Example 1

Many legacy carriers still tend to have higher base fares than low-cost carriers. As a result,
legacy airlines have started to enact increased seat segmentation. Rather than just the traditional
first, business, and economy seating arrangements, carriers are now introducing classes between
these levels, such as a basic economy or a premium economy class. Delta Air Lines has
pioneered the development of the basic economy fare among legacy carriers. This fare is cheaper
and more restrictive than the traditional economy, or “Main Cabin,” fare offered by Delta. (Delta
Air Lines, n.d.). For example, passengers flying in this class may not upgrade, reserve an
assigned seat, or change their itinerary (Delta Air Lines, n.d.). By having a lower base fare, Delta
can attract more price-sensitive customers as well as compete for market share against the low-
cost carriers. In fact, Delta promotes its basic economy fare as its “value-fare product for price-
driven customers” (Delta Air Lines, n.d.) The basic economy fare is proving successful as legacy
competitors to Delta, such as United and American, have recently announced the implementation
of basic economy products on a selection of routes beginning in spring of 2017.

Role of Game Theory

Given Delta’s apparent success in deploying the basic economy fare, why have the other two
legacy carriers waited so long to employ such a policy? Typically, airlines are very responsive
when it comes to responding to price changes in the marketplace. When one carrier raises prices,
another airline will follow the former’s lead within a day or even within a few hours, or if the
other does not follow through, the first carrier will back off. The delay of Delta’s legacy airline
competitors may have had to do with their organizational states at the time. In March of 2012,
United Airlines had finally incorporated Continental Airlines into its operating structure as part
of the carriers’ planned merger in 2010 (Elliott, 2012). Similarly, in February of 2013, American
Airlines and US Airways announced that they would also merge; however, they were not fully
integrated until April of 2015 (Karp, 2015). Perhaps United Airlines and American Airlines were
so preoccupied with resolving complications from their respective mergers (e.g., labor
agreements, operating structures, polices, computer systems, etc.) that they had no time to focus
on enacting new and untested strategies like a basic economy fare. Delta Air Lines then took
advantage of their preoccupations to focus on enacting a new, profitable strategy that would set
them ahead of their legacy competitors (i.e., first mover advantage). Or, perhaps it may have
been a simpler reason…perhaps American and United doubted that the strategy would work or
that the amount of time, complexity, and effort involved to overhaul their pricing structure would
not be feasible. Then, as a second mover, they would be able to respond by either offering “a
product that [would] differ markedly from [the] existing product” or “mimic [an] existing
product closely” (Frank & Bernanke, 2009, p. 285). One could therefore conclude that the basic
economy fare strategy represents an economic game in which timing matters. Now that both
American Airlines and United Airlines are in more stable conditions, they likely feel more
comfortable at deploying new strategies that compete with Delta’s. However, it is important to
reiterate that both American’s and United’s basic economy fares have only been employed on a
select variety of routes, which may indicate some residual uncertainty surrounding the new
tactic. Delta may still have the first mover advantage in this area and thus has more experience in
knowing what modifications are necessary in order to ensure higher utilization and profit
maximization. Since Delta’s basic economy fares were implemented years ago, Delta also has
the lead in market penetration in that more consumers are aware of Delta’s basic economy
offering than of American’s and United’s basic economy products. Delta has another advantage
in that its basic economy fare is less restrictive than the basic economy products of United and
American, which would consequently better appeal to customers looking the try the basic
economy option. It appears as though United and American have incorporated some elements of
both of the aforementioned options that are available to second movers in pursuing a strategy.
Both carriers mimicked Delta’s basic economy fare and differentiated their product, but not
markedly so. The main difference in the basic economy offerings of American and United is that
they are more restrictive than Delta’s. Specifically, both carriers do not permit carry-on bags
other than one personal item.

Example 2

Game theory can help predict in some part moves by competitors but requires sophisticated
models. No one model can fit. This is because:
 Airlines compete but also form alliances (so cooperative & non-cooperative theory)
 Resources are pooled at times (so no zero-sum games)
 Some decisions are influenced by the policy environment (so not a rational decision)
For instance, An airlines success depends on its ability to offer travelers, a mode to get from
point A to point B at a convenient time. The times at which an aircraft can land at an airport is
determined by the allocation of “slots” to airlines. Slots in turn are determined by the number of
runways and runway capacity (defined as the ability of the runway to handle aircraft
movements). Slots in essence are zero sum games as the grant of a slot can then keep competitors
out of key time bands. Traffic rights which grant the permission to fly to specific destinations,
broadly speaking, are also zero-sum games.

