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Are Airlines on the Right Track?

By Mark Martin
May 2, 2011

In recent years there has been an influx of airlines who have become involved in Formula One. The most prominent of these have been Virgin, Kingfisher and Air Asia.

In a period blighted by economic hardship and unemployment, are the airlines wasting their money as some critics have suggested or is it a shrewd move aimed at generating additional custom?

The negative viewpoint
On the 17th February 2009, Virgin Atlantic announced that it was looking to make 600 redundancies. This was decided upon in response to a decline in the company profits which was sparked by consumers struggling financially on the back of the credit crunch. Virgin Atlantic Chief Executive Steve Ridgway commented: “No airline is immune from the recession and we continue to reshape our business to ensure we're in the best position for the longer term.”

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Just over one month later on the eve of a new Formula One season, Sir Richard Branson announced that Virgin would sponsor the Brawn GP team throughout 2009 in a multi-million pound deal. The 600 employees whose jobs were on the line were rightly outraged.

Twelve months later, Virgin’s F1 sponsorship programme had expanded exponentially as they now owned a significant stake in a debutant Formula One team which Ferrari President Luca Di Montezemolo claimed had little chance of success.

In contrast, the Toyota car company pulled the plug on support for its own team at the end of 2008 claiming that it was no longer viable to plough money into the sport at a time when job cuts were being made. It surely won’t have escaped the attention of the 600 employees who were made redundant by Virgin that the F1 sponsorship budget could easily have secured their jobs for another twelve months.

The positive viewpoint
Formula One has a global television viewing audience of almost 600 million people, a figure which is only beaten by the World Cup and the Olympics which only occur every four years. It is estimated that Red Bull spent $240 million on Formula One participation in 2010, which was enough for them to win the world championship with their own Red Bull Racing team and finish a respectable ninth with the junior team called Toro Rosso.

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Independent newspaper journalist Christian Sylt and Caroline Reid publish a book each year called Formula Money. The book contains facts, figures and analysis into all the major business transaction revolving around Formula One. In 2010, Formula Money calculated that the combined brand exposure that Red Bull inherited in television air time by having its logos emblazed across both its teams’ cars would be worth $358.5 million if it were to be bought via traditional television advertisement techniques such as commercials.

This means that Red Bull actually bought television time for $118 million cheaper than it was worth. It should also be noted that commercial tend to be watched by a much smaller proportion of the population that statistics suggest, as people often do not remain seated in front of the television during advertising breaks.

Involvement in sports such as Formula One also engenders fan affiliation, something which marketing academics such as Pedro Dionisio believe are of incalculable worth to a company such as Red Bull which is keen to differentiate itself in an overcrowded market place. Indeed, it is the opinion of most people involved in marketing that the key benefits of sponsorship are immeasurable. This is obviously contended by people working in the finance industry who like to see an obvious return on investment.

Virgin Case Study
Although Formula One sponsorship is working for Red Bull, can the same be said for Virgin whose team has never even scored a championship point?

The Virgin Racing team entered the sport with the intention of sticking to a £40 million annual budget. This ambition has been aided by the team becoming the first to design a car using only CAD (Computer Aided Design) techniques and completely avoiding expensive wind tunnels. This means that the team don’t actually have to win races, as the amount of television time they require to recover costs is much less than what is required by Red Bull. This is a less risky strategy than what has been employed by its rivals at Kingfisher, who are easily spending double that amount in an attempt to win the races that would help recover their expenditure- a pursuit which may ultimately prove fruitless.

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On top of this strategy being financially beneficial, it has also helped the company support its brand personality of being the perennial underdog fighting against the odds. Virgin have pointed this out by setting up a twitter account for its racing team, allowing it to interact with racing fans around the world while at the same time building up what is referred to as “brand affiliation”, where people become enamoured to the company. This ultimately helps draw customers as the company is making itself stand out from its competitors, placing itself as a consumer champion who is fighting on behalf of normal people against large and dominant corporations whether it is Ferrari or British Airways.

This type of strategy would be unlikely to work for a company such as Emirates who differentiate themselves from their competitors by emphasising their quality service, which likely explains why the company sponsored the McLaren team in 2006, an entrant who are known to be one of the most technologically advanced in the business. This perfectly gelled with Emirates brand personality, but the amount of space on the car which the company could afford with its budget rendered the benefits largely void due to the limited television air time they received. The deal was not continued into the 2007 season.

Is F1 sponsorship the right thing to do?
It is easy to brand Virgin’s F1 sponsorship exploits as a pointless waste of money, with it possible that the sponsorship budget could have been used to avoid painful redundancies. However, this is an unfair assessment and it should not be forgotten that the whole purpose of marketing is to generate a larger profit through additional custom. By building up its brand personality, garnering fan affiliation and picking up television airtime for £40 million, it is likely that Virgin is actually making a profit from its motor racing ventures.

However, as proven by Emirates, sponsoring a Formula One team does not always prove fruitful. Emirates brand personality emphasising quality ultimately required them to pursue sponsorship with one of the sports leading teams, and in order to make any sort of return on this investment they would have had to have had a large presence on the exterior of the car, something which their budget ultimately didn’t allow.

By pushing its underdog qualities, Virgin is in a unique position in that it can get away with spending a small amount of money on its own team and not damage its brand image which will actually benefit from its valiant failures. The same could not be said for Kingfisher, whose quality image would be tainted if it were to pursue a similar strategy.

In summary, while Virgin’s F1 involvement is likely generating them additional business and profits, the true worth of the involvement of other airlines such as Kingfisher is far less obvious. As with anything in marketing, what works for one company may not necessarily work for another.

Written by
Mark Martin

Mark Martin works in the marketing department of the UK based price comparison company moneysupermarket.com.

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