Strategic segmentation of China's air passenger market: a customer centric focus to airline strategy

The air travel market in China is booming, buoyed by the rise of the domestic middle class. Since 2010, domestic and international travel volume have grown ~13% and ~17% per year, respectively. More and more, individuals are choosing to fly, be it the far-flung international getaway or the in-country jaunt.    

With the rise in consumer demand, Chinese airlines—both the large SOEs as well as start-up privates—should be well positioned to capture profitable and fast sales growth. Yet, profitability among Chinese carriers has by and large been elusive. Chinese airlines, despite experiencing nearly ~15% annual passenger growth rates, have largely underperformed relative to their global counterparts.  

So, what levers can airlines pull to grow revenue and increase profits? We recently focused on one critical, yet oft-underutilized, lever -- “know your customer.”  (Click here for the full article in mandarin in CACS.)

Strategic Customer Segmentation

The adage is nothing new. Carrie, the young, affluent, ambitious executive has different needs than David, the thrifty, no-frills retiree. Yet from our experience, while most Chinese airlines do use value-based determinants to segment passengers –Business Class versus Economy, Elite versus non-FFP, etc.—many stop there. Such value-based segmentation is important, but it can only get you so far.

A better segmentation of the passenger base, accounting for not only behavioral but also demographic and psychographic attributes, provides a more holistic view of the customer. This, in turn, provides opportunities to improve the passenger experience, differentiate the airline’s brand, and grow revenue.

We recently conducted quantitative surveys to better understand a specific segment of Chinese passengers, the early adopters of technology. In this instance, we isolated respondents to fit two criteria: must live in a Tier 1 or 2 city, and must have at least one travel app on their mobile phone. By isolating big-city tech users, these passengers could be considered early adopters of future norms.

Findings reveal distinct segments of passengers

Our survey analysis of Chinese passengers in Tier 1 & 2 cities reveals four differentiated customer segments:

1. Sophisticated Elites: Demand frictionless experience, are willing to pay for it (or at least their companies are)
2. Bargain Hunters: Engage in extensive research, are motivated by perceived value
3. Thrifty Seniors: Travel infrequently, are price-sensitive and only willing to pay for the basics
4. Tech-savvy Youth: Travel mainly for leisure, are addicted to technology

Each segment is distinctive based on its demographics, psychographic characteristics, and behavioral profile:

How can market participants deploy segmentation insights?  

Strategic segmentation analysis provides ample opportunity to better serve customers. For airlines, the first step is to understand how the revenue and customer base is split among each segment. Which segments are over- and under-represented? Which are most profitable? Which are most satisfied? And so on.

Once these insights are developed, they can be deployed across a number of areas:

1. Marketing & Communication:  What are customers’ trip purposes? Customer insights regarding trip purpose can inform key marketing activities for each identified customer segment such as how an airline markets to each segment; for example, Thrifty Seniors are more likely to fly for family visits while Tech-Savvy Youths are taking more adventure holidays
2. Product features:  Which products are valued — and which are missing from the airline portfolio that, if added, would improve the customer experience? Thrifty Seniors and Bargain Hunters will seek a “no-frills”, lower cost experience, while Executive Elites and Tech-Savvy Youths will more highly value functionality such as on-board WiFi

3. Mobile Technology:  Which Web and App features do customers most value? Our research indicates all segment demand an airline to get the “basics” of mobile right before adding bells and whistles. Beyond that, airlines must understand which features appeal to each segment. Not surprising Tech-Savvy Youths go furthest on this dimension by seeking enhanced engagement

4. Network development:  Based on customer profiles, what cities make the most sense for network expansion? Matching customer profiles to city genpop will help airlines discern where their network is over/under penetrated; City Tiers 3+ will have, on average, more thrifty customers than the Tier 1 & 2 customers segmented in this analysis

5. Credit cards/ Mobile Payment:  Are there opportunities to improve penetration of co-branded credit cards or other payment forms? If so, with which segments? Opportunities likely exist to improve usage of co-branded credit cards particularly among Sophisticated Elites and Tech-Savvy Youths

6. Loyalty / FFP:  How loyal are customers in each segment? What adjustments can be made to improve loyalty? Sophisticated Elites are highly likely to over-index in top tiers of an airline’s Frequent Flyer Program. Mapping customer segments to FFP tiers will help explain their needs as well as their value to the airline

7. Ancillary revenue:  How can current and future ancillary products be adapted to appeal to the specific requirements of each segment? Product upsells could be tailored to segments and could resonate even among value-oriented segments (e.g., Bargain Hunters more highly value duty free promotions)

While much of these insights have been geared towards airlines, traveler segmentation analysis plays a similarly critical role for all travel-related companies; hotels, travel agencies, rail, etc. Strategic segmentation analysis is fundamental in understanding the characteristics and needs of a business which should form the basis for development of successful commercial strategies and initiatives.

Michel Brekelmans is a Partner at L.E.K. Consulting and Managing Director and co-head of L.E.K.’s China practice. He has 20 years of experience in strategy consulting and has been based in Shanghai since 2006. L.E.K is a global consulting firm that supports business leaders in evaluating investments and developing strategies and organizational capabilities to deliver significant impact on the performance of their business.