TSM10106 Airline Marketing & Management

Lecture 8: Pricing and Revenue

Management

Edinburgh Napier University

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Aims of this lecture:

• To understand approaches to pricing

• To establish the general pricing policies of

different types of airline

• To identify how airlines differ in their approach to

different tactics

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Galileo screen

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The mysteries of airline pricing

“The price of an airline ticket is one of the great mysteries of modern life. It costs
one price if you buy it over the phone and another if you buy it in person, one if
you buy it this morning and another three hours from now. It practically defies the
laws of physics.”

●
Senator Ron Wyden, Introduction to S 383 Airline Passenger Fairness Act

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Key factors affecting pricing
strategies
Supply factors Demand factors
• Regulatory regime • State of economy
– (regulation vs liberalisation) • Customers willingness to
• Capacity in the market pay
• Cost of service
– Customers needs are
different
– Different customer needs
impose different costs
• Competition
– Direct (including low cost
carriers)
– Indirect 5
The Business Model Adopted
determines tactics

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Pricing policy tactics

Profit Market share Break-

maximisation maximisation even
Predatory
Match
Survival competitors
pricing (not
legal)

Send signal Airlines pricing Pricing policy should

objectives may vary not be considered in
about the quality from market to market isolation but in relation
of the product and route to route to load factor and cost

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Do Businesses or Customers
set prices?

What has been the key

change in the last
decade that has affected Discuss!
the balance of power in
setting airline prices?

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General Pricing Strategy of

FULL SERVICE CARRIERS

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Differentiation by Class
and service offered

• Club World £4500

– Larger seats
– Business Lounge
– Priority boarding
• World Traveller + £1,171
– More leg room
– Wider choice of meals
• World Traveller £543
– Less space

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Price discrimination is primarily
based on the assumption:

Business Travellers: Leisure Travellers:

• Make plans at last minute • Book far ahead
• Less flexible • More flexible
• Willing to pay a high price • Very price sensitive
Demand profile for a flight
Passenger Demand

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4 steps to yield management:

Step 1 Divide the market into different groups of customers

●

with different demands

Step 2 Prevent customers travelling between groups

●

Step 3 ●
Set a fixed price for each group

Step 4 Allocate some seats to each of the groups

●
Differential Pricing - Discrimination
by duration of stay/ refunds/restrictions

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Fare type dictates restrictions

Normal/basic fares

●
First class
●
Business or executive
●
Economy

Promotional Fares Route specific - fares are subject to restrictions:

●
Min/Max stay
●
Saturday night stay
●
Departure time restrictions
●
Advance purchase time requirement
●
Routing (round trip, indirect service)

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Price differentiation through
yield management
Economy / Coach / Tourist Class Prime Codes
W Economy/ Coach Premium
S Economy/ Coach
Y Economy/ Coach
B Economy/ Coach Discounted
H Economy/ Coach Discounted
K Economy/ Coach Discounted
L Economy/ Coach Discounted
M Economy/ Coach Discounted
Q Economy/ Coach Discounted
T Economy/ Coach Discounted
V Economy/ Coach Discounted

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 BA Fares London to Paris
Half return fares
Economy – hand baggage only £48
Economy – with checked bag £63
Business class £275
One way fare on same flight
Economy – hand baggage only £125
Economy – with checked bag £140
Flexible fares on same flight
Economy – hand baggage only £300
Economy – with checked bag £315
Business class £336

Fares on 27 Oct 2014 for a journey on 10 Nov 2014 on 17

BA03304 LHR-CDG one-way fare before taxes and charges
BA fares London to Hong Kong

Half return fares

Economy £380
Premium Economy £1421
Business Class (flexible) £3955
First class (restricted) £3004

OW Flexible fares
Economy £1435
Premium Economy £2645
Business Class £5533
First Class £5935

Fares on 27 Oct 2014 for a journey on 10 Nov 2014 on

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BA0025 LHR-HKG one-way fare before taxes and charges
Average fares business class

Source: CWT 2013, 19

Problems with FSC pricing
strategies
• Too many fare types and fare classes
• Too many conditions and restrictions
• Complex structure
• No clear pattern of change over time – Dynamic
Revenue Management
• Growing gap between restricted and unrestricted
fares
• Obsession with market share and load factor
growth at the expense of profit
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Capacity/Revenue/Yield Mgt
Passenger Demand

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Revenue Management vs Yield
Management: see handout sheet for activity

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 Profit maximisation

Load
Revenue Yield factor
Number Number Total
Premium discount seats Yield per
seats cost seats cost revenue sold passgr Load %
25 £1,900 125 £1,300 £210,000 150 £1,400 100
95 £1,900 25 £1,300 £213,000 120 £1,775 80
70 £1,900 70 £1,300 £224,000 140 £1,600 93

Yield vs Revenue: depends on fixed or variable costs.