Creating games and payoffs help in making decisions regarding strategies to retain
passengers

 For instance, in launching a buy-on-board meal on the airplane one would have to consider
cost of uplifting the meal, pricing of the meal, how many passengers fly and out of those how
many would like the meal, impact on brand and impact on overall experience. You would also
have to account for socio-cultural norms — for instance a meal choice may not matter to a US
passenger while it may be a critical factor for an Asian passenger.
 Some other decisions with payoffs — introducing a premium cabin or introducing an ultra-
premium product and the ability enhance brand image, ensure loyalty and retain passengers.
 Similarly, in a market, if there are 3 competitors all low-cost airlines flying similar airplanes
to similar destinations. Evaluating a frequent flyer program will require assigning payoffs and
probabilities to the competitors reacting. If all react in the same manner, all I do is increase my
cost base without providing any tangible benefit for the firm (does provide tangible benefit to
consumers)
To reiterate a point made earlier though — payoffs always come down to return of investment
followed by return on investment.

Example 3

Problem that airlines face every day: how to entice people to give up their seats voluntarily.

Treat the problem as a game.

To keep seats full on planes, airlines overbook assuming that some people will be no-shows. But
when everybody actually shows up, you've got 100 seats on an airplane and you've sold 105
tickets. Sure, it's a problem. But it's also a game. The airline wants some people off the plane;
every single person on the plane wants to stay on absent anything else changing."

Don't let passengers to board the plane and then take their seats away. And if you do, offer
them a lot more money.
There are studies that show that if you show someone a coffee mug and ask them how much they
would pay for it? They might offer you $5. But if you instead give the person the same coffee
mug and then say, "Hey, I want that coffee mug back. How much will you sell it to me for?" the
person is likely to want considerably more money, say $10. And, it's the same thing with airplane
seats. Once people get on a plane and sit down, they think: "Now that's my seat, I'm sitting in it,
So then to ask me to give up my seat would require more." So, when airlines offer passengers,
say, $800 to give up their seat, that's going to work a lot better in the airport terminal. If
passengers are sitting on the plane, the airline should know it needs to offer a lot more money.

Don't make the offer in such a public way, because nobody wants to be a sucker.
Most airlines do when they want people to voluntarily give up their seat: "They make this big
announcement where they say, 'Would anybody be willing to give up your seat for $400? The
problem with that is that "humans are really sensitive to being suckers." Some people would be
willing to give up their seat for a $400 ticket voucher. But this can also happen where everyone
looks around and everyone sees, well, nobody else is doing it, so I must be a sucker if I do it, so
I'm not going to do it either.
Analysts say Delta is one airline that has started to ask passengers when they check in whether
they'd give up their seat, sometimes asking them how much they would want in exchange. That's
a much better approach.
Make better use of technology and start with a big offer.
We get text messages telling us if our flight is delayed. So why not send passengers a text saying,
"We are overbooked on your flight; reply to this message if you would give up your seat for a
$400 flight voucher."

That's a great start. But when a flight is really overbooked and the airline needs a lot of seats, it
could get more passengers in on the game and willing to play if they started with a high offer and
worked down from there. If the airline texted a person and offered $2,000, they'd say yes if they
didn't really need to get where he was going on time. So now they are engaged in the process and
Hopefully they are going to win it at $2,000. Of course, too many people would say yes, so then
the airline would offer a lower price. So now they're bumping it down to $1,500. Well, that's still
pretty good; people will still take that. By getting people engaged in the process and active from
the beginning would go a long way to getting people to feel like now it's a competition or a
game. It would likely result in the airlines getting more volunteers and fewer people
involuntarily bumped from flights.

Use the information you get from the game to make better choices about who you bump off
a flight.
Another advantage to starting with a high offer is that it would give the airlines a key piece of
information. People who won't even consider a lot of money in exchange for their seat probably
really need to get where they're going. Maybe it's a job interview or their best friend's wedding or
they're in a hurry to be with a sick parent who was just admitted to a hospital. Even if the person
doesn't scream and get dragged off the plane bleeding, those are passengers you don't want to
bump if you can help it.