AIR FRANCE: THE LOAD FACTOR PUZZLE IN BUSINESS CLASS  It was November 2016, and Suraj Nayar, marketing head of Air France India, reflected on the two-day meeting for national executives that he had just attended

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AIR FRANCE: THE LOAD FACTOR PUZZLE IN BUSINESS CLASS 

It was November 2016, and Suraj Nayar, marketing head of Air France India, reflected on the two-day meeting for national executives that he had just attended. The meeting had been organized to brainstorm options for the growth and profitability of Air France India, in an effort to provide the company with a new direction. Air France India had done quite well in the economy-class air travel segment; however, its passenger load factor1 was very low in the business-class travel segment.

 

The national-level meeting had been attended by more than 30 managers, all from middle and senior management. Top management of Air France, the parent organization of Air France India, had planned an aggressive expansion drive in the Indian subcontinent from 2016 to 2020 and had provided clear guidelines to Air France India management for improving the company's market share in this segment.

 

Before the meeting, Nayar had been concerned about some questions related to the future course of Air France India. Which group of business-class travellers should Air France India focus on to add new customers? How should it acquire new customers in the high-yield business-class segment? Should Air France work toward customer acquisition, bring partners on board, or utilize both of these routes? These were the questions he had raised for discussion at the meeting.

 

THE INDIAN AVIATION MARKET

 

With 81 million trips, India's domestic aviation market grew over 20.3 per cent from January to December 2015—the highest growth rate recorded in the world. India was on its way to becoming the third-largest aviation market by 2020.2 The combined capacity of Indian airports was 220.04 million passengers in 2015. According to the Directorate General of Civil Aviation, international passenger traffic in India had a compound annual growth rate of 9.52 per cent from 2006 to 2014 and was expected to reach 60 million by fiscal year 2017 and 131 million by 2030.3 In 2014-15, a total of 190 million air passengers travelled through India, including 45.7 million international passengers. International air passenger traffic in India saw annual growth of 5.85 per cent in 2014-15. Europe and the United States 

 

together contributed 16 per cent to the total inbound and outbound international passengers travelling to or from India. Foreign tourist arrivals comprised 25.58 per cent of total international passenger arrivals. Between July 2014 and July 2015, the country's domestic air passenger demand increased by 28.1 per cent, which surpassed the increase of 10.9 per cent in domestic air travellers in China and of 5.9 per cent in the United States during the same period. According to the International Air Transport Association, global passenger traffic (also known as revenue passenger kilometres)4 saw a 6.5 per cent increase in demand in 2015 compared with 2014, which was the highest growth since the post-global financial crisis rebound in 2010. India had the highest revenue passenger kilometres growth in 2015, with 25 per cent year-on-year growth, followed by 8.2 per cent in China and 4.9 per cent in the United States.5

 

In India, the international air travel market was dominated by international carriers, although Indian airline companies were increasing their market share gradually. From 2004 to 2005, international airlines had a 71.1 per cent market share, while Indian airlines had a 28.9 per cent market share of total international air passenger traffic to and from India. In 2014-15, international airlines had a 63 per cent market share, while Indian airlines had a 37 per cent market share6 (see Exhibit 1).

 

International travel to and from India had increased sharply as a result of an increase in India's middle- class population, rapid economic growth, the rising aspirations of middle-class Indian consumers, a fall in the price of aircraft turbine fuel, and an increase in tourism due to visa reforms and increased promotion of Incredible India.7 A change in attitude toward the exploration of new travel destinations and the increased disposable income of the middle- and upper-class Indian population contributed to an increase in more frequent international air travel per person. This increase in international air travel was also facilitated by the Indian government's e-Tourist visa policy (also called Electronic Travel Authorization), which was issued for short-duration visits related to business, medical treatment, meeting family and friends, and tourist travel, and, by February 2016, was extended to travellers from 150 countries.

 

Further fuelling the demand for air travel were new technologies, including bookings through mobile applications (apps) using e-wallets, heavy discounts, and cash back for online bookings on travel web portals such as Expedia, MakeMyTrip, and Goibibo. Due to this increased demand, the Indian aviation industry entered a path of expansion driven by low-cost carriers (LCCs), foreign direct investment in domestic airlines, modernization and expansion of airports, the Indian government's increased emphasis on regional connectivity,8 and various information technology interventions. However, the challenges facing the industry included high taxes on aircraft turbine fuel; the devaluation of India's currency, the rupee; competitive fares; and high-interest rates. India had developed world-class airports due to the public-private partnership between the private sector and the Airport Authority of India; however, airlines remained primarily concerned with airport tariffs, land acquisitions, capacity expansion of airports, and various government approvals. 

