Pricing Strategies Airline Industry

James Lannon
Jacqueline Egan
James Keady
Industry: Travel
Product: Transportation
to and from Destination
Customers: Those with
disposable income and
need/desire for
extensive travel
Distribution: Varying
Competitive Marketplace
Consumer Good
 Extensive buyers and sellers
 Perfect Information
 Homogeneous product
 Costs are reflected in the product price
Airline Deregulation Act
October 24, 1978
Removed gov’t controls
1973 Oil Crisis and stagflation- Congress feared a
repeat of the Railroads
Penn Central Railroad had just collapsed in the largest
Bankruptcy in history
Deregulation has created a more competitive
American Airlines
We know why you fly.
Founded 1930
Revenue: $22.7 Billion
5th largest airline in
United Airlines
Let’s Fly Together
Revenue: $37.1 Billion
One of world’s largest
airlines with 2nd largest
fleet- 703 planes
Merger with
Southwest Airlines
A Symbol of Freedom
Founded 1967
“Low Cost” Airline
Revenue: $15.7 Billion
Largest US airline with
fleet of 708 planes
2nd Degree
3rd Degree
Bundling & Tying
Predatory Pricing
Price Dispersion
Variation in prices for the same item
Variations of a product or service at different prices
to different groups of customers
 First Class vs. Coach seating
Increases with competition
 Increases with variation in the population
 Decreases with homogeneity of the market
 Increases when there are more differing
product attributes
 A firms responsiveness to price dispersion
decreases when their market share increases 
The expected difference in fares paid is 36%
Airlines likely to have 20 or more different
fares on one given flight
Dynamic Pricing
 Time-based pricing
Advanced Booking
 High valuation vs. Low valuation
Capacity Constraints
 Optimal Allocation
Peak-Load Pricing
 Different demands for the same good during
different periods of the day, month, or year
 Congested times vs. Off-peak times
 Reflects variations in opportunity cost
Results in higher price during busy period and lower
price during off-peak periods
 Flights for airline X between two uncongested
airports during off-peak periods will
experience no price dispersion
 Flights for airline X between one airport during
a congested period and one airport during an
off-peak period will experience price
There is a variation in opportunity cost
It can be observed that:
 Prices increase as takeoff approaches
 There are season peaks over the summer
months and winter holidays
 There has been a general trend in increasing
airline fares over the past 15 years
Selling a good or service prior to its delivery or
Can increase profits when buyers are uncertain
about future valuation
Allows for market segmentation
Prevents loses on cancellations
Yield Management Systems
 Less price sensitive people are not willing to
purchase in advance
 Advanced purchases are made only by low
valuation people
 Segmentation of High-fare and Low-fare
Allows for Options
Advanced contracting of a ticket with no specified
date or time
Allows for maximum gain of consumer surplus and
Optimal Allocation
The most profitable allocation of High-fare and
Low-fare prices
More attractive to buyers because it guarantees
Allows for maximum consumer surplus
There are many different Airlines who compete
against each other for market share
The big 6 are United, Delta, American, US Air,
Southwest, and Jet Blue
The airline industry is made up for profit by
publicly owned corporations which have a
fiduciary responsibility to earn profits for their
investors and share holders.
This is one of the reasons that Predatory Pricing
takes place in the Airline Industry.
Since there is constant competition in the
airline sector, many Airlines conduct ruthless
pricing campaigns to oust other airlines from
their spaces.
By doing this they can potentially drive them out of
the space and capture more of the market share
 Drastically lowering prices from a regional airlines
fare forces the smaller airline out of the market.
 This forces customers to pay full boat and allows the
larger airlines to earn huge margins on the flights
Dallas-Fort Worth is the third largest airport in
the country.
It serves 55 million passengers per year
American Airlines flies 61% of these passengers from
this airport
Complaint filed by Department of Justice
American Airlines uses its dominant position to
deprive consumers of competitions benefits.
The Department of Justice continued by saying,
“when small airlines try to compete against
American, American typically responds by
increasing its capacity and reducing its fares
well beyond what makes business sense.”
