessity of developing an alternative means of competing with LCCs within new and traditional markets and, as a result, has leveraged the use of loyalty programs in order to attract and maintain passengers (Vera Rebollo & Ivars Baidal 2009, pp. 559-570)

The current problem with the airline passenger market within the global economy is the fact that consumer spending is at an all time low due to the 2008 – present day economic downturn (Shuk-Ching Poon & Waring 2010, pp. 197-213). Unfortunately, the inherent problem with the current situation is that it creates a vicious cycle wherein low consumer spending results in companies reducing various aspects of their operational capacity (i.e. manufacturing of products, low level employees etc.) in order to remain in business which results in even lower consumer spending since people do not have jobs to support themselves anymore (Maldutis 2004, p. 66). An example of the effect of such a behavior by major corporations can be seen in the U.S. wherein up to 6% percent of the population is unemployed due to workforce cutbacks employed by various companies in an attempt to continue to remain viable despite lackluster local demand.

Another global factor that should be taken into consideration when conducting business operations is the current debt crisis in Europe that was brought about through not only the reckless actions of various banks within the region (as seen in the case of Ireland) but also through government mismanagement of finances (seen in the case of Greece) and exposure to a reckless housing market (the case of Spain) which has also adversely affected domestic manufacturing within the U.S. Such factors have taken a steep toll on the airline passenger market with up to 50% of profits effectively wiped out in period immediately during the aftermath of the 2008 recession with only a marginal improvement on domestic flights in the latter half of 2012.

The impact of such a situation on the airlines industry is that it has become more important than ever to create consumer patronage in order to ensure a constant stream of passengers. While frequent flyer programs have existed within the industry for decades and are even transferable to a certain extent so that they can be utilized in other businesses (i.e. frequent flyer miles being convertible towards stays at a hotel or car rental services), the fact remains that due to the current nature of the airline industry such additional methods of attracting consumers has become more important than ever.

Research Objectives

The main objective of this research paper is to examine the effectiveness of loyalty programs in the airlines industry. This will be done through an examination of legacy carriers such as Qatar Airways, Emirates Air, Singapore Airlines, British Airways and Lufthansa and their low cost alternatives within the U.S., Europe and Asia.

As such, the objectives of the research paper will consist of the following:

1. Examine the means by which loyalty programs “draw” passengers in to create long term consumer patronage.
2. Determine, if within the past few years, the current global economic downturn and subsequent recessions in numerous countries has resulted in consumers shifting towards low cost carriers as their primary means of air travel
3. Lastly, determine if loyalty programs have had any significant impact whatsoever in retaining passengers for Legacy carriers or if low cost carriers with their more affordable air fares have in effect rendered loyalty programs useless in the face of the economic problems passengers face due to an underperforming global economy.

Scope and Limitations

The independent variable in this study consists of the academic literature that will be gathered by the researcher for the literature review while the dependent variable will consist of the responses gained from the passengers that will be recruited for this study. It is anticipated that through a correlation between literature on the current state of the airline industry and the responses of the passengers, the researcher will in effect be able to make a logical connection regarding the current effectiveness of airline loyalty programs.

Overall, the data collection process is expected to be uneventful; however, some challenges may be present in collecting data involving loyalty programs and current airline practices that are to be utilized in this study. Such issues though can be resolved through access to online academic resources such as EBSCO hub, Academic Search Premier, Master FILE Premier, Newspaper Source Plus, and AP News Monitor Collection.

Other databases consulted for this topic include Emerald Insight, Academic OneFile, Expanded Academic ASAP, General OneFile, Global Issues in Context, Newsstand, Opposing Views in Context, popular magazines as well as other such online databases which should have the necessary information. Relevant books were also included in the review.

Furthermore, websites such as The Economist.com have several online articles which contain snippets of information that should be able to help steer the study towards acquiring the necessary sources needed to justify asserted arguments. It must be noted that the time constraint for this particular study only allows structured interviews with an unrepresentative number of people, and also a limited amount of flexibility when conducting the interview

The main weakness of this study is in its reliance on interview results as the primary source of data in order to determine the general opinion of passengers regarding airline loyalty programs. There is always the possibility that the responses could be false or that the passenger in question really does not know anything at all about the nuances of airline travel as indicated by the researcher. While this can be resolved by backing up the data with relevant literature, it still presents itself as a problem that cannot be easily remedied.

Dissertation outline

The dissertation will consist of the following parts:

• Chapter 1 will contain the introduction, background of the study, the study limitations as well as its aims and objectives.
• Chapter 2 will consist of a literature review detailing the current effects of the global economy on consumer perception, the origin of airline loyalty programs as well as their intended impact on consumer patronage.
• Chapter 3 will consist of the methodology that will be utilized in the study as well as the means by which data will be collected.
• Chapter 4 will contain the results of the study and will discuss the implications of the results.
• Chapter 5 will consist of the conclusion and recommendation section of the paper.