 

THE EVOLUTION OF TRAVEL CLASSES IN AIRLINES

 

With the advent of airline services in the 1920s, air travel was initially restricted to affluent people because of the high costs of airfares. Due to the long duration of travel at the time and the high cost of tickets, airlines provided comfortable and extravagant services, including fold-down beds. However, with the development of the airline industry, airlines introduced large planes that could carry more people, resulting in a reduction in the cost per passenger.

 

To create differentiation, airlines resorted to splitting the seating space available on a plane into two categories: first class, with a very high price for affluent flyers, and economy class, with low prices, which made travel by air affordable to many more people. In the 1970s, airlines began to increasingly adapt to a customer-focused approach; however, it was considered quite uncomfortable and unpleasant to travel long distances in economy class. On the other hand, the cost of the first class was prohibitively high for economy flyers.

 

In 1979, Qantas Airlines introduced the business-class category, between first class and economy class, which was quickly adopted by other airlines. Gradually, airlines increased their business-class seats to cater to the increased demand for this category, which also reduced the number of first-class seats to just a few seats in most airlines. In the 1990s, some airlines introduced a fourth category—premium economy class—a category midway between economy class and business class. The aim of this new class was to provide passengers with more space and increased comfort than economy class, but at a lower price than business class. Due to the continuous decline of international first class and the considerably smaller degree of innovation in premium economy class, the number of business-class seats on airlines increased significantly. Gradually, airlines started focusing on a gamut of innovations to attract flyers to business class and to meet or exceed their wide range of service expectations (see Exhibit 2).

 

BUSINESS CLASS

 

Since 1979, when business-class travel started, airlines have experimented with the offerings in this class, including introducing bigger seats that opened into fully flat beds, menus designed by celebrity chefs, individual entertainment systems, and airport lounges exclusively for business-class travellers. The business class came to be preferred by holiday travellers, business people, and senior managers, as its flat- bed seating allowed passengers to rest and to therefore experience less jet lag and be ready to start their vacation or go straight to work or to a meeting after reaching their destination. The flat-bed seats also helped to prevent deep vein thrombosis,9 as passengers were able to move and stretch easily. Business- class passengers could also expect preference in boarding and disembarking to save time, a full-course meal on board, fewer crying babies, and fewer anxious first-time flyers. Business-class travel also enabled passengers to earn extra miles on their journey compared with economy-class travellers.

 

Due to corporate business travellers' expectations of more comfort during air travel with lower prices than first class, the demand for business-class seating increased significantly. These corporate business travellers were loyal to specific airline brands and were price-insensitive. As a result, airlines started making contractual deals with larger businesses, organizations, and even government bodies in an effort to win a significant share of their air travel spending. Profit margins were much higher in business class than in economy class. On average, a business-class seat cost the airline 1.5 times more than an economy class seat. However, the price of a business-class ticket to the passenger remained two to four times that of an economy class ticket.10 

 

AIR TRAVELLERS

 

Worldwide, 3.5 billion passengers travelled by various airlines in 2015;11 however, more than half of the world population had not travelled by air even once in their lifetime. Airline passengers had their own reasons for travelling, including managing their own business or a company's business, connecting with loved ones, or enjoying a leisure or adventure trip. For some passengers, boarding a plane was fun and entertaining, while for many others, travelling represented an opportunity to sit in a calm environment and stay connected to work.

Worldwide (domestic and international), in 2013-14, the passenger load factor (PLF) was 78.1 per cent in February 2013, reached 83.8 per cent, its highest level that year, in August 2013, and then dropped to 77.7 per cent in January 2014. Similarly, in 2014-15, the PLF was 78.5 per cent in February 2014, 84.7 per cent in August 2014, and 78.8 per cent in January 2015.12 Break-even load factors saw a decrease over the years from 64.8 per cent in 2012 to 64 per cent in 2014, although, in 2000, it was only 59 per cent and afterward saw an upward trend.13 Net profit per departing passenger was $6.5014 in 2010, which decreased to $2 in 2012 and then rose to $5.1 in 2014. A similar trend occurred in terms of return on investment (ROI) in the aviation sector worldwide, where ROI was 6.4 per cent in 2010, 4.9 per cent in 2012, and 5.9 per cent in 2014.15

