Developments in Airline Pricing and Revenue Management
N P S Dennis, University of Westminster, UK
This paper examines developments in airline pricing including less restricted short-haul fares, availability of through rates for connecting journeys, ancillary charges, consumer bid pricing, overbooking strategies and unofficial discounts.
Airlines have adopted innovative means of pricing to offer a wider range of fares that reflect passengers having varying needs from the airline product, as well as different levels of willingness and ability to pay. These ticket types are characterised by factors such as time of booking and travel, flexibility of reservations, quality of service and 'unbundling' of the tariff.
The low-cost carriers with their simple one-way pricing have forced the traditional airlines to revise their fare structures to compete on short-haul routes. The major network airlines still keep a degree of sophistication in their pricing however. Cheapest tickets are often only sold as returns so that the computer system can look at the choice of the outbound flight before pricing the return. Although carriers such as KLM and Swiss have mostly clung to their minimum stay restrictions on cheaper tickets, this typically incurs two nights away rather than the previous requirement to be at the destination over Saturday night. Airlines such as British Airways and Lufthansa vary their strategy by market and origin of travel while bmi and Aer Lingus have moved fully to the low-cost carrier (LCC) structure. Load factors are often lower at peak business times now than off-peak - as airlines close off discount fares to try to minimise revenue loss from this lucrative element of the traffic. The pricing of connecting journeys is studied within this framework as these are a major part of operations for the network carriers (47% of British Airways' passengers at Heathrow are making a transfer connection and for KLM at Amsterdam it is almost 70%).
Ancillary charges have become an important feature of LCC pricing in Europe and are creeping into the traditional airlines as well, especially in the US. The contribution from these items is analysed with the help of UK CAA and A4A/DoT US data. It is shown that many airlines would not be profitable without these extra charges. The trend towards fees for checked baggage has potential negative cost implications however. This is because it increases the passenger boarding and alighting times (adding an estimated 8 additional minutes to turn-around a fully-loaded A320) and leaves costly baggage handling systems underutilised. There is also a risk of deterioration in quality of passenger service. The example of Spirit Airlines in the US is considered, who have now introduced higher fees for the convenience benefits of taking a carry-on bag - to try to get most luggage back in the hold. Other items such as payment surcharges for any widely used credit/debit cards have attracted the attention of the Office of Fair Trading in the UK. Upgrade strategies are a further area of interest, allowing airlines to squeeze marginal extra revenue from customers who were happy to book in economy class.
The concept of consumer bid pricing is explored. This is used by agencies such as Priceline and Hotwire to enable passengers to bid what they are willing to pay for a journey. They are not allowed to specify exact times, routes or airports meaning they may end up with a non-preferred airline or an inconvenient schedule. The risk to the airlines is that passengers will shop around first and make a bid significantly below the current best price, leading to further dilution of revenues. An alternative strategy involves undisclosed flights sold at a deep discount (similar to 'mystery hotels'). In both cases the traveller only obtains details of the actual flight once they have parted with their money.
Overbooking strategies are analysed. Airlines do this to maximise load factors, knowing that some passengers will cancel late, fail to turn up on the day or miss connections. Unfortunately this is not an exactly predictable number! The challenge is to ensure that the increase in costs from offloads does not exceed the gain in revenue obtained.
On short-haul services, airlines typically offer the lowest rates through their own websites, nevertheless unofficial discount ('bucket shop') fares remain important in long-haul markets, especially for indirect routes. The reasons for this are investigated and shown to be both commercial and regulatory.
It is concluded that the low-cost carriers have redefined the pricing parameters for short-haul travel while the growth of the internet has made price availability more transparent. The business market is declining in importance and leisure passengers favour price over convenience. Airlines have reacted with a wide range of alternative revenue management strategies to this changing competitive environment. These processes may not be immediately obvious to the customers however!
Association for European Transport