Literature Review

This section reviews and evaluates literature on the current state of the airline industry, the impact of the competition between Legacy Carriers and Low Cost Carriers and the changing tastes of consumers involving airline travel. Through this section, readers will be able to better understand the various factors that have impacted the airline industry and how this in turn has affected the loyalty programs that various carriers utilize. The literature in this review is drawn from the following EBSCO databases: Academic Search Premier, MasterFILE Premier; as well as Jstore and various internet sources when applicable. Keywords used either individually or in conjunction include: Legacy carrier, Low Cost Carrier, Financial Crisis, Airlines, Loyalty Programs, customer satisfaction, consumer behavior, consumer decision making, consumption and patronage.

Trends Impacting Carriers

The following is a table showing how economic, political, social, technological and media trends have impacted the airline industry within the past 20 years and how such trends will impact the airline industry in the years to come. Through this table, a better understanding can be developed regarding the evolution of the present state of the airline industry by showing how different trends created positive or negative effects on legacy and low cost carriers alike.

One of the interesting aspects shown by the table above is the increasing rivalry between legacy and low cost carriers and the attempts of low cost carriers such as Jetblue and Southwest etc. to expand into longer distance domestic routes within the U.S. and other regions. Research data from Boeing has shown that there has been a significant rise in orders for twin engine 747s in several markets including the U.S. and Europe (Field & Tacoun 2006, p. 71).

The reason behind this sudden upsurge has been indicated by the article “Best and Worst” (2011) as being the direct result of the development of not only an increasing amount of regional hubs within Asia but in the U.S. as well. One of the unique aspects of the 747 is that not only is it well suited for local domestic flights between short distance flight routes but it actually also capable of long distance flights (Bond 2005, p. 38).

As such, the reason behind this sudden upsurge in sales is connected to the subsequent expansion of low cost carriers that see the fuel efficiency of the 747 twin bodied aircraft as one of the best means of entering into the main stream long distance flight market in order to rival legacy carriers (Bond 2005, p. 38). The reason why this particular strategy would be effective is due to the fact that many of the legacy carriers at the present have been reducing the amount of flights to particular routes in order to save on fuel and operational costs (Flottau 2004, p. 26).

As indicated by the study Flottau (2004), one of the main issues with new carriers entering into the main stream market is the strangle hold many legacy carriers have over landing slots and departure gates in many of the regional hubs within the U.S. Europe and other regions (Flottau 2004, p. 26). With some carriers reducing operations for cost savings, the end result is the opportunity for local low budget carriers to assume these vacated slots and offer passengers low cost rates for tickets which the low cost carriers can afford due to higher fuel efficiency of their planes.

As such from 2009 to 2013 it can be assumed that the evolution of the rivalry between LLCs and Legacy carriers will intensify as a direct result of the factors that have been indicated. This may in fact lead to a potential price war in the future with LLCs gaining the ability to outstrip legacy carriers due to them having better planes (Hazledine 2008, pp. 337-348). It must also be noted that various studies have also indicated that that single highest cost for an airline is purchasing an airplane and, as such, it is unlikely that legacy carriers will be able to immediately replicate the operational strategy of LLCs given the cost of new planes and the fact that many of today’s carriers are trying to reduce costs whenever possible.

Studies such as Hazledine (2008) do give an indication of what may happen in future as seen in the section where legacy carriers have focused more on business and first class passengers due to the higher fees derived from such customers (Hazledine 2008, pp. 337-348). Taking this into consideration, it could be possible that one potential evolution of the current situation is a separation of the types of passengers that particular airlines cater to with LLCs catering to ordinary consumers that are looking to save on their fairs while legacy carriers on the other hand could focus on developing better services and amenities and focus more on business and 1st class passengers.

What Affects Consumer Buying Behavior?

It is rather interesting to note that various theories of consumer decision making processes always seem to assume that consumers pass through distinct stages/steps before, during and after the process of selecting a particular product to buy or service to utilize. On the other hand Omar et al. (2010) states that this may not necessarily be the case since not all consumers pass through a particular decision making process and in some instances consumers may in fact skip certain stages all together (Omar et al. 2010, pp. 6-28).

What must be understood is that an average consumer is influenced by a myriad of different factors that affect the way in which they choose to patronize a particular product or service (Brierley 2012, pp. 225-233). This can range from various psychological reactions such as the way in which they think and feel about different products (i.e. brand perception) to the way in which the market environment they are currently present in affects the way in which they perceive a particular product or service (i.e. local culture, their family, local media influences etc.) (Wagner et al. 2009, pp. 69-85). For example, the 2008 financial crisis and the subsequent financial recession the U.S. and Europe is currently experiencing have greatly affected the way in which consumers perceive particular products or services at the present (Wagner et al., 2009, pp. 69-85).

