Seminar Paper, 1998
22 Pages, Grade: 1.2
Since its deregulation in 1978 the US airline industry has been a forerunner in the use of price differentiation to maximise revenues. Robert Crandall, Chief Executive Officer of American Airlines, is credited with having coined the term 'yield management' (revenue management is often used synonymously) for the initial inventory management process put in place at American Airlines. All other major carriers followed American in the subsequent years, and today the principles of yield management are applied in the tourism industry for hotels, car rental companies and even many restaurants. Recently also consumer good manufacturers and service providers have developed interest in the practice of yield management.
Pricing is one of the four key issues in both tactical and strategic marketing. Three different generic approaches, cost-based, value-based and competition-based pricing strategies exist.
Prior to the deregulation of the domestic airline market in the US, pricing was not a major concern for airlines. Tariffs were regulated and had to be authorised by the Civil Aviation Authority. In many other countries the international flag carrier received major subsidies and the rational for pricing was not directly related to profitability. For instance, some national carriers are required to stimulate incoming tourism through low airfares. Only with privatisation profitability became the key concern of most airlines and pricing strategies with a new set of objectives were developed (Doganis 1991). The most important objectives across airlines are to ensure an adequate return on assets and an attractive return to shareholders as well as to generate sufficient reserve for self-finance.
In this respect it is crucial for airlines to be explicit about short-term and long-term performance objectives, as their achievement usually requires different strategic
4 Aviation Management, Sem. 2 - 1998 U of Sydney - Paul Freudensprung
pricing decisions (Holloway 1997). However, even in a deregulated environment pricing strategies not always are determined to maximise profitability. Other objectives like growth and increase of market share or the scope to even out fluctuations in demand might impinge on the profitability goal. A couple of sixthfreedom carriