Qantas, Virgin Australia in misguided airline lounge war?

By Max Winchester, October 21 2013

As Qantas and Virgin Australia continue to upgrade their airport lounges as part of their tussle for top-tier travellers, former Ansett marketer Maxwell Winchester argues that the airlines risk losing focus on 'ordinary' travellers who make up the bulk of their business.

OPINION | The airline industry has long been stuck in the mindset of Pareto’s Law: that 80% of your profit comes from 20% of your customers. Qantas and Virgin are no different, going head to head to refurbish their lounges in order to attract lucrative corporate accounts.

Ansett followed a similar approach during my time as a marketer at the airline: Focus on the high value customer, give them lounge access, priority baggage and a range of other privileges that will make them feel “valued”.

But the evidence on consumer and business purchase patterns suggests focusing on high value corporate clients may be a little short sighted, and narrow minded.

High value but low loyalty

Firstly, in most cases, high value customers not in corporate contracts (or in what is described as a repertoire market) are the least likely to be loyal to an airline.

Airline marketers may believe they offer select customers exclusive benefits, but thanks to the natural competition that occurs in a marketplace; the offering across competitors often ends up being indistinguishable to the customer.

In Australia, it is very likely such “high value” customers at an aggregate level switch across the competing airlines such as Qantas, Virgin, Jetstar and Tiger in line with their market share.

Don’t believe me? Just ask anyone who flies regularly how many frequent flyer cards they hold.

Statistically, a customer who buys from a category most frequently is most likely to share their purchases across a small group of brands (because there are more purchase occasions during which switching may happen).

This is known as the Duplication of Purchase (DoP) Law.

In airlines, because there is a natural limitation to the distribution it may even be more likely that customers spread their purchases across more brands, but this is to be empirically confirmed.

Frequent flyers can also be frequent 'switchers'

In the case of corporate contracts, the travellers are simply tied into contracts for a period of time, and at the end of the contract it is very likely the switching occurs just as would be predicted by the DoP Law.

That is, the switching of corporate contracts would be most likely to be distributed in line with each airline’s market share in the corporate market when they are being renewed.

While it is a good idea to give customers a decent level of service, the second issue is that many companies do this for “high value” customers, but believe there is no point doing it for low yield customers.

Yet, as demonstrated by Professor Byron Sharp in his book How Brands Grow, it is precisely such infrequent users of the brand that offer the best likelihood of brand growth.

We know that consumers spread their purchases across a repertoire of brands. The question is, do airline marketers know what their “typical” customer (as in on the 50th percentile on a distribution of purchase frequency) looks like?

It is likely that a “typical” customer flies with them once a year, not once per week. Such customers have recently seen access to lounges made more difficult by both Qantas and Virgin.

Raising the lounge entry bar

Qantas has over recent years significantly increased the cost of Qantas Club membership to their less regular flyers and Virgin has recently ceased its partnership with Priority Pass.

Both of these factors have probably reduced the attractiveness of both airlines to their “typical” customers, and also to high value customers of their competitors who occasionally travel with them as part of the customer’s repertoire of airlines.

A final issue is specific to airlines. Not impressing lower yield customers may seem irrelevant. But particularly in the airline industry they are crucial. Such customers often buy lower yield fares and have more flexibility in their travelling times.

It is precisely this that allows an airline to have a more flexible timetable that enables the “high value” customers to fly at times that are convenient to them.

Qantas and Virgin need to take a look at what they are doing.

Spending millions of dollars on lounges that will benefit a very small proportion of their customer base while reducing the attractiveness of their airline to “typical” customers may not be the best way forward. But constructing flash lounges that most Australians will never see does get plenty of PR.

To Alan Joyce and John Borghetti, “typical” customers may seem irrelevant. Ignore them at your own risk.

This article originally appeared on The Conversation, an independent source of news and views from the academic and research community.

Max Winchester

Maxwell Winchester is a senior lecturer in marketing at Victoria University, and spent two years as market research manager at Ansett Australia.

12 Jun 2013

Total posts 744

Dear Max Winchester:

Sssshhhhhhh! Don't ruin it for everybody! I quite like paying $89 for an airfare and then getting thirty bucks' worth of food and booze in the lounge beforehand.