When examining the present day consumer decision making process what is apparent is that there is not only a decision to resolve a current problem (i.e. buying food when they’re hungry or picking a particular insurance policy when it is necessary) rather what also happens is the necessity to fulfill a “higher need” in terms of what patronizing a particular product or service means to a customer (Zhang & Breugelmans 2012, pp. 50-65; Dorotic, Bijmolt & Verhoef 2012, pp. 217-237). This principle can be seen at work in the airline industry wherein product choice is not governed by just price and quality but rather by the processes that go into it that consumers have increasingly been taking into consideration before patronizing a particular company (Danaher & Dagger 2012, 2).

For example, consumer satisfaction regarding their choice of airline can be seen as being governed not only by the inherent price of a policy of the airlines in their legacy programs but also the convenience by which claims can be made, the ease of use of the process, the way in which the customer support staff handles their request and finally the readiness in which airlines are willing to assist a passenger (Furinto, Pawitra & Balqiah, 2009: pp. 307-319)

Theory of Consumer Behavior and the Airline Industry

The theory of consumer behavior revolves around the concept of the perceived value or satisfaction that a consumer derives from the consumption/ use of a particular commodity (Bhuyan 2011, pp. 205-220). In terms of actually understanding the demand side of market consumption/utilization the theory of consumer behavior uses two distinct methods of measurement, namely Total Utility (TU) and Marginal Utility (MU). Total utility is defined by various experts in the field of consumer behavior as being the equivalent to the total level of satisfaction that a consumer can get from the use/consumption of a particular good or service (Brinber & Wood 1983, pp. 330-338). In the field of analyzing consumer behavior marginal utility is basically described as an add-on, namely it is the additional form of satisfaction that a passenger can get from the use/consumption of an added portion of a particular good or service.

It must be noted though that while total utility increases with the overall level of quality, at some point due to the continuous consumption of a particular product or use of a type of service the overall yield will result in smaller and smaller levels of additional utility towards the consumption. To illustrate this point one can imagine a person buying a scoop of dark chocolate ice cream at an ice cream store. While initially the total utility and marginal utility are equal if the person were to go back and kept on buying the same product in order to stay cold the total utility would increase due to the consumption however the marginal utility would decrease over time as a result of the continuous consumption of the same product.

This is based on notion that continuous consumption of the same product would eventually cause a person to get tired of consuming it thus the added value continues to decrease over the course of consumption (Isabella et al. 2012, pp. 657-671). The same process can be seen in the case of the airline industry wherein continuous consumption/use of loyalty programs would in effect decrease the marginal utility over time (Hansen 2008, pp. 128-137). Once a certain decrease in marginal utility has been met, consumers switch to another product/service where they can derive more marginal utility (Hansen 2008, pp. 128-137). Among carriers this takes the form of passengers switching between Legacy Carriers to Low Cost Carriers for their travel needs.

In order to better understand how such a concept integrates itself into business planning and marketing the four fundamental concepts of consumer choice must be taken into consideration namely: rational behavior, preferences, budget constraints and prices (Wenjie & Othman 2010, pp. 229-252). The concept of rational behavior assumes that all consumers are rational individuals who try to use their earned income in order to derive the greatest amount of satisfaction/ utility. In other words consumers try to get the most out of their income through rational buying behavior which results in a maximization of total utility from the products or services used (Rossiter & Foxall 2008, pp. 123-141). In the case of this paper this comes in the form of clients choosing a particular carrier based on their perception that they would get the most value from patronizing that company (Shaw, Shiu, & Clarke 2000, pp. 879-894). This rational behavior is based on the fact that consumers will act in an economically competent manner in that they will not spend too much money on irrational purchases or services (Calder & Burnkrant 1977, pp. 29-38). This can take the form of stockpiling unneeded products or choosing certain services that are well beyond their budgetary means(Buttle 1998, pp. 63-94).

As such, the concept of rational behavior assumes all consumers engage in rational buying behaviors which becomes the basis for any future analysis of consumer patronage towards a particular type of product or utility (Oshikawa 1969, pp. 44-49). For the airline industry, this means that customers have a certain “limit” to the amount they are willing to pay on airline tickets on a particular travel package based on the rates that the company has allotted for them (Nelson & Consoli 2010, pp. 665-687). It must also be noted that the concept of preferences is based on the fact that each individual consumer has his/her own personal preference towards a particular service or product that is currently available in the market from which they are able to derive the greatest amount of total utility/ satisfaction (Luomala 1998, pp. 109-132). Consumers are inherently aware of how much in the way of marginal utility they are able to derive from successive use/consumption of a particular product or service.

