Pricing & revenue management

1. Pricing policy of AirlinePricing policy of Airline
Pricing decision cannot be made inPricing decision cannot be made in
isolationisolation
Product & pricing decisions mustProduct & pricing decisions must
clearly be made togetherclearly be made together
Airlines invest large sum inAirlines invest large sum in
improving First & Business Class asimproving First & Business Class as
better seats, high quality catering &better seats, high quality catering &
IFEIFE
Accordingly raises price in realAccordingly raises price in real
term to provide return onterm to provide return on
investmentinvestment

2. DeregulationDeregulation
-Until recently, government regulatoryUntil recently, government regulatory
policy was a major constraints on airlinespolicy was a major constraints on airlines
pricing.pricing.
- Bilateral Air Services Agreement wereBilateral Air Services Agreement were
designed to stop airlines competing ondesigned to stop airlines competing on
price.price.
-Airlines used to maintain same fare.Airlines used to maintain same fare.
Even in domestic market notably in USAEven in domestic market notably in USA
where regulation prevented pricewhere regulation prevented price
competition in the hope of maintaining acompetition in the hope of maintaining a
stable industrystable industry

3. Dissemination of fares informationDissemination of fares information
-Until recently, pace of change in airline fares wasUntil recently, pace of change in airline fares was
a regulated competition meant that all pricesa regulated competition meant that all prices
were a compromise.were a compromise.
-At the same time, the system for disseminatingAt the same time, the system for disseminating
fare information precluded rapid changes. Thefare information precluded rapid changes. The
method of such dissemination was a printed tariffmethod of such dissemination was a printed tariff
manual where changes brought in once in a yearmanual where changes brought in once in a year
-The situation is totally different today. TheThe situation is totally different today. The
development of GDS has meant that almost alldevelopment of GDS has meant that almost all
travel agents have instant access to a faretravel agents have instant access to a fare
database which is updated several times a day, ifdatabase which is updated several times a day, if
necessarynecessary
-At the same time, an increasing proportion ofAt the same time, an increasing proportion of
airlines tickets are sold through carrier’s websiteairlines tickets are sold through carrier’s website
where tariff changes rapidlywhere tariff changes rapidly

4. Uniform & Differential pricingUniform & Differential pricing
-Very high price charges for seat in First &Very high price charges for seat in First &
Business class reflect substantial & tangibleBusiness class reflect substantial & tangible
differences in the product supplied such as full-differences in the product supplied such as full-
length bed, in-flight services & entertainment &length bed, in-flight services & entertainment &
low average load factors (40-50%)low average load factors (40-50%)
-Business travellers often have requirement forBusiness travellers often have requirement for
flexibility- on demand booking- which induces lowflexibility- on demand booking- which induces low
load factorload factor
-Airline offering full ticketing flexibility achieveAirline offering full ticketing flexibility achieve
load factor of 65-70%. In contrast, airline notload factor of 65-70%. In contrast, airline not
giving on-demand product achieve cabin factor ingiving on-demand product achieve cabin factor in
excess of 90%excess of 90%
- higher prices are charges to cover the costs ofhigher prices are charges to cover the costs of
unoccupied seats due to ticketing flexibilityunoccupied seats due to ticketing flexibility

5. Uniform & Differential pricingUniform & Differential pricing
-Leisure travellers have high price-Leisure travellers have high price-
elasticity. Increase in price would result inelasticity. Increase in price would result in
some not travelling at allsome not travelling at all
-Greater number will travel if low fareGreater number will travel if low fare
with differential price structure is offered-with differential price structure is offered-
cross Atlantic travel market between UAScross Atlantic travel market between UAS
and UK. This market grew by more thanand UK. This market grew by more than
4 times over last 20 years4 times over last 20 years
- this approach of pricing that havethis approach of pricing that have
generally been taken by Low Costgenerally been taken by Low Cost
Carriers (LLC) in comparison to LegacyCarriers (LLC) in comparison to Legacy
Carriers. LLC’s certainly vary their faresCarriers. LLC’s certainly vary their fares
over timeover time

6. Management of discount faresManagement of discount fares
- A differential pricing policy needs toA differential pricing policy needs to
be managed & controlled properly. Ifbe managed & controlled properly. If
it isn’t, “revenue dilution” will occurit isn’t, “revenue dilution” will occur
when too many people use lowestwhen too many people use lowest
fares & too few the higher faresfares & too few the higher fares
- Control of discount fare is exercise inControl of discount fare is exercise in
two ways:two ways:
a.a. to decide on the Numbers of low-to decide on the Numbers of low-
fare seats are available onfare seats are available on
different flightsdifferent flights
a.a. to impose restrictive conditionsto impose restrictive conditions
on discount fareon discount fare

7. Conditions on discount faresConditions on discount fares
1.1. Minimum stay conditionsMinimum stay conditions: passengers: passengers
to spend a minimum amount of timeto spend a minimum amount of time
at destination. Short-haul routes-at destination. Short-haul routes-
Saturday night stay, long-haul routesSaturday night stay, long-haul routes
– seven days. In both cases,– seven days. In both cases,
passengers could return early butpassengers could return early but
with full fare. Most effective tool ofwith full fare. Most effective tool of
conditions designedconditions designed
2.2. Maximum stay conditionsMaximum stay conditions: a: a
maximum length of time (45 or 60maximum length of time (45 or 60
days) that passengers can stay atdays) that passengers can stay at
destinations & still return home usingdestinations & still return home using
discounted fare. If they stay longer,discounted fare. If they stay longer,
full fare has to be paid to returnfull fare has to be paid to return

