E6pricingjan21.doc - AIRLINE PRICING AND REVENUES Dr Nigel...

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AIRLINE PRICING AND REVENUES Dr Nigel Dennis Senior Research Fellow School of Architecture and Cities University of Westminster 35 Marylebone Road London NW1 5LS Tel: +44 (0) 20 350 66559 e-mail: [email protected] The motivation for differential pricing It is fares paid by the passengers that provide the airlines with their major source of revenue. For British Airways (BA) in 2014, £9.9 billion of revenue was generated by 39 million passengers on scheduled flights and this represented 91% of the airline's total revenue. Each passenger paid an average of £251. If the fare could be raised by just £1 per passenger without affecting demand this would add £39 million (assuming zero commission) to the bottom line. This demonstrates the importance of pricing the product appropriately (Figure 1). Whereas thirty years ago airlines typically had a simple structure of a first class fare and an economy class fare, both related to distance, this has been replaced by one of the most complex pricing structures of any industry with the goal of maximising profit. Figure 2 demonstrates the issue of differential pricing. This is a demand based revenue maximisation policy to which the key is passengers' willingness and ability to pay. Consider three passengers, A, B and C willing to pay £300, £200 and £100 respectively for the journey. If only a uniform fare is offered, the best outcome that can be achieved is a fare of £200 where passengers A and B will travel, C will not, the total revenue is £400 and the average yield (revenue/passenger) is £200. If however perfect differential pricing could be employed so that A pays £300, B £200 and C £100 all three passengers will travel, the total revenue goes up to £600 and the average yield remains at £200. Segregation by cabin One method for catering to different passenger requirements is to offer a choice of accommodation on the aircraft at a range of prices. On its long-haul flights, British Airways for example offers a choice of First, Club and World Traveller (Economy) - Figure 3 (World Traveller Plus is now also offered as a fourth class). The costs associated with these products are not the same (Figure 4). Taking Economy Class as 100 we first adjust for seat pitch (legroom) then number of seats abreast. On a simple space occupied basis, First Class passengers with their lie-flat beds are occupying 5x the area of an economy passenger. Planning load factors are higher in Economy, while passenger services (food, drink, staff numbers) are higher in First and Business. This gives a broadly 8:4:1 split of costs between the three cabins. This differential is greater than it would have been five years ago as the specifications of the premium cabins have been steadily upgraded. 1
Type of fare Airline fares are something of a hybrid whereby market pricing has been applied to a cost based fare structure. In deregulated markets there is usually a proliferation of fares while in domestic markets with no real competition there may be only one fare.

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