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Airline Pricing, Demand Output Determination

Chapter 9
Airline Pricing, Demand Output Determination
Dr. Rohafiz binti Sabar
Logistics and Transport Department
School of Technology Management and Logistics
College of Business
email: [email protected]
Transport and Logistics Department
July 2009
Airline Pricing
Relationship between Airline Pricing Policy and
Corporate Objectives
Impact of Deregulation and Technology on Fares
Future Prospects
Airline Pricing & Corporate
An airline’s “primary aim must be to sell the
capacity it is prepared and able to offer at
prices which will generate sufficient demand
to generate an ‘adequate’ level of profit” –
(Doganis 2002)
What is “adequate” and who are airlines
seeking to please?
Airline Pricing & Corporate
Objectives - 2
State-owned airlines may have objective of maintaining service to
specific destinations, providing for inbound tourism and “breaking even”
Privatised airlines may have objective of producing an adequate rate of
return on shareholder value or specific rate of return on their current
In addition privatised airlines may have desire to produce an adequate
reserve fund to self-finance acquisition of new assets – as shown by
Singapore Airlines
Airline Pricing – route vs network
Whilst an airline may have a global corporate objective,
their pricing policies will vary by region and route,
depending on economic conditions, level of competition
and other external factors
e.g. British Airways may have an aggressive pricing policy on
certain routes due to new-entrant competition, but maintain the
status quo on routes with less fare competition
Airline Pricing – Factors to Consider
Whatever airline’s objective is, pricing will require an
understanding of the costs for operating the route and the
potential demand
For Break-even: Total Revenue = Total Costs
For Profit: Total Revenue > Total Costs
Influence of Operating Costs
Understand costs for operating given route for specific
aircraft type(s) – carefully define allocation method
For flights with multiple cabins a more detailed allocation
at cabin level may be useful
Improvement in facilities in long-haul First and Business
Classes – flat beds, on-demand food and high technology
entertainment and communications - and the introduction
of Premium Economy Class all incur higher costs
Controlling Demand
Passengers who are not prepared to pay the full economy
fare can be directed to lower fares (e.g. APEX/Standby etc)
on the basis of their ability to meet the booking conditions
Slippage of those who are willing and able to pay full
economy fares into promotional fares should be avoided
Promotional Fares
Duration Limited – Minimum / Maximum Stay
Departure Time Limited
Purchase Time Limited
Limits on Changes to Reservations
Routing Conditions
Age Restricted
Group Fares
Inclusive Tour Arrangements
Regulated Markets
Pre US deregulation there were generally only two main
fare types on a route: First and Economy Class
Today in regulated markets fares have to be agreed
between airlines and approved by relevant governments,
hence little fare competition, except possibly by charter
airlines, fifth/sixth freedom flights or connecting flights
UK- US Bilateral – still a Regulated
UK-US flights have higher fully flexible Business Class fares
than many Europe-US markets. It is sometimes cheaper for
UK passengers to route over Amsterdam or Frankfurt to
get to US
Airlines argue that corporate discount and promotional
fares are at a lower level in the UK
What will happen after 2018?
Impact of Deregulation on Fares
Ability to set own fares resulted in proliferation of fare
types – Business Fares introduced and a large range of
promotional fares
In Europe in 1985 the average yield from promotional
fares was 63% of the normal economy price, by 2000 it
had dropped to below 50% and the percentage of
travellers using promotional tickets had increased from
57% to 71% of the total (Doganis 2001)
Impact of Technology on Fares
Introduction of Computer Reservation Systems
enabled airlines to manage seat inventory to their
Sophisticated Revenue Management Systems connected
to booking information are very powerful in maximising
Revenue Management Systems help airlines to keep
track of bookings over time and provide a history from
which to develop forecasts
The Route Manager
Will monitor bookings and open or close fare classes to
match pattern of bookings
Needs to be aware of out of the ordinary events – e.g
cultural/sporting events or accidents to other transport
modes - which could lead to increase in demand
Response to Competitive Pricing
Airlines need to decide how to respond to competitors
offering lower fares on their routes
Investigate the reason for the low fares – is it an established
carrier which is trying to get cash quickly or a start-up airline
trying to make a name in the market?
How many seats are being made available at the lowest prices?
On basis of these answers airline managers can decide how to
respond, at what price and with what capacity
easyJet Fares - 1
Offer “Value for Money Fares”
Not necessarily the cheapest fare on a route
Variation between lowest and highest is large.
London Luton
Lowest Fare
Highest Fare
Source: easyJet Prospectus 2000
easyJet Fares - 2
Tickets are sold on a one-way basis only
Fares are set in increments of £5 or £10 and availability is
restricted depending on demand on route. Only one fare
displayed per flight
Fares initially displayed are inclusive of airport fees and
government taxes (e.g. UK Air Passenger Duty), and then add
on any surcharges and credit card fees (use a debit card)
easyJet Fares - 3
Example, London Luton – Amsterdam, based on travelling
outbound on EZY 2164 (18:40) on Wednesday 4 February
Time before
2 weeks
8 days
2 days
1 day
Comparative fares LON-AMS
One-way fares for travelling on Friday 23 November 2007
Departure time
Fare (one-way)
British Airways
British Airways
Source: www.skyscanner.net (fares checked on 22/11/2007)
Ancillary Revenues
These can include:
Hotel “book throughs”
Car hire “book throughs”
Travel insurance “book throughs”
On-board sales
Name and flight change fees
Speedy boarding
On-line checking
Hidden fare increases
Additional checked bags
Excess baggage
Card fees
Sports /music equipment
Infant fees
ABN-AMRO (2007)
Pricing and Fares – The Future - 1
As deregulation spreads and competition increases there
will likely be a reduction in fares at the lower fare end of
the market
Short-haul premium fares could remain high, but ultimately
are under pressure
On long-haul premium fares will possibly increase to
enable airlines to recoup their investment in flat beds, IFE,
e-communication etc.
Pricing and Fares – The Future - 2
Increased use of Internet will provide more “transparency”
for travellers – increasing consumer power and those
looking for a bargain will shop around more, however, not
allows easy to find the “best deal”.
Airlines will try to push more bookings on to their own
Ancillary revenue (genuine or not) is vital to many airlines!
Pricing and Fares – The Future - 3
As low cost carriers become more widespread, we are
likely to see a move to simpler fare structures by more
mainline airlines (as evidenced by BA’s Fare Explorer and
moves by other network carriers, e.g. SAS)
Impact of expansion of Ryanair and easyJet and the
proliferation of new entrants. Good for the consumer in
the short term, but how many airlines will survive?