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 levels 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 marketplace American Airlines We know why you fly. Founded 1930 Revenue: $22.7 Billion 5th largest airline in world Bankruptcy United Airlines Let’s Fly Together Founded1926 Revenue: $37.1 Billion One of world’s largest airlines with 2nd largest fleet- 703 planes Merger with Continental 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 Versioning 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 Example: 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 dispersion 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 usage 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 consumers Allows for Options Advanced contracting of a ticket with no specified date or time Allows for maximum gain of consumer surplus and revenues Optimal Allocation The most profitable allocation of High-fare and Low-fare prices More attractive to buyers because it guarantees services 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 market Upped flights from 8 to 14 per day Matched Vanguards fare of $80 per trip American continued an all out war on Vanguard 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 Dallas 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 share.” 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 losses. 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 competition. Frequent Flyer Miles Drink Coupons Flight &Hotel Discounts Airlines often offer repeat customers “miles” for flying with them as a type of Loyalty Program Each mile on the trip represents a mile that they can redeem at a later date for another free or discounted flight By doing this airlines are able to increase consumer loyalty 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 Discrimination Two-Part Tarrif Price to get on the Plane Another cost for food, movies, alcohol, etc. Example 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 beer. Many times Airlines will work with travel agencies. Allow for people to book flight and hotel at same time 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 point Airlines should have better customer loyalty programs 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.