It must be noted though that the amount of marginal and total utility derived from a particular product or service differs based on each individual consumer group since they all have individual tastes, preferences and ideologies. In the case of the airline industry this comes in the form of various fare packages that the companies offer passengers (Hauser & Urban 1979, pp. 251-262). If a customer pays a lot into their ticket price package yet regularly avails of the loyalty program for all their flights on a yearly basis, this mean that consumer is able to derive the greatest amount of total utility/satisfaction from patronizing that company’s services (Pavlou & Fygenson 2006, pp. 115-143). On the other hand it must be noted that if a customer is paying a lot into a service yet does not use the loyalty program at all, it can be stated that they are not making the most of the service and as such are not able to derive as much total utility/ satisfaction from paying into it (Krystallis et al. 2012, pp. 1438-1463).

Under the concept of budget constraints each consumer is assumed to have a fixed and finite income due to the limited amount of work in exchange for income each individual consumer is capable of achieving (Ratchford 1975, pp. 65-75). In this case it is assumed that there is unlimited demand for goods and services however this is offset by a limited income. For the airline industry this takes the form of having specific types of ticket packages available that take into account varying income levels instead of having fixed price packages that neglect to take into account a person’s level of income before a particular payment plan is set (i.e. promo fares, low cost carriers, etc.) (Pookulangara et al. 2011, pp. 311-321).

Finally, the concept of prices assumes that each individual consumer is part of the total demand in the market. Due to the limited amount of income each consumer is capable of achieving they must choose to obtain the best combination of goods that maximizes their total utility while at the same time remaining within a certain price range. In this study, the point of view of the consumer, namely consumer preference, plays an important role in determining whether the total utility of the consumer knowing that the airline company they are under has beneficial practices (i.e. good customer service, widespread loyalty packages, online service etc.) actually contributes to consumer patronage of that particular airline (Lal & Pathak 2011, pp. 99-108). It must be noted that while the concept of consumer preference plays an important role in the choice of a particular product or service the fact remains that the remaining concepts of rational behavior, budget constraint and price also play roles that can actually override the concept of preference (Cohen 1968, pp. 73-80).

While a consumer may prefer to use a particular airline that has widespread coverage and great services, barriers to this choice in the form of higher prices which directly conflicts with a consumer’s inherent budget constraints would thus change their pattern of behavior to choose a more affordable solution in order to conform to what is rational. This can be seen in the airline industry as of late with the shift of consumers from legacy carriers to low cost carriers (Özsomer & Altaras 2008, pp. 1-28). On the other hand if a consumer is presented with two choices namely an airline that has a loyalty program while the other has not with both prices being similar it is likely that the consumer will choose the former choice rather than the latter.

This decision is influenced by all concepts of consumer behavior wherein preference and rational behavior for airlines that have loyalty programs led the consumer to choosing the airline that has better services while the similar prices for each airline conformed to the consumer’s budget constraint thus letting the choice be left up to preference. It must be noted that the theory of consumer behavior is basically an examination of what influences a consumer’s choice in a particular product or service. Should a consumer be presented with the same service with both being within budget constraints and prices, the choice is usually left up to consumer preference.

On the other hand if a choice is beyond budget constraints, price level and is considered to be an irrational choice preference is no longer included into the decision making process. Thus in terms of understanding consumer behavior, preference should not be considered the sole deciding factor in understanding consumer behavior rather a combination of rational behavior, preference, budget constraints and price must always be taken into consideration in order to understand how consumer behavior towards a particular product or service works.

Changing Selling Strategies

Another aspect to take into consideration is the fact that at times certain products become a “tough sell” as a direct result of consumer objections to the product itself. One case where this is evident is changing consumer attitudes in the U.S. towards the use of gas guzzling SUVs. From 1995 to the early 21st century SUVs were considered almost the vehicle of choice for a large percentage of families and consumers within the U.S. however due to increasing gas prices the demand for SUVs has severely plummeted resulting in a significant deterioration the market base for current SUV dealers. Professor Stephen Hoch of the Wharton school of Business explains that in such cases what is needed is to “frame an offer to get rid of the objection”. This means to create a buying situation where the consumer observes the perks of buying a particular product and neglects to take into account the possible negative implications of the sale.

Proper Pricing

The last approach that should be considered by companies when approaching consumer relationships is to take into account business cycles and market slumps and adjust prices accordingly. As explained by Professor Leonard Lodish of the Wharton school of Business “pricing is a critical element of successful marketing, in good times and in bad and many companies do not focus enough on getting their pricing right”. It is based on this and the cyclical cycle of business that companies should consider proper pricing strategies when selling particular hard to move products. This takes the form of taking into account the physical value of the product being sold as well as various non-tangible elements that consumers take into consideration before they will be willing to pay for a product. For example, the state of the housing market in the U.S. is at an all time low however there are still individuals who are in need of homes. In such cases developers need to take into account the physical cost of the home itself and factor in the current housing slump before creating a price range for a particular apartment or home. It is based on this that it can be said that the greater the amount of non-tangible assets that are taken into consideration by the customer before making a purchase the greater the need for companies to fix prices in accordance with what is necessary to sell the product itself.

