Customers? Willingness to Pay for Intermediate Cabins in the Airline Industry: a Trade-off Between Improved Service and Frequent Flier Benefits
S Caussade, LAN Airlines, CL; S Hess, ITS University of Leeds, UK
In this paper we explore the willingness-to-pay for attributes defining an intermediate class of service in the airline industry and its relationship with frequent flier programme benefits
On long haul routes, premium economy class can provide an appealing intermediate option between standard economy and full business, with some of the perks of full business, but at a much lower price. However, going back as far as the early 1990s, such intermediate cabins have also been implemented by regional carriers, albeit for slightly different reasons, in part as a way to offer a premium product in regional routes served by narrow-body aircraft where a full business service is unlikely to be economically successful. In recent years, the economic downturn and its impact on corporate travel policies has led to a further reduction in the uptake of business class travel on regional routes, rekindling airlines? interest in providing an intermediate service with a view to capturing some of the former business class passengers now lost to economy class.
Premium Economy cabins commonly rely on a more comfortable seating, as well as prioritised airport processes such as check-in, boarding and disembarking. Pricing for such a cabin has been a challenge since in terms of service features, Premium Economy is much closer to the Economy end of the scale than the Premium end. An additional complication however arises. Many legacy carriers have based the differentiation among levels in their frequent flier programme in part on similar attributes, e.g. providing priority check-in and boarding to higher tier members. Crucially, there is also a significant overlap between the target passengers for premium economy and those travellers who currently are members of higher levels in the frequent flier programmes.
In the present paper, we explore the willingness to pay (WTP) for the attributes defining the Premium Economy class of service at LAN Airlines, differentiating among top tier categories, in order both to assess the accuracy of the current pricing policy and to evaluate the existing trade-offs between an improved service and the benefits granted by the airline frequent flier programme. Such monetary valuations were obtained by means of advanced discrete choice models estimated in willingness-to-pay space making use of stated choice data collected through a web-based interview.
Association for European Transport