 

In 2007, New Zealand Airlines commissioned Synovate Research Solutions to conduct a study to determine air travellers' attitudes, needs, and commitment to their airlines and other competitor airlines. Based on a study of more than 1,000 passengers, the study identified the following five typologies of air travellers: positivists, socialites, cocooners, disengaged, and territorialists.16

 

Positivists were planners and organizers. Fidgety and excited, they perceived flying to be a part of the holiday trip and they wanted the fun to start immediately; highly engaged and involved in flying.

 

Socialites were social but needy. They could not entertain themselves and thus needed external stimulation and direction. They tended to be highly involved in the flight and looked for the airline to entertain them.

 

Cocooners considered the flight to be a necessary part of the trip, but not the trip itself. They had an attitude of zoning out (i.e., "let me get there and let me entertain myself"). They took care of themselves and preferred a quiet cabin away from families.

 

Disengaged flyers were often exhausted and considered air travel to be a means of getting from A to B. They did not like flying, were very difficult to please, and travelled with a complete lack of enthusiasm. Territorialists wanted to be left alone and developed a close relationship with their space. They were highly involved in the flight, but selfishly (i.e., it is all about them). This segment was weighted toward frequent flyers. 

AIR FRANCE

On October 7, 1933, a merger of five airlines (Air Orient,Air Union,Compagnie Ge?ne?rale Ae?ropostale, Compagnie Internationale de Navigation Ae?rienne, and Socie?te? Ge?ne?rale des Transports Ae?riens) gave birth to Air France, which later became a major European carrier. By December 2015, it had operations in 80 countries, covering 179 destinations. It had a fleet of 344 aircraft, with a total of 63,995 Air France Group employees. The company had three core businesses: passenger operations, cargo (freight transport), and maintenance (aircraft repair and maintenance). The company's strengths included its services to Charles de Gaulle Airport in Paris, which was a powerful European hub for airlines; a balanced network; an optimized airline fleet; its membership in SkyTeam Airline Alliance (a global alliance with 20 member airlines); a trans-Atlantic joint venture agreement with Delta Air Lines; an innovative product offer, a customer-centred strategy; and a strict cost-control strategy.

 

 

AIR FRANCE IN INDIA

 

 

In 1933, after the merger of five airline companies to form Air France, the new airline entity operated one weekly flight from Paris to Saigon with three intermediary stopovers in India—in Jodhpur, Allahabad, and Calcutta. It started weekly Paris-Delhi flights in 1955 and Paris-Mumbai flights in 1967 (the Mumbai service replaced the Calcutta service). In 1973, the Mumbai-Paris flights increased to three flights weekly. In the 1960s, Air France faced problems related to the limited economic and cultural relationship between France and India and the limited amount of foreign currency that Indian travellers were allowed to carry onboard due to strict limitations imposed by the Indian government. Air France used this situation as an opportunity, and provided free accommodation services to Indian customers at intermediary stopovers before reaching their final destination. This offering led to a considerable increase in the flow of Indian travellers on Air France.

 

In 1974, Air France began flights from India to the new Paris-Charles de Gaulle Airport. By the summer of 1981, two out of three Mumbai-Paris flights were non-stop flights. The first non-stop flight from Delhi to Paris was offered in 1982. Air France started daily flights from India in 1987 (with three flights a week from Mumbai and four flights a week from Delhi), which was increased to two daily flights in 2002, including one from Mumbai and one from Delhi. In 2005, Air France started its service to three other Indian cities, Chennai, Bangalore, and Hyderabad. By March 2016, in partnership with Koninklijke Luchtvaart Maatschappij (KLM) airlines (which was merged with Air France in 2004), Air France offered a total of 27 weekly flights between Europe and India, serving Delhi, Mumbai, and Bangalore (with its own weekly 17 direct flights) and Hyderabad (seven weekly flights operated by KLM, which was a sister concern of Air France). Air France India had personalized its services for Indian customers, such as providing information to passengers in the national language of Hindi, and offering Indian tea (

chai) and Indian dishes as the main meal in all travel classes. For in-flight entertainment, it offered Indian films in the original Hindi versions and Indian daily newspapers and magazines in all classes on flights from India.