27 Jun 2012

Total posts 2

Couldn't agree with you more Hugo. Don't give the game away Max.... I can buy a cheap fare for the hols but enjoy myself before hand in the First Class Lounge.

I was lucky enough to experience the new super secret Virgin Club at Sydney airport. The experience was completely sensational. Private security entrance. Someone accompanies you to the amazing lounge and then to the Gate. Absolutely amazingly over the top experience. No one was there while we were there (Chairman's is kind of about who you see in there right?) so that was the only downside for a lowly Platinum like me.

Qantas - Qantas Frequent Flyer

02 Jul 2011

Total posts 1380

Yes Max,

Let's scrap the lounges. I mean those people that pay $12,000 for their SYD-LHR return airfare, rather than the $1,500 special don't deserve anything extra, they should sit out on the uncomfortable metal chairs with the great unwashed.

(insert sarcasm)

Also the argument about market share is a bit bunk. Obvious that passenger numbers are a function of market share, but maybe its the things like lounges, onboard services, schedule etc that bring in the passengers in the first place

Qantas - Qantas Frequent Flyer

28 Sep 2012

Total posts 7

Keep the Qantas Club and Virgin Lounge exclusive for those who can afford it or save up enough FF credits to earn a seat at the long dining table. I think "lounge-envy" is still needed to attract the aspiration flyer to a higher status - and this can only be done by being loyal to the airline (or alliance). 

But airports should still provide a cheaper alternative where travellers can grab a meal, put their feet up or have a shower, at an affordable price. Hong Kong is a good example where this is possible.

I question the assumptions behind the application of DoP law. As the author himself said, "...but this is to be empirically confirmed".

The argument also does not factor in alliances and the impact that has.

Dear RealBabushka.  Thanks for your comments, but you've misrepresented what I said.  The DoP Law is well established (hence it is a scientific "Law" of marketing).  What is not established is how the distribution effect with airlines may lead to even less loyalty.  This could be a good PhD topic for someone one day!  Meanwhile, the DoP has been established across thousands of studies over 50 years.  We are no longer at the point where we need to fit it to any more markets, but rather try to find boundary conditions of this law.  Safest then to assume that DoP works in any repertoire market till we have been shown otherwise.

Hi Max,

If there is no empirical evidence to support the application of a theorem to a set of circumstances, how then can you assume that the theorem is true for that situation?

The DoP law may be correct but your argument for diminishing loyalty rest on the application of this law. However  you said it is not yet established how the distribution effect with airlines may lead to even less loyalty.

So how exactly is the science related to diminishing loyalty? 

At best its a poorly written argument. At worse it's throwing in a bit of science to provide a veneer of substantiation.

Or have I completely lost the plot?

19 Jan 2012

Total posts 427

I don't personally think you've lost the plot.

It seems that the article is substantially based on the Byron Sharp book cited. The "free" introductory pages on Amazon provide a very clear insight into the general thrust of the reasoning (and I personally find them interesting and worth a read).

I'm not sure Max provided the clearest summary: this perhaps shouldn't detract from consideration of Sharp's approach or findings for those with an interest in marketing.

That said, pending reading the original source, there would be much fun to be had with wider academic debate (extrapolation from pattern to process, analysis and relevance of macro processes, how process can be mastered to create new pattern, etc...).

The applicability of all of this, what's "fit for purpose", the vaidity in the airline industry would still need to be validated one way or another - so no, you haven't lost the plot!

And even if Max is right (pay attention to your infrequent travellers) I am still unsure why he thinks airlines are failing to do that already.

19 Jan 2012

Total posts 427

Thanks for the opinion piece, Max, although it’s taken a few reads through to grasp the thrust of your argument and I find myself at odds with a substantial part of your reasoning and therefore most of your article.

 “…The airline industry has long been stuck in the mindset of Pareto’s Law: that 80% of your profit comes from 20% of your customers. Qantas and Virgin are no different, going head to head to refurbish their lounges in order to attract lucrative corporate accounts…”

 Presumably airlines aren’t stuck in a mindset because of Pareto’s Law at all – they are focusing on high yield customers based on known data, which they collect, collate and analyse! They have access to frequent flyer records and can augment the dataset with customer survey questionnaires and focus groups. This would enable both modeling of actual behaviours and customer perceptions, not to mention estimation of degree of loyalty across all demographics and customer profiling cohorts.

