Virgin Atlantic Airways

• Current Problem – no market segmentation

Despite its strong brand, Virgin Atlantic still attempts to be “everything to everyone,” offering high quality service at low prices. The Company likely spends time and money competing for customers who are ultimately unprofitable.  For example, the current offering of “economy class” seats can be viewed as expensive marketing devices – VAA hooks customers with low fares and full VAA experience, and hopes they upgrade to profitable classes (business or first) next time.   The implicit acquisition cost in this type of marketing is that VAA must reduce its own potential profits in order to attract these customers.  Unfortunately, because this effort is targeted at the general population, it most likely attracts price-sensitive customers who have little loyalty to Virgin whenever a lower cost alternative is available.  Thus diverting profits for “economy class subsidies” is ultimately not a successful investment.

• Better way to do business – proposed market segmentation and target market

To ensure that VAA properly allocates its resources to attracting only the sustainably profitable customers, the Company must analyze the market and identify the most promising segments. We propose segmenting the airline industry on three customer variables: distance of travel required (short/long), price vs. service preference (price/service), and entertainment preferences (conservative/liberal).  Table 1 presents the entire customer base broken down by our proposed variables.  

• Which segments are most attractive relative to profitability and VAA’s strengths?

1.   Price vs. Service: VAA should target service-sensitive customers and give up price-sensitive ones.  “Price sensitive” customers are price seekers who constantly look out for the lowest prices. We expect little loyalty from them. By contrast, “service sensitive” customers look for enjoyable benefits and are more willing to stick with the carriers that can provide the benefits.  In addition to being more loyal, these customers are also willing to pay a premium on an ongoing basis.  While other airline may be able to successfully compete as low cost carriers, this is an arena where margins are constantly threatened and VAA’s current strengths will provide little differentiation.  
2.     Demeanor: This variable speaks to whether customers prefer traditional things in life or enjoy more creative and unique experiences.  Neither type of customer is overtly more willing to spend to achieve their preference. However, VAA is uniquely suited to serve the latter. “Liberal" customers will truly appreciate both Branson’s personality as well as the way it pervades the company.  Moreover, these customers are underserved by the competition and will remain very loyal to Virgin.
3.     Distance:  Given the previous assumption that VAA should focus on service-sensitive customers, longer distance flights will allow the Company sufficient time to differentiate itself (in-flight massages are much more valuable on a 10-hour flight than a 2-hour one).  Furthermore customers seeking long-haul flights are less sensitive to the number of departure and arrival times offered.  This allows Virgin to offer only one or two flights a day, thus maximizing load factor.  

This market segmentation analysis indicates that the target customers for VAA’s services are individuals in the “Service” “Liberal”, and “Long-haul” segment.  They are willing to pay a premium for unique and entertaining long-haul flight service.

• How should VAA act to target and serve the preferred market segments?

Service Offering: VAA should match existing first-class service norms and add on only profitable services that are both valued by target customers and difficult for competitors to imitate. Motor-cycle rides to the airport are an excellent example of this type of service.  They are not wildly expensive while competitors such as British Airways cannot imitate it without damaging their traditional image.  Such service offerings also protect margins over time and increase customers’ loyalty and willingness to pay.  

Product Offering: VAA should discontinue offering economy-class seats.  This low-price offering may bring new customers to the airline; however, it is a misguided and expensive marketing tool because these new customers are likely to be neither loyal nor willing to pay a premium in the future. There is a concern that eliminating economy-class seat would hurt VAA’s bottomline. However, Table 2 suggests, even with fewer total seats per flight AND reduced load factor, the strategy brings in approximately 17% more revenue per route with no additional price increase.  Given that Virgin will be offering better and more differentiated services, we feel the Company will also be able to increase prices in the future.  As our recommendations require little extra cost to the airline, any additional revenue from increased seat prices will flow straight to the bottom line.

New Routes: VAA planed six new major metropolitan destinations. We think that adding new routes will not cannibalize load from existing routes, and are and a good fit with our proposed strategy.

Risks of the New Focused Strategy

The biggest risk is that VAA’s customer base is much less diversified. Also, leisure-seeking price-sensitive travelers might seek alternatives. True, the new strategy will be much narrower. Yet, VAA becomes narrower to better serve the customers who are loyal and profitable to it. There is no point to hold on to the money-losing customers.  A second risk is that VAA, by focusing on a small customer group, will be perpetually smaller (in terms of revenues) than competitors like British Airways.  However, we feel that any attempt to compete purely on scale will lead VAA to acquire unprofitable customers, lose any differentiation it already has, and ultimately fail.   Thirdly, given that the target segment is likely to contain many business people who have strict deadlines, VAA is more at risk should its problems of late departures/arrivals continue.  The Company has already begun to address the problem, but a quick solution will be all the more imperative as VAA tries to reposition itself as only service focused instead of price and service focused.  Finally, by offering more specialized services, fewer passengers may be interested in purchasing a ticket for any given route.  Even with fewer seats on the plane, this my decrease load factors.  However, as table 3 indicates, VAA can still be more profitable with no price adjustments and a load of 60% under the proposed seat configuration.

Figure 1: Proposed Market Segmentation and Preferred Segments

* We assume the spatial conversion between mid class and economy class is approximately 1.3:1. Additionally, we assume a conversion rate of approximately 2.5:1 between first class and economy class.

Table 3. Load Sensitivity for the LDN/JFK Route Under Proposed Configuration