 

Air France had a reputation in the market for its premium quality, excellence, sophistication, upgrades, and up-to-date innovation. By offering Flying Blue (Air France's frequent flyer program), the airline provided a French experience with a focus on elevating travel to an art. However, Indian flyers perceived the company as an "expensive airline" compared with other competitor carriers, such as Jet Airways, Lufthansa, British Airways, and Emirates Airways (see Exhibit 3). In financial year 2015-16, the company had a passenger load factor of 90 per cent in the economy-class segment and 79 per cent in the business-class segment (see Exhibit 4). 

 

Indian travellers using Air France tended to be business-oriented (56 per cent), and their main travel destination was Europe. France was the most popular destination among the European countries, followed by the United Kingdom and Germany. Approximately 56 per cent of business-class customers flew for business reasons; however, a small percentage of customers also flew for leisure, especially those who enjoyed flying in luxury and wanted to maintain their social status and those who wanted to ensure a comfortable flight for their elderly parents. Frequent-flyer benefits with priority access and lounge access were also important for business travellers. Furthermore, emotional drivers contributed more than rational drivers to the choice of Air France (60 per cent). For company executives who had a corporate relationship with Air France, "connection and transit time" was a priority over the fares.

 

BUSINESS CLASS ON AIR FRANCE INDIA

 

 

Air France, known for its comfort and luxury travel, provided exclusive spaces for both rest and entertainment in its business-class cabins. Each seat could transform into a spacious bed up to 2 metres (6.5 feet) in length, one of the longest in the market, and could take on the shape of the body to provide quality sleep. Each business-class passenger was provided a hypoallergenic feather pillow, a pure wool blanket, and a "comfort and well-being" kit that included a moisturizer from Clarins (a renowned skin care company). Each meal consisted of a tasty appetizer, a seasonal salad, a selection of cheese, and a dessert trio. On flights longer than 10.5 hours, business-class passengers had access to two reserved bar areas equipped with buffets to enjoy refreshments and meals, relax, and chat with other passengers without disturbing the peace and calm of the cabin. For those who preferred to work during the flight, business class offered a power outlet to plug in a laptop or other electronic devices, a reading lamp that could be oriented so as not to bother one's neighbours, noise-cancelling headphones, a personal telephone to make calls via satellite, and express light meals after takeoff. In summer 2016 (from March 2016 to September 2016), Air France (excluding KLM) had a combined capacity of 41,287 business-class seats, with availability of 12,088 business-class seats on flights from Delhi to Europe, 16,979 business-class seats on flights from Mumbai to Europe, and 12,220 business-class seats on flights from Bangalore to Europe.

 

THE CHALLENGE

 

 

Air France India had only a 79 per cent passenger load factor in the business-class segment in 2015 (see Exhibit 4), which posed a challenge for management. The main agenda of the national executive meeting was to identify prospective new customers for its business-class segment and determine how to bring them onboard Air France. After intense discussions, brainstorming sessions, the exchange of some harsh words, one-to-one talks, and a whole lot more, team Air France India zeroed in on the following key challenges the company was facing: capacity constraints/seat accessibility, seasonal products (first class and capacity increases in winters only), the lack of flat beds in business class, Indian travellers' negative perceptions of Paris-Charles de Gaulle Airport, lack of retention of customers, overdependence on travel agents (which accounted for 90 per cent of business), limited promotional resources compared with the rest of the industry, and the need to connect with Indian customers without diluting either the essence of French hospitality in Air France India services or the company's profitability. Air France management knew that India was a major market for the airline. There was no doubt about the growing affluence and passenger traffic in the Indian aviation industry. Essentially, India was an LCC market, and one of the company's key challenges was determining how to increase profitability through the acquisition of more business-class travellers. 