 Much as I find QF to be derelict in its ability for customer connection on a management level, I would be amazed if the airline is operated in absentia of any data-mining and analysis of the gigantic intelligence at their disposal..

 

“…But the evidence on consumer and business purchase patterns suggests focusing on high value corporate clients may be a little short sighted, and narrow minded…”

 

I don’t see any actual evidence in your article at all to support this statement.

 

“…Airline marketers may believe they offer select customers exclusive benefits, but thanks to the natural competition that occurs in a marketplace; the offering across competitors often ends up being indistinguishable to the customer…”

 

With respect, this is not a defensible position. You cannot claim (without evidence) select customers are unable to distinguish between the main airline offerings. – I suggest you look at any of the frequent flyer web sites to see that the offerings are subjected to intense scrutiny.

 

“…In Australia, it is very likely such “high value” customers at an aggregate level switch across the competing airlines such as Qantas, Virgin, Jetstar and Tiger in line with their market share...”

 

I find this to be another claim without any evidence of substance.  Indeed, as VA captures market share you are dealing with a dynamic environment  with churn favouring VA given an increase in market share, ironically aided and abetted by  opening the very lounges and launching corporate end product which you find fault with.

 

“…Don’t believe me? Just ask anyone who flies regularly how many frequent flyer cards they hold…”

 

Firstly, this statement does not provide any evidence at all for your previous claim (churn rate in line with market share). Secondly, the number of frequent flyer cards held doesn’t necessarily indicate a simple conclusion. For any number of reasons, including holding memberships of airlines you never even fly on (for beneficial earn/buy and burn rates, or easier status attainment, etc).

 

“…Statistically, a customer who buys from a category most frequently is most likely to share their purchases across a small group of brands (because there are more purchase occasions during which switching may happen). ..”

 

No. Not necessarily. And we’re talking very few brands in the case of the Australian domestic aviation market. Not surprisingly, you then state…

 

“…this is to be empirically confirmed…”

 

Extrapolation of a model on simplistic application of statistics without model validation doesn’t wash in any empirical context as you apparently admit. So your argument is unproven.

 

“…infrequent users of the brand that offer the best likelihood of brand growth…”

 

 

Well you’re already danced around between corporate contract customers, non contract corporate customers and…others? So your arguments about cost of QFC vour example probably don’t hold for the corporate account customers do they?

 

“…it is precisely such infrequent users of the brand that offer the best likelihood of brand growth…”

 

Why is it you think these folk aren’t catered for? Why would they give a damn about lounge access? They probably don’t even know the lounge exists?

 

Wouldn’t these people be primarily driven by PRICE?

 

Why do you think these folk haven’t been targeted by the MOST substantial effort from airlines in the last decade – the rise of the LCCs where the occasional traveller can ride a plane for cheaper than taxi fare to the airport and a broadened market can be captured? Have you missed those pesky JQ adverts, Friday frenzy sales, priority access to 787s…?

 

I think there are plenty of other targets for the airlines if they want to promote their business across the range of travellers, occasional and high repeat.

 In my humble opinion you are way off the mark, Max, but thanks for the read.

 I can only hope (as some who enjoys the perks of various loyalty programs)  that Joyce and Borghetti are employing far more eloquent and data-driven smarts in their marketing than the thought processes you have kindly shared with AusBT.

Thanks for your comments Platy.  It is clear you did not like what I said in my "opinion" piece because you have gone out of your way to misinterpret and ignore any ounce of evidence I provided. Here are a few pointers:

  1. Most industries I have come across are stuck in the Pareto mindset of 80% of revenue comes from 20% of customers, even though this has been shown to be incorrect.  Look up Gerald Goodhardt's work on this topic and you will see it's more like a 20:50:30 law. 
  2. Looking at your own customer data limits you to an understanding of your own customers, but ignores the rest of the market.  Industry data is what is needed to draw real conclusions about any market.  I would have thought this is obvious and is a clear limitation of data mining.  It's one of the reasons data miners can't get their heads around the well established DoP Law. 
  3. There is plenty of empirical evidence that customers see little difference across competing brands and that competitive advantage is largely a figment of senior management's imagination in any company.  Look at your own company's brand image tracking.  Most customers say pretty much the same responses about brands they use.
  4. "Nope. Not necessarily".  Unless your customer base is in a subscription market, customers share customers across a repertoire of brands.  This has been well established over the last 50 years.  See any work by Andrew Ehrenberg, Frank Bass amongst many.  Type "repertoire", "polygamous loyalty", "NBD Dirichlet" or "Duplication of Purchase Law" into Google scholar to see the plethora of empirical evidence.  
  5. Interestingly you have chosen to ignore the fact I referred to Prof Byron Sharp's book "How Brands Grow" which offers a simple explanation of many of the empirically established consumer purchase patterns that I refer to.  This book is well worth a read and is backed by years of empirical studies across many industries in many countries. 
  6. Do you think it's only low value customers that use LCCs?  Think again.  Many people pay good money to fly on Ryan Air or other LCCs if they come up to the gate at the last minute. 

Having worked with the airline industry across a number of airlines I am sure you are right that both Qantas or Virgin do lots of eloquent data-driven smarts with their databases.  But I'm sure they also ignore the well established laws of consumer behaviour that I have referred to in my piece.  

19 Jan 2012

Total posts 427

Max, the problem is you didn't provide the "evidence" in your article and now have had to resort to introduced citations (perhaps you should have included this in the first place) and now insultingly accusing me of wantonly misinterpreting you.

Good luck with your consultancy business and university work.

 

KG
KG

Qantas - Qantas Frequent Flyer

10 May 2011

Total posts 736

Sorry to insult any marketeers out there, but articles / opinions like the above from Max makes me feel they really don't know what they are talking about. Frequent switchers? Typical customers? As a flyer who pays his airfare himself I make sure to be loyal and to get the extra perks as a high status FF (e.g. I like to maintain status in the program to benefit from lounges and other perks), indeed, cheap airfare but proper lounges with food and beverages. I am on a holiday now in The States and rather pay 50 or even a 100USD more for a JFK-LAX flight on AA and get the perks as lounge access and priority boarding and seats, rather than to fly DL for instance. Totally the opposite of what mr. Max says. no wonder Ansett went bust....

19 Jan 2012

Total posts 427

Max is right, in my opinion, to promote the concept of product and service innovation and to challenge orthodoxy in thinking and approach, especialyl if this leads to market differentiation whioch proves effective in attracting and retaining customers.

That said, effective marketing is generally underwritten by empirical data collection and analysis - customer surveys to validate new ideas and the success of new/ongoing product/service; data analysis to contruct and validate mathematical/statistical models enabling assessment of marketing strategies and analyses of multiple factors, which may be covariant.

 

...one further thought...surely the incidental travellers are also well targeted through the FF schemes, especially by QF...

Many thanks for your comment here Platy.  Unlike many of the other posters above, you have enough critical thinking ability to be willing to question what marketers traditionally do.   The one thing I would ask you to challenge a little further is whether marketing knowledge is better developed by customer surveys and statistical modelling.  Simple observation of aggregate behaviour has established the laws I have referred to in the piece (put "Duplication of Purchase Law" or "Double Jeopardy Effect/Law" into Google Scholar and you'll see what I mean. 

19 Jan 2012

Total posts 427

Max, yes I welcome debate and innovation (if you can show us the respect to omit the unnecessary accusations of misrepresentation to filibuster your arguments).

My concern is validation of the applicability of these "laws" in the current context.

It is my personal (unvalidated) observation that QF and VA run poorly contructed market research (based on surveys I have conducted). For example, they have no idea that despite being P1 with QF they lost maybe 30 business class sectors of my business to VA last year.

Sure use your "laws" as a means to stimulate debate and innovation if that is what it takes...!

Virgin Australia - Velocity Rewards

01 Mar 2012

Total posts 169

Hi Max,

Interesting piece. In the whole I agree with you.

A quick question for you. Really isn't the "Lounge War" just a part of the whole marketing mix? It seems more about capturing the higher end frequent flyers than capturing the average punters at this moment in time.