Airplane Purchasing Trends in Aviation

The previous decade within the airline industry was dominated by wide-body long range aircraft however as of late the rise of low cost carriers and regional air services, especially in Japan and China, utilizing twin engine aircraft with small frames calls into question strategic options that focus on large bodied aircraft that focus on passenger capacity rather than efficiency (Poon and Waring, 2010: 197). Within the past 5 years it was seen that Asian carriers (a large of which are dominated by low cost carriers) have been shedding their 747 – 400 series aircraft in favor of wide-body twin engine aircraft such as the B-787 due to their overall improved efficiency and greater range.

In fact, when examining the prevalence of high capacity aircraft such as A-380s within Asian fleets it was noted that Airbus received only a few orders. On the other hand, population estimates examining the growth of airline passengers within the next 40 years shows an increase of at least 16 billion. Based on this data the relevance of utilizing higher capacity aircraft such as the A-380 becomes much more important due to the need for meeting consumer demand however, with various airlines choosing smaller and more fuel efficient aircraft, this calls into question whether such airlines are either mistakenly purchasing the wrong kind of plane or there is an unperceived strategic value in choosing twin engine alternatives.

When examining the particulars involving the choice of aircraft among airlines at the present, you have to take into consideration present day market studies that indicate that business travelers will pay a 15-25% premium to fly to their initial destinations non-stop or direct, rather than change carriers en-route (De Neufville, 2008: 35-68). Since various legacy carriers such as United Airlines, Luftansa, British Airways etc. considers business travelers as one of their more profitable target segments maximizing the amount of business travelers per flight through the use of the A-380 would seem to be the most logical choice especially when taking into consideration estimates at passenger increases in the near future. On the other hand shifting towards the primary use of A-380s does present several problems such as the plane’s size requiring special modifications necessary to existing airports in Asia which are more used to B-787 airplane sizes (To frill or Not to Frill 2005, p. 34).

Various studies have shown that there is a current predilection within the Asian region for utilizing wide bodied twin engine aircraft such as the B-787. In fact such studies indicate that this is a trend that began at least five years ago wherein there was a dramatic shift in the region towards planes with small frames (Halls 2004, pp. 19-21). The reason behind this can actually be connected to the rise of several Asian budget airlines within the region whose business models emphasized affordability rather than luxury.

Not only that, due to the effects of globalization within the Asian region various regional hubs have been created to service a variety of far flung destinations resulting in budget carriers being the plane of choice for travel to such areas (Gray, 2008:22). As a result of such events, budget airlines within the Asian region have outstripped the growth of network carriers resulting in more airports having structural frames designed for receiving planes like the B-787 rather than the A-380. This is particularly important to point out due to the fact that while the open skies deal (an agreement between the U.S. and Japan to enable access for American carriers) would enable United Airlines and other U.S. based carriers to potentially access the regional airports of the Japan, the fact remains that if the fleets serving these airports were composed of A380s this would result in considerable expenses for these airports in terms of tarmac and station modifications to accommodate the A-380 which could jeopardize the open skies deal due to perceived costs on the part of the regional airports (Ventola 2010, pp. 216-225).

On the other hand, other examinations of the A-380 and its place in the future of aviation indicates that as the number of airline passengers per year in the world reaches an estimated 16 billion within the next 40 years this is indicative of massive growth potential within the upcoming years. This means that utilizing the B-787, while affordable, demand will set various airlines back in terms of being able to handle increased passenger capacity and as such would cause companies to lag behind its rivals. Despite this, orders for the B-787 have been increasing while orders for the A-380 are steadily decreasing. Studies such as those by De Neufville (2008) assume that one of the reasons behind the decline of orders of the A-380 is connected to the fact that an increasingly larger percentage of consumers have become budget conscious. As a result, they tend to prefer cost effect travel over the type of travel arrangements provided by traditional legacy carriers (Fiorino 2004, p. 51). This is indicative of the fact that affordable low cost carriers are becoming “the carrier of choice” for the next generation of consumers who forgo loyalty advantages and benefits in exchange for a more affordable way to fly.

Theoretical Framework

This section elaborates on the use of attribution theory and grounded theory as the primary methods of examination utilized by the researcher in order to check the information gathered during the interviews. These theories were chosen due to their ability to examine the opinions of the interviewees in order to properly interpret the data and create viable solutions and recommendations.

For example, through attribution theory the research will be able to correlate the views of the passengers with their current experiences in air travel in order to properly determine whether loyalty programs by Legacy Carriers or cheaper travel through Low Cost Carriers influences their choice of carrier.

By following grounded theory during the data analysis stage of the study, the research will be able to determine the current effectiveness of loyalty programs utilized by various airlines, whether significant problems exist, what the companies are doing to address such issues and if possible alternative to current methods have been considered.

It is expected that by following the two theoretical frameworks during the examination process of the paper, the researcher will be able to succinctly address the research objectives of the study. The main difference between the two theories is that attribution theory concerns itself with the assumptions people have towards a particular product or process while grounded theory focuses more on developing succinct assumptions based on the data that has been presented.