If fixed, then revenue will maximise profit;
If variable, then yield per pax is more important.
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Revenue Maximisation

Airline objective is to maximise revenue for each flight

Yield management is better called revenue maximisation

The process gambles on the existence of a future customer that is prepared to pay
more for a seat than a real customer today

Leisure travellers are prepared to pay less but tend to book earlier

Business travellers are prepared to pay more but book much later

Therefore the airline might seek to adopt differential pricing (i.e. charging different
prices for the same product)

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Overbooking Policy
Seating Capacity

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The yield management toolbox

Fare levels ●
The prices charged for each fare class

The number of seats available in each fare class

Fares classes
●

●
May be up to 100 (or more)

●
Acceptance of bookings in excess of capacity to minimise the
Overbooking ●
number of unused seats at departure
Tempered with denied boarding cost (of economy pax)

Discrimination on one sector between passengers travelling

Itinerary Control
●

on different itineraries across a network (Alliance challenge)

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General Pricing Strategy of

LOW COST CARRIERS

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Variable 1: Date of Booking

The
Flights Passeng
highest
ers
booke booking a fare
d early few days (walk-up
before fares)
= are are
cheap charged capped
much at about
est the higher half of
fare fares the FSC
= Inter-temporal price discrimination
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Variable 2: Effective Demand
(a: time of day/ week = periodicity)

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Variable 2: Effective Demand
(b: Time of year = seasonality)

London – Krakow 31
graph of airfares (Odopo, Oct 2010)
General Pricing Strategy of

CHARTER CARRIERS

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Flight is only part of a ‘package’

• Holiday prices may be negotiated up to 2 years in

advance
• Air seat only part of the cost of the package
• Seat only sold to bring up load factors

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Charter: relies on load factor

• Flights not covering costs are cancelled or

consolidated.
Additional seats
They need to sell a represent profit
particular number of margin
seats to cover costs

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Sector Fares

LCC and Charter approach:

A B

FSC and Regional carrier approach:

A B C
And
beyond

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Itinerary control:
Yield on point-point vs through
Through Fare

245
Sector 1 Fare +938
1183
-1071
=112
Lost revenue
Sector 2 Fare

So why not
sell seat to
domestic
sector pax?

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Seasonality/Periodicity

The FSC approach:

• Mix between Leisure and Business class

depends on time of day/ week
• Moveable business class

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Seasonality/Periodicity

• The LCC – they have only one class

• But fares do differ depending on time of day and
over season

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Pricing Tactic 1:
Seasonality/Periodicity
The Charter Approach:
200
180
160
140
120
Airfare

100
80 Airfares
60
40
20
0
Apr May Jun Jul Aug Sep Oct
Month

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 Summary
The
The same
Different
use tactics
of differential
pricing
can
pricing
strategies be
must
areused
not
needed
rise to
depending
point where
differently by on itthe
different
alienates
business
airlinecustomers
strategy
types

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References and further reading

• Alderighi, M., Cento, A. And Piga, C.(2011) A case study of pricing

strategies in European airline markets: The London-Amsterdam route,
Journal of Air Transport Management, Vol.17 No.??/ pp369-373
• Casadesus-Masanell, R. and Ricart, J. E. (2004) "From Strategy to
Business Models and onto Tactics", Long Range Planning, Vol. 43, No.
2-3, pp. 195-215.
• Knorr, A. and Zigova, S. (n.d.) Competitive Advantage Through
Innovative Pricing Strategies: The Case of the Airline Industry, IWIM
Institute for World Economics and International Management, University
of Bremen [Online] Available at:
http://www.iwim.uni-bremen.de/publikationen/pdf/b093.pdf [Accessed 29
October 2011]
• Shaw, S. (2011) Airline Marketing and Management, 7th Edition, Surrey:
Ashgate Publishing Ltd, (Chapter 9)
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