8. Conditions on discount faresConditions on discount fares
3.3. Advanced PurchaseAdvanced Purchase: passengers must: passengers must
book & pay for their ticket a definedbook & pay for their ticket a defined
minimum period in advance. It willminimum period in advance. It will
involve substantial penalty if theyinvolve substantial penalty if they
wish to alter or cancel booking. Itwish to alter or cancel booking. It
improves cash flow & makes businessimproves cash flow & makes business
travellers to use lower faretravellers to use lower fare
4. Standby: fare can be booked at any4. Standby: fare can be booked at any
time. It do not guarantee a seat on atime. It do not guarantee a seat on a
flight. Passenger must report & wait.flight. Passenger must report & wait.
If there is empty seat, they willIf there is empty seat, they will
travel. Airline should avoid standbytravel. Airline should avoid standby
fares on off-peak flight.fares on off-peak flight.

9. Conditions on discount faresConditions on discount fares
5.5. Preferential faresPreferential fares: airline offer many: airline offer many
types of fares cheap fare available totypes of fares cheap fare available to
named group. These are two typesnamed group. These are two types
(a) stage-of-life – children, young(a) stage-of-life – children, young
people & senior citizen (b) occupiedpeople & senior citizen (b) occupied
related – seamen, military &related – seamen, military &
diplomatsdiplomats
6.6. Fares for tour package: fare toFares for tour package: fare to
wholesalers, who are then supposedwholesalers, who are then supposed
to add in accommodation & othersto add in accommodation & others
which makes up a package holiday.which makes up a package holiday.

10. Pricing response & price initiativesPricing response & price initiatives
-Managers face situations where they have to decideManagers face situations where they have to decide
whether or not to response to the pricing initiatives ofwhether or not to response to the pricing initiatives of
rivals. Most common factors contributes to pricingrivals. Most common factors contributes to pricing
initiative is overcapacityinitiative is overcapacity
- Airlines have little alternative but to response to theAirlines have little alternative but to response to the
challenge. By responding, they will risk of running intochallenge. By responding, they will risk of running into
a loss-making situation. By not doing so, the fall ina loss-making situation. By not doing so, the fall in
market share may cause more worse.market share may cause more worse.
-Start-up airlines may do offer discounted fare toStart-up airlines may do offer discounted fare to
persuade people to try its services. Equally, a maturepersuade people to try its services. Equally, a mature
airline might do so when launching a new route.airline might do so when launching a new route.
-Discounting initiatives may be taken in a situation ofDiscounting initiatives may be taken in a situation of
variation of seasonal demand. It may be suitable in off-variation of seasonal demand. It may be suitable in off-
peak seasons to utilize the unoccupied seatspeak seasons to utilize the unoccupied seats

11. Pricing response & price initiativesPricing response & price initiatives
-Other major question airlines need toOther major question airlines need to
address in managing pricing is when theyaddress in managing pricing is when they
should take of leading the market in priceshould take of leading the market in price
increaseincrease
-It is still possible through tariffIt is still possible through tariff
conference organized by IATA. Airlinesconference organized by IATA. Airlines
may unite in Yield Improvement Programmay unite in Yield Improvement Program
(YIP) to reduce availability of discount(YIP) to reduce availability of discount
fares & fares increasesfares & fares increases
-This approaches are effective in aThis approaches are effective in a
situation where capacity & demand are insituation where capacity & demand are in
equilibriumequilibrium

12. Pricing response & price initiativesPricing response & price initiatives
Low profits & losses may be caused by costLow profits & losses may be caused by cost
increase. It is vital to decide whether theseincrease. It is vital to decide whether these
increases are in “Controllable” or “Uncontrollable”increases are in “Controllable” or “Uncontrollable”
costscosts
Uncontrollable costUncontrollable cost: are those which airlines can: are those which airlines can
do little or nothing to influence such as fuel &do little or nothing to influence such as fuel &
landing fees. Situation allows to raise price tolanding fees. Situation allows to raise price to
recover the financial positionrecover the financial position
Controllable costControllable cost: are those which are within the: are those which are within the
control of airlines management such as labourcontrol of airlines management such as labour
cost. It contains 30% of total cost. Effectivecost. It contains 30% of total cost. Effective
management of these is essential to profitablemanagement of these is essential to profitable
without discounting the price.without discounting the price.

13. Pricing response & price initiativesPricing response & price initiatives
-It possible to raise price in up-It possible to raise price in up-
swing period of trade cycleswing period of trade cycle
when demands are recovering.when demands are recovering.
Similar situation was found inSimilar situation was found in
mid 1990’s & in 2004-05mid 1990’s & in 2004-05
-Airline can increase prices in aAirline can increase prices in a
market where it has strongmarket where it has strong
domination and market sharesdomination and market shares
are existedare existed