As such, by combining both methods this enables a researcher to examine the opinions of a test subject under a particular investigative framework while at the same time utilizing another framework to determine the inherent problems within a given scenario and the appropriate method of addressing them. It is based on this that these two theories become an ideal method for the research topic. The main benefit of utilizing both theories in the examination of the research topic is that they enable a better examination of the responses of the interviewees as well as the data from the literature review as compared to merely doing an examination of both aspects utilizing a single theory.

Attribution Theory

Attribution theory centers around the derived assumption of a particular individual/group of people regarding a particular process, product or service based on their experience with it (Gurevich et al. 2012, pp. 439-444). It is often used as means of investigating consumer opinions regarding a particular product and to determine the level of satisfaction derived from its use (Orth et al. 2012, pp. 1321-1327). By utilizing this particular theory as the framework for this study, the researcher will be able to correlate the opinions of the interviewees regarding their assumptions over what practices currently utilized by individual airlines lead to consumer satisfaction and patronage (Trafimow et al. 2011, 81-93; Oswick, Fleming & Hanlon 2011, pp. 318-337). This particular theoretical framework helps to address the research objective of determining current practices within the airline industry by creating the framework that will be utilized within the interview (Savolainen 2013, pp. 63-68).

Utilizing attribution theory, the research will design the research questions in such a way that they delve into the opinions of the passengers in order to better understand what factors influence their buying at the present (Settle 1972, pp. 85-88). The needed information will be extracted through a carefully designed set of questions whose aim is to determine how a particular passenger’s experience with an airline affects the way they choose to travel and whether, in their opinion, significant improvements need to be implemented or not (Johnson 2006, pp. 181-195).

However, it should be noted that while attribution theory is an excellent means of examining the opinions of interviewees, it is an inadequate framework when it comes to determining the origin of problems in certain cases (Shepherd 2011, pp. 1229-1259). Grounded theory, with its emphasis on utilizing a specific framework to guide a researcher during the examination process can be considered an adequate method of performing the more “in-depth” aspects of the research.

Grounded Theory

The advantage of utilizing ground theory over other theoretical concepts is that it does not start with an immediate assumption regarding a particular case (Manuj & Pohlen 2012, pp. 784-803). Instead, it focuses on the development of an assumption while the research is ongoing through the use of the following framework for examination:

1. What is going on?
2. What is the main problem within the company for those involved?
3. What is currently being done to resolve this issue?
4. Are there possible alternatives to the current solution?

This particular technique is especially useful in instances where researchers need to follow a specific framework for examining a problem (as seen in the framework above) and, as such, is useful in helping to conceptualize the data in such a way that logical conclusions can be developed from the research data (Cooney 2011, pp. 17-22).

By utilizing the framework of grounded theory to perform an examination of the interviewee responses and the data from the literature review, the researcher will be able to adequately examine the processes utilized within the airline industry related to encouraging consumer patronage and whether such processes are effective based on the data collected (Gambetti et al, 2012, pp. 659-687). It is assumed by the researcher that there can be an effective correlation between the current problems of Legacy Carriers in their customer retention processes and the use of their business model of loyalty programs instead of no frills travel (Urquhart 2010, 357-381).

What you have to understand is that in qualitative research the concepts or themes are derived from the data. According to Charmaz, grounded theory provides systematic, yet flexible guidelines to collect and analyze data (Fenwick et al. 2012, pp. 53-66). That data then forms the foundation of the theory while the analysis of the data provides the concepts resulting in an effective examination and presentation of the results of the study (Zarif 2012, pp. 969-979).

Methodology

This section aims to provide information on how the study will be conducted and the rationale behind employing the discussed methodologies and techniques towards augmenting the study’s validity. In addition to describing the research design, this section will also elaborate on instrumentation and data collection techniques, validity, data analysis, and pertinent ethical issues that may emerge in the course of undertaking this study.

Research Methodology

Merriam (2009) in her book “Qualitative Research: A Guide to Design and Implementation” explains that qualitative research is a type of exploratory research than in that it tries to examine and explain particular aspects of a scenario through an in-depth method of examination (Merriam 2009, 3-21). While it is applicable to numerous disciplines, it is normally applied to instances which attempt to explain human behavior and the varying factors that influence and govern such behaviors into forming what they are at the present (Merriam 2009, 3-21).

Thus, it can be stated that qualitative research focuses more on exploring various aspects of an issue, developing an understanding of phenomena within an appropriate context and answering questions inherent to the issue being examined. It is based on this that the researcher chose a qualitative approach to be utilized within this study.

