Robert Russell
Gerrit Van Sittert
Kevin Keresztes
Armando Said
Air Canada’s Flight Pass
Air Canada provides several different types of flight passes with a variety of
options to pick from in order to meet the needs of their customers. The pricing
policy has restrictions and limitations according to the pass preferred by the
consumer but they all basically work in the same way. The buyer gets a pass to
either travel unlimitedly for a certain period of time, or purchases flight credits.
One credit is good for one flight to a destination including connections. This
strategy obviously targets people who travel an extraordinary amount compared
to the average traveler.
This pricing policy uses segment discrimination to accomplish its goals. The
market for flight passes is a very small one since very few people can travel that
much. This makes us assume that it is targeted mainly towards those adventurers
that have the privilege of being able to travel that much and/or people who travel
a lot because of their jobs. This being said, I believe that the flight pass will not
cause a very big impact in the airline market over all. It is more of a service that
Air Canada provides for those who consider getting a flight pass more
economically efficient in every way. Most of the people who purchase the flight
pass will make sure that they are using it to its fullest potential or else it is a waste
of money. The prices for flight passes compared to flights are attractive because
the average total cost of the overall travel will be lower most of the time but most
importantly it provides their holders with more flexibility deciding when and where
to fly. Flights might be subject to availability but flight pass holders will not have
to worry about high season prices. I believe that this pricing policy for flight
passes is very well designed and discriminates buyers effectively. This will
ultimately cause only a small number of travelers to purchase the pass but will
provide a service that is very economically efficient for both consumers and the
company.
The flight pass segments the market into two main groups, business
travelers and leisure travelers. The average vacationer and infrequent business
traveler will not be attracted by the flight pass, it is meant for frequent flyers
maybe with a second home/cottage/timeshare, frequent business flyers or
businesses with lots of traveling employees. The flight pass directly discriminates
these two markets by offering a pass that is business specific, which only
businesses can buy, and a regular pass. Within each section the pass indirectly
discriminates by varying prices, options etc. For very frequent flyers there is an
unlimited pass, which allows unlimited flights within a designated time period.
The other pass comes with a limited number of credits that usually expire after a
year. A flyer that has unpredictable travel and will not know how much flying will
be done will be attracted by the unlimited pass and willing to pay for this flexibility
and assurance of being able to travel. The flight pass also offers booking up to
one hour before departure and unlimited changes in flight plans. This is a huge
benefit for people who travel unpredictably.
The Flight Pass policy by Air Canada is likely to increase revenue relative
to uniform pricing by setting prices as close as possible to the benefit of buyers,
extracting as much buyer surplus as possible. This is accomplished through price
segmentation amongst flying in different regions, short or long distances,
vacationing, etc., which also includes additional segmentation between casual
and business flyers. The policy also provides an increase in sales not possible
with uniform pricing. This increase in sales is available due to the wider range of
buying customers made possible through price discrimination in segmenting
buyers, which gives Air Canada more power in determining the quantity of flight
passes sold. They will then sell the quantity of passes where buyers’ marginal
benefit equals marginal cost to maximize their profit. This is more effective
compared to uniform pricing because uniform pricing fails at exploiting these
opportunities to increase profit. With uniform pricing some buyers cannot afford to
purchase at the uniform price of the passes while others receive large buyer
surpluses as they can afford much higher pass prices. Buyers that fail to afford
passes and the surplus gained by other buyers reflect the inefficiency of uniform
prices and the wasted opportunity of selling more tickets and charging more for
select buyers, which means economic efficiency is being wasted. The
combination of increased sales to the economically efficient quantity, and the
discrimination of prices to minimize buyer surplus make the policy more effective
than uniform pricing and are the factors that lead to the increase in revenue.
The more a company can discriminate their prices either directly or
indirectly, the more profit they can make. When it comes to Air Canada’s Flight
pass they already discriminate directly between businesses and vacationers as
well as indirectly by setting higher prices for popular sun destinations. Air Canada
could further their indirect discrimination by instead of one credit equaling one
flight, the number of credits could be determined by other factors. For example, a
flight during the busy season, like around holidays, would be more credits than
during a slow time. Or if a booking is made in advance it may be less than a last
minute booking. By doing this Air Canada could increase their profits by getting
people who want to fly on holidays or book last minute to use more of their
credits. Air Canada could also further diversify their flight passes. They could
create discount flight passes that have blackout dates, such as Christmas
holidays, or passes that are only good for certain times of the year like the winter
season. This would attract consumers that have a second house or cottage and
only go during certain times of year. Air Canada could also impose an extra credit
fee. Instead of extending the time if a person uses all their credits before the
duration of the flight pass has expired they could be charged to add more credits
in packages such as 3, 5, 10, etc. depending on the pass. By giving more options
Air Canada can attract a wider variety of consumers and get each of them to pay
as close to their maximum willingness to pay hence making the maximum profit.
The Air Canada Flight Pass policy is successful in segmenting the market
making it beneficial to the company and to consumers. The luxury of tailoring your
flying needs to your own specification increases revenue for Air Canada and
enhances the consumer experience creating a system that maximizes economic
efficiency. Despite minor possible adjustments, Air Canada has structured a profit
maximizing pricing policy capable of extracting benefit very effectively.
Word Count: 1129
Sources
-
Png, I & Lehman, D. (2007). Managerial Economics Third Edition
Air Canada Flight Pass,
https://fp.aircanada.com/wallet/servlet/CTO5RIASearchServlet/booklet_lan
ding