This allows American to drive smaller airlines out of
the market
Small airline based in Kansas
Profitable flight for Vanguard was the Kansas to
Dallas route
Started this route in January 1995
By April 1995 American had flooded the
Upped flights from 8 to 14 per day
Matched Vanguards fare of $80 per trip
American continued an all out war on
Used similar tactics against them on all routes which
flew to Dallas
 Wichita, Cincinnati, and Phoenix
Vanguard was forced out of Dallas-Fort Worth hub
all together
Once Vanguard pulled out of the Dallas Hub
American, almost immediately cancelled extra
(unprofitable) flights and raised routes fares by
50 to 80 percent
Bragged that Kansas city route went from being the
“worst” to the “best in the west”
Paul Dempsey, director of Transportation Law
program at University of Denver describes
airline pricing
Says it is a “homicidal mission to destroy the lowcost airlines.”
American vs. Vanguard is a perfect examply
American was able to absorb the short term
costs of increasing the number of flights out of
American executives concluded, “the short term
cost, or impact on revenue, of “aggressive”
(predatory) pricing can be viewed as the investment
necessary to achieve the desired effect on market
In other words, price so low that smaller airlines
can’t compete so they are forced to exit the market.
Supreme Court established 3 criteria for
proving an instance of predatory pricing.
Prices must be below an appropriate measure of cost
These artificially low prices must be capable of
driving rivals from the market
The perpetrator must have a reasonable prospect of
using its monopoly power to recoup its short-term
Since 1978 when deregulation, no government
regulation on price, went into effect, courts had
not heard a single predatory pricing case
against an airline. (2001)
So hard to prove because cost of flying an extra
passenger is practically nothing
How to compare ticket prices
 Business-Coach, Advanced or Same Day Purchase,
bonus frequent flyer miles for different routes.
Many Airlines give customers different types
of incentives to fly with them rather than the
Frequent Flyer Miles
 Drink Coupons
 Flight &Hotel Discounts
Airlines often offer repeat customers “miles”
for flying with them as a type of Loyalty
Each mile on the trip represents a mile that they can
redeem at a later date for another free or discounted
By doing this airlines are able to increase consumer
 Consumers want to use same airline so that they can
accumulate miles for free trips
Frequent Flyer miles also can be used for
increased benefits
Travel Upgrades
 Access to Airport Lounge
 Priority Bookings
This is an example of 2nd Degree Price
Two-Part Tarrif
Price to get on the Plane
Another cost for food, movies, alcohol, etc.
American Charges $150 one way to Miami
 If you want to watch the movie you pay $2 for
headphones, and if you want to drink you pay $7 for
Many times Airlines will work with travel
Allow for people to book flight and hotel at same
 Easy for the consumer, much less expensive
 By doing this they increase flyers because they feel
like they are getting a better deal
Bundling also allows airlines to charge
premiums at peak times of the year, while still
offering discount
Spring break packages are more expensive if you do
not book them in a package
Successful because marginal costs of bundling hotel
and airfare are low
 Travel agency fee offset by more volume in sales
because of discount
Airlines have fallen on tough times since the
financial crisis of 2008
Many airlines struggling to survive because of
decreased travel and increased maintenance and
fuel costs.
Many fleets are aging and are starting to need
to be replaced
Airlines will have to take on huge amounts of debt
to finance new planes
Investing in an airline would be a risky
investment to take on
The amount of debt vs. revenue that an airline
actually has is huge.
If market stays on current upswing, airlines
potentially could be more profitable.
Money made per seat sold actually is quite low
Pending low fuel costs
I would not suggest investing in Airlines at this
Airlines should have better customer loyalty
Increased loyalty means increased revenue for every
happy customer
 Having better miles programs will make customers
want to fly more to receive the benefits sooner.
 Making a trip to the Bahamas cost 20,000 miles rather
than 30,000 miles could increase loyalty
Continue offering flight packages and bundling with
hotels to make travel easy and affordable.
Have tighter regulations on predatory pricing
Allowing more competition in the market will drive
prices down
 Less expensive flights will increase peoples travel plans
 Smaller airlines can enter the market, and buy planes
from large aging fleets of the market leaders
 This way the small airlines can get business going, and the
large airlines will have capital to finance improvements on
their fleet
Stop nickel and diming customers.
Charging $2 for headphones, rather than giving them out
and keeping the customer happy could make a huge
difference with regards to customer loyalty.
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