Research Design

Sekaran (2006) observed most qualitative studies are either descriptive or experimental. The study will utilize a descriptive correlational approach because the participant will be measured once. Furthermore, it is imperative to note that the study will employ a questionnaire technique for the purpose of collecting participant data from the aforementioned areas indicated in the previous paragraph. According to Sekaran, a questionnaire technique is used when the researcher is principally interested in descriptive, explanatory or exploratory appraisal, as is the case in this study.

The justification for choosing a questionnaire based approach for this particular study is grounded on the fact that the participant will have the ability to respond to the researchers questions more directly and thus provide more information. An analysis of related literature will be used to compare the study findings with research on various strategies utilized by the airline industry. Such analysis, according to Sekaran (2006), is important in identifying the actual constructs that determine efficient analysis because “it goes beyond mere description of variables in a situation to an understanding of the relationships among factors of interest” (Sekaran, 2006).

Data Collection

Data collection for this study will actually be pretty straightforward; it involves utilizing a questionnaire to gather the opinions of up to 200 respondents in order to determine whether the loyalty programs of legacy carriers are sufficient in ensuring their loyalty as consumers despite the presence of low cost alternatives (i.e. low cost airlines).

Questionnaire

1. What is a deciding factor for you when choosing an airline to patronize?
   1. Price?
   2. Loyalty programs?
2. How Many Miles do you Travel within a given year?
   1. 5,000
   2. 25,000
   3. 100,000 and above
3. Do particular loyalty programs offered by certain airlines result in you patronizing them?
   1. Yes
   2. No
   3. Not Applicable

Explain:___________________

4. Of the following airlines which do you prefer to utilize?
   1. Qatar Airways
   2. Emirates Air
   3. Singapore Air
   4. British Airways
   5. Lufthansa
   6. Southwest Airlines
   7. Virgin Airways
   8. Cebu Pacific
   9. China Air
   10. Jet Blue
5. When it comes to a choice of carrier, do you look for the price or do you examine what sort of amenities or loyalty programs are available?
6. From among the following, what concerns you the most regarding patronizing an airline?
   1. Customer Service
   2. Loyalty Programs
   3. Affordability
   4. Size of seating
7. What type of airline are you going to patronize in the future?
   1. a.) Low Cost Carrier
   2. b.) Legacy Carriers
   3. c.) Does not matter
8. Has the current financial recession affected your choice of airline?
   1. Yes
   2. No
9. If money was not an issue, would you choose a legacy carrier or a low cost carrier as your primary means of air travel?
   1. Legacy Carrier
   2. Low Cost Carrier
10. In your own words, elaborate on where you believe the current trajectory of the airline industry is heading based on your experience flying with various carriers over the past several years.

Participants

The research subjects that will be used for this paper will consist of various individuals that will be recruited at the local international airport. Prior to the start of this research paper, the researcher will ask the permission of the airport administrators in order to conduct the study. 200 individuals will be recruited with no distinction being made between what type of passenger they are (i.e. business class, first class, economy etc.).

All participants will be given a consent form encompassing what the study entails as well as assuring them that all responses will be kept strictly confidential and will observe proper research ethics in terms of ensuring that the data will not be leaked to the general public. Once the research subject has consented to be part of the survey, they will be given the questionnaire in order for them to

Data Analysis

The primary method of data analysis in the case of this study involves an individual review. The individual review will primarily be the researcher examining the collected response data from the passengers that were interviewed and comparing it to the data obtained from the literature review. The researcher will then review these main themes and use this information to assist in establishing the key findings of the study. This method of data analysis is appropriate for a qualitative design.

Study Concerns

One potential concern that should be taken into consideration is the potential that the responses given by the study participants are in fact inaccurate or outright false. While the researcher is giving the passengers the benefit of the doubt, the fact remains that there is still the potential that the information being given has been crafted in such a way that it was made to ensure that it is false.

Unfortunately, there is no way for the researcher to verify the information since only one research subject is being interviewed. This methodology exposes the participant to an assortment of risks that need to be taken into consideration during the research process. The main risk the participants will encounter is if any of the answers that criticize or indicate dissatisfaction with carriers leaks.. This may have consequences on the attitude and opinion of company officials towards them and can result in victimization.

To eliminate this risk, the responses will be kept in an anonymous location. This way, the only way to access the information will be through a procedure that involves the researcher. The project thus observes research ethics in sampling as well as during data collection process.

Results

The results of the study are as follows:

• Total number of participants: 200
• 60 Business class passengers
• 20 first class passengers
• 120 Economy class passengers

What is a deciding factor for you when choosing an airline to patronize?

• Price: 120
• Loyalty Programs: 80

Do particular loyalty programs offered by certain airlines result in you patronizing them?

• Yes: 80
• No: 120

How Many Miles do you Travel within a given year?

• 5,000: 40
• 25,000: 60
• 100,000 and above: 100

When it comes to a choice of carrier, do you look for the price or do you examine what sort of amenities or loyalty programs are available?

• Price: 180
• Amenities: 20

From among the following, what concerns you the most regarding patronizing an airline?