There seems to have to be two different approaches towards the promotion of an airline's product:

1. Those infrequent travellers who make up the lions share of travellers are important as they provide incremental earns albeit in lower yielding farecategories.

2. The high frequency and more often than not high yielding FF's

The former have different purchasing needs and habits to FF's, of which I suspect gaining status in the FF program is at the lower end of priorities, as you quite rightly point out. Mostly it is all about the basics of quality service commersurate with the price. It would be important to communicate that to the traveller. 

On the other hand more frequent travellers value easy of travel, connections and comfort, as they are travelling so much and will select their airline based on that. They are then linked more heavily with a FF program and due to the incremental perks attained and other perks desired, are more and more aligned with that program. That is until the airline's service levels decrease to such a level that their basic need for smooth comfortable travel is not met. I feel Qantas has skirted with that reality over the past while and are realising that.

Really, airlines face what appears to be a complex mix of customers but in the end the purchase decision is all based on the basic tenement of customer service and the value the customer is going to place on that. I feel these "Lounge Wars" are more about Virgin trying to steal a valuable part of the mix from Qantas than an outright focus on high end FF's.

Virgin is walking a tightrope trying to balance the newly converted FF's needs and those of the people who pay the bills for the airline, the infrequent passengers. I feel that over time their mix will not be as biased towards the FF and become more balanced. Their latest adverts focusing on the the crew and service seem to be moving in that direction. 

There will be many to argue I don't know what I'm talking about simply because it does not sit well with the crap peddled by the typical MBA marketing textbook.  I find it hard to believe you are really loyal to one airline.  If so, how do you manage to travel to different parts of the world?  It is almost impossible for me to do my travel on even one airline alliance, let alone one airline, and I'm sure many others are in the same boat.   Simply because you can't get everywhere with one alliance.  

Many thanks for your well educated final comment.  If your marketers manage the finances of the company you work for, I wish you luck. 

19 Jan 2012

Total posts 427

Max, please consider that perhaps taken in isolation the article has not entirely presented fully your case! This may be an artefact of the need to write a shortish piece and the medium herein and not reflect the true voracity of your position.

19 Jul 2012

Total posts 15

I absolutely agree with KG. The Platinum Frequent Flyers who travel because their companies pay for it probably have very little loyalty at all. Those of us who pay for it all out of our own pockets are the true litmus test of airline loyalty.(As a side issue, no that isn't why Ansett went broke, perhaps had something to with NZ buying all those shares... sounds a little familiar doesn't it).

Virgin Australia - Velocity Rewards

25 Feb 2013

Total posts 10

Hi as a Platinum FF that has paid for most of her flights, I disagree.  I am quite loyal.  While I would consider switching airline for price it needs to be significant (eg flying to US on VA later in the year, but flying within US on UA as Virgin America or Delta is more than double the price (and there are four of us flying) for the flight from LA to Seattle than UA.)  However really rate my Platinum FF and it is not only the lounge it is all the other benefits I get, and as someone that flies a lot I really appreciate the extra attention I get.

27 Sep 2011

Total posts 34

"The Platinum Frequent Flyers who travel because their companies pay for it probably have very little loyalty at all."

Not true. I'm a platinum frequent flyer with Qantas thanks to work, and I definitely choose to fly Qantas (or if no Qantas flights, One World partner airlines) when I fly on my own dime, because I like to use the benefits I've earned - the lounges, the better seats, the possibilities of international upgrades. Why would I earn all those nice things and then fly with some other random airline where I missed out on them?

As to FFs like me holding a number of FF cards, as the article suggests, well yes, we do. Occasionally, I fly a route where Qantas doesn't operate. I have a Virgin FF card for those times. I have a Turkish Airlines FF card thanks to a status match. I have a Singapore Airlines FF card from a time before I was Qantas plat. But does that mean I spread my flying around? Not unless I have to. I'm chasing lifetime gold status with Qantas, I am not going to fly with anyone else if I can help it - and the idea that FFs are choosing to fly Tiger or Jetstar is laughable. People who fly all the time know the value of your flight actually taking off, usually on time, and the benefits like better seats and lounge access. We don't throw that away to fly an LCC.


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