 

ROUTE AHEAD FOR AIR FRANCE INDIA

 

 

In discussions with the team, Nayar said, "Air France has the right product, our brand is one of the premium brands of the airline industry, and still we have not been able to increase our load factor in the business-class segment, which has been stagnant for the last two years." This observation resulted in a fierce argument between Nayar and the team members. Rajesh Menon, regional sales manager (North India) screamed that Air France was offering its products at a much higher price than other Indian and international carriers. As a result, it was difficult to convince prospective clients to travel by Air France India. Others elaborated that the company had low penetration in the market due to low visibility in the Indian air traveller market and very low presence on social media. Also highlighted was the company's high dependence on corporate clients, especially technology companies, which constituted approximately 40 per cent of its clientele. To calm down the team, Nayar replied:

 

The business class segment is priced quite rigidly. On an average, our business-class fares are 10- 12 per cent less than British Airways, 5-7 per cent more than Lufthansa Airline, 20-23 per cent more than Swiss International Airlines, and 30-32 per cent more than Jet Airways.17 Last year, we offered a discount to travellers in the business-class segment, but many made bookings even without utilizing the discount code. So, let's think along these lines and come up with some concrete solutions.

 

After lunch, the session started with one objective: What was the route ahead? Shantanu, head of Sales, emphasized his position:

 

A high dependency on channel partners, like travel agents, is not good for the company in the long run, as it will reduce the direct interaction between our customers and the company regarding their purchase decisions. This might result in giving more bargaining powers to channel partners. So, the challenge is whether we should directly approach the right customers in the high-yield business-class segment or search for partnership options with companies that have a similar target group of customers.

 

The group settled down and began to discuss the available options. Nayar asked the team to identify the specific challenges and benefits of pursuing each of these options while keeping in mind that they needed to target only people who represented the A1 and A2 classes of the Indian socio-economic classification system.18

 

All managers agreed that if the company directly approached the business-class travellers, it could focus on medical tourism in India or the budding class of young entrepreneurs.

 

In India, medical value travel19 was on the rise. India was expecting 3.2 million medical tourists in 2015-16,20 the majority of which were from the Middle East and African countries. By 2020, the medical tourism market in India was expected to reach $8 billion. Another target group was the Indian community of doctors, especially renowned doctors living and practising in metropolitan cities. They travelled abroad many times a year to complete medical courses; learn new skills; attend conferences and seminars for learning, networking, and liaising with their European and U.S. counterparts; and enjoy holidays with family. 

 

India also had an emerging class of budding entrepreneurs, who were owners of new businesses and new start-ups, especially foreign-educated children of rich business people. These people had a lot of new ideas that they wanted to act on. They were young, full of energy, and had big aspirations. They were looking to Europe and the United States as markets for their products and dreams. Owners of small and medium-sized businesses were similar to these budding entrepreneurs in several key ways. These Indian business travellers were judicious flyers. They chose an economy class for short and domestic trips, but opted to travel by business class when going abroad.21 Another challenge facing the Air France team was determining how to approach these target groups.

 

Taking the group in another direction, one senior executive said that Delta Airlines had entered into a partnership with Empire State Development's Division of Tourism in September 2015. Both used a joint logo and Delta Air Lines displayed its own New York partners, network, and presence alongside New York's upstate tourism initiatives.22 Until March 2016, Air France India did not have any such partnership with a similar type of brand that had similar target groups. There were many premium brands whose customers were frequent flyers on airlines for their business, family, or leisure trips. Developing a partnership with such brands, whereby they provided their company's platform to promote the products of another partner, could be a win-win situation for both companies. However, in the past, when Air France had approached several luxury brands, many of these brands had not offered the airline an equal platform, but instead had shown a more dominant position.

 

Many group members insisted that instead of adopting a singular approach, they could utilize both these options, according to market conditions and available resources. However, a senior manager cautioned that although this approach might lead to an optimal utilization of resources, it could lead to additional challenges, including an increase in the dependency on partner companies.

 

It was 7:30 p.m. Still thinking about the options, Nayar explained the limited financing for promotions and related activities to acquire new customers and retain old customers. The company had an annual budget of only $200,000 for its pan-India operations to promote all its travel classes. Therefore, he asked everybody to keep this constraint in mind while zeroing in on an option. Nayar was apprehensive about what the coming days would bring for Air France. How would the airline be able to increase its market share and its load factor in the business-class segment, as per the expectations of the company's management? Which customer groups should the company target? What approach should be adopted to target those groups? Nayar was intent on finding a definitive answer to these questions. 

 

Questions

 

1.What challenges does Nayar face, in terms of customer behavior in the emerging market such as India, compared with, in developed countries?

 

2.What challenges does Nayar face in the business class segment?

 

3.What options are available to Nayar and his team to increase the passenger load factor in Air France India's business-class segment?

 

4.What marketing strategy should Air France pursue to increase the load factor in the business-class segment?