• Customer service: 20
• Loyalty programs: 40
• Affordability: 130
• Size of seating: 10

What type of airline are you going to patronize in the future?

• Low cost: 110
• Legacy: 70
• Does not matter: 20

Has the current financial recession affected your choice of airline?

• Yes: 130
• No: 70

If money was not an issue, would you choose a legacy carrier or a low cost carrier as your primary means of air travel?

• Legacy: 200
• Low cost: 0

Discussion

When examining the results of the study, it becomes clear that there is a distinction between the effectiveness of loyalty programs based on the type of passenger class that a person is in. Of the 200 passengers that were examined, 60 of them were business class passengers who believed that an airline’s loyalty programs were an instrumental factor that influenced their choice of carrier. These individuals usually flew an average of 50,000 miles or more a year and stuck to only legacy carriers as their primary airline of choice.

On the other end of the spectrum, 120 of those that were interviewed belonged to the economy class section and they stated in their respective questionnaires that price was a deciding factor for them when it came to their choice of carrier. As a result, such individuals stuck to no frills low cost carriers whenever they had a choice and rarely flew with legacy carriers.

The remaining 20 passengers that were interviewed were 1^st class section passengers and were more concerned with the amenities provided by the airline as compared to any loyalty program that the carrier possessed. Unsurprisingly, this set of passengers primarily utilized legacy carriers and did not use low cost carriers at all. What these results reveal is that income is a deciding factor when it comes to airline loyalty programs. Such a conclusion is in line with the theory of consumer behavior that was discussed in the literature review wherein it was shown that price and not necessarily amenities was a deciding factor when it came to influencing consume purchasing decisions.

The theory of consumer behavior also happens to state that as price no longer becomes an issue towards the fulfillment of the total equity in the consumption of a particular product or service, consumers turn towards quality and other additional benefits that they may derive from patronizing a particular product. This can clearly be seen in the attitudes presented by business class and 1^st class passengers wherein they preferred legacy carriers over their affordable LCC counterparts on the basis of the legacy programs that were present and the type of amenities that were provided. Further examination of the results of the studies showed that the effectiveness of loyalty programs primarily impacted business class consumers.

Loyalty programs that enabled business class travelers to exchange their points for hotel stays or seat upgrades were more appreciated as compared to programs that focused on a free ticket once a certain point threshold has been met. Based on the results of the study, it can be stated that airline loyalty programs are an effective means of encouraging patronage only when cost does not factor in to the consumer decision matrix. Once cost enters into the picture, it s far more likely that consumers would avail of no frills travel options through LCCs that do not offer loyalty points as compared LCs. When looking back on the sections in the literature review labeled “Changing Selling Strategies” and “Proper Pricing”, it can be seen that the various authors that were analyzed emphasized the necessity of adjusting selling and pricing strategies in order to better match the needs of consumers.

In the case of the airline industry at the present, the lingering effects of the 2008 financial crisis as well as the economic recession which has continued to effect the world even until 2013 has created a situation where a large percentage of consumers are oriented more towards price rather than amenities and, as a result, this necessitates the need for various airlines to present alternatives rather than presenting improved loyalty programs.

Within the section “Airplane Purchasing Trends” it can be seen that various airlines have in fact noted the need to create better price alternatives through the use of B-787 airplanes for budget oriented consumers. Various studies have noted that there is a distinct shift in the airline industry at the present wherein legacy carriers have been orienting themselves more towards business class and 1^st class passengers while low income passengers are primarily being targeted by low cost carriers. The results of this study clearly show such a predilection is primarily due to the fact that legacy carriers cannot compete with low cost carriers in terms of cost but can beat them in terms of the amenities and loyalty programs they can provide.

Conclusion

The four fundamental concepts of consumer choice must be taken into consideration namely: rational behavior, preferences, budget constraints and prices when trying to determine what drives the decision making process of consumers to choose a particular type of airline to patronize. It is the assumption of this study that as income levels increase the propensity for consumers to go beyond the demographic of price and consider other factors in the decision making process such as loyalty programs increases as well.

In order to prove this point, the four fundamental concepts of consumer choice will be utilized in order to trace consumer behavior in this study and will attempt to explain how patients make their decisions regarding what health insurance company to patronize.

The concept of rational behavior assumes that all consumers are rational individuals who try to use their earned income in order to derive the greatest amount of satisfaction/utility. In other words consumers try to get the most out of their income through rational buying behavior which results in a maximization of total utility from the products or services used. It must be noted that while the concept of consumer preference plays an important role in the choice of a particular product or service the fact remains that the remaining concepts of rational behavior, budget constraint and price also play roles that can actually override the concept of preference.

While a consumer may prefer to utilize a airline that has a loyalty program, barriers to this choice in the form of higher prices which directly conflicts with a consumer’s inherent budget constraints would thus change their pattern of behavior to choose a more affordable solution in order to conform to what is rational.

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