Pricing Strategy of Alitalia Airline Essay

Price is very important to the seller of any good or service who wants to make a profit. This is due to the reason that most consumers first look at the price, before considering whether or not to buy a good or service. The sellers have to be very careful when setting price, so that the good or service does not appear to be very expensive, since this will discourage the potential clients from purchasing them (Schade and Schlag 2002: 43-52), (McGrath 2000: 37-43). On the other hand, if the good or service appears to be too cheap, the clients will be suspicious of it. There are many strategies that are used by sellers in pricing their goods or services. These include loss leader, price discrimination, cost plus, penetration, limit, predatory, premium, creaming, marginal cost, target pricing among others (Yates 2003: 22-29), (Nagle and Holden 2002: 26-37). This paper will analyse Alitalia’s problems regarding pricing, among other factors. Introduction Alitalia is an Italian airline that began operation in 1947, and transports cargo and passengers in several destinations throughout the world. This airline serves twenty five Italian airports, forty five airports in North Africa, Europe and Middle East. According to Iatrou and Oretti (2007; 23-28) and Hanlon (2007: 26-28), it is one of the members of SkyTeam, an airline alliance that includes such major airlines as AeroMexico, Aeroflot, China Southern, Air France and others. Last year, the airline transported over 24 million passengers which represented an increase of 1. 5% from the previous year. Nature of Alitalia’s problems Alitalia has experienced financial difficulties over the years, which are mostly attributed to problems with crew members and pilots, political interference by the government and labour difficulties. There have been many allegations of mismanagement and misappropriation of cash. Strikes by workers on several occasions have led to flight cancellations which further discourage customers from using the airline. According to Doganis 2006 (34-39), the government uses the airline to reward its cronies, further fostering its mismanagement. In terms of pricing, Alitalia is perceived by many passengers to charge very high prices which are not reflected by the service it offers. The airline’s customer service, among other departments is also not very effective, and many passengers have complained that the services offered are below standard. This makes customers move to other airlines whose prices reflect the services offered. According to Morrell (2007: 56-67), another problem that the airline faces is bureaucracy, and this causes delay in making crucial decisions. Bureaucracy also leads to inefficiency, since there is duplication of efforts (Wilson and Gilligan 2005: 22-29). Finally, the airline also lacks a clear leadership structure since most CEOs are changed very frequently, which hampers continuity. These factors have combined to discourage potential clients from using this airline. The end result is that the airline has suffered losses for very many years. In fact, since Alitalia began operations in 1947, it only made profit in one year, 1998 (Jarach 2005: 44-46). The net losses that Alitalia has experienced over the last decade amount to 3. 7 billion Euro. Government and private sector attempts to help this airline has bore no fruits yet. The airline has such major financial difficulties that stock exchange regulators in Italy requires it to file its debts, each month in order to monitor them. In 2006, Keegan and Schlegelmilch (2001: 55-61) add that, EU forbade the Italian government from injecting further capital, leading to its sale. Alitalia had a plan of filing for bankruptcy thus protecting itself from creditors. The second part was splitting the airline into the profitable and non profitable part and subsequently liquidating the latter. Comparison between FIAT’s and Alitalia’s problems and strategies. FIAT and Alitalia both experienced similar problems, not only in pricing but in mismanagement. According to Laux 1999 (33-38), FIAT began operations in 1899 and dealt with construction and agricultural equipment, commercial vehicles, aviation, natural gas and power distribution among other operations. It was however not doing well financially, with losses accumulating gradually each year. In 2002, the financial problems became clear after it was announced that the company had losses amounting to $1. 2 billion. General motors was a minor shareholder in FIAT, but did not see it fit to further invest in this company in order to help it overcome these financial difficulties. According to Simonis and Garwood (2004: 44-46), FIAT’s financial difficulties were reduced with the entry of Sergio Marchionne as the CEO. He made radical changes that streamlined operations in the company an improved efficiency. He also integrated an innovation facility specialising in innovating transmissions and engines, which was known as Powertrain technologies. The CEO also ensured that the joint venture with General Motors was terminated since he perceived it to hinder the development of FIAT. He also strengthened the governance structure and introduced non executive and independent directors. Alitalia, as discussed above can use FIAT’s solutions; the revolutionary strategy, not only in pricing but in overhauling the entire organisational structure. Other strategies available. Alitalia has very limited choice of strategies, since its problems go beyond pricing (Baker 2002: 17-19). Any other strategies used, that do not include the revolutionary strategy that overhauls the whole organisation, are not likely to increase the company’s profitability. This is due to the reason that the major problem for the airline lies in the organisational structure and mismanagement. Revolutionary pricing strategy. I would highly recommend a revolutionary strategy, not only in pricing, but the overall organisational structure, in solving Alitalia’s problems. This is due to the reason that most of the strategies that have been previously used have not been successful. In choosing a pricing strategy, I would recommend the penetration pricing strategy, which uses low prices to establish a grip on the market. The airline would then break loyalty that customers have on other airlines, and attract them. This should however be done after re-branding the airline, so that customers may perceive it to have changed for the better. In my opinion, pricing is not the major factor that caused Alitalia’s problems; Government interference did, as seen above. The government of Italy kept on pumping capital to the airline until the EU forbade it. It does not make sense to keep on pumping money into an organisation that is inefficient, since the money will just be wasted. Alitalia needs a revolutionary leader such as FIAT’s CEO, Sergio Marchionne who made changes across the organisational structure of FIAT. He also cut the company free from the joint venture with general Motors in order to create room for FIAT to grow. The CEO of Alitalia should do likewise, and free the airline from interference by the government so that there is room for the airline to grow and develop. He or she should overhaul the current organisational structure since that is where the problem is. He or she should then hire open minded, focused, competent and independent managers who will guide the airline towards prosperity (Pollack 2007: 44-48), (Rhonda 2003: 66-75). Other strategies. Organisational changes cannot take place under the current circumstances since the airline has already lost goodwill and reputation from its clients. The airline should be re-branded and a new vision which reflects the current goals and objectives should be set by the management (Buss 2006: 12-14), (Steward 1999: 44-49). The airline should also take advantage of the airline alliance that it is part of. It should utilise the goodwill of the other bigger airlines such as AeroMexico and use code sharing as a means of marketing its flights. It can also reduce several costs due to sharing resources with the other member airlines. Such resources include spare parts, personnel, administration buildings and others (Lu 2003: 55-59). This will reduce the amount of expenditure that it incurs, which is crucial in attaining profits. Conclusion and recommendation. FIAT and Alitalia both faced similar problems that went beyond pricing. In my opinion, pricing is not the major contributor for the decline of Alitalia. Government interference, mismanagement, bureaucracy and poor service, in my opinion are the main contributors to the airline’s downfall. The airline needs to adopt a revolutionary strategy in the entire organisation, like FIAT did. It also needs to free itself from government interference and re-brand in order to market itself as a new product. After doing this, I would recommend penetration pricing strategy as a means of attracting customers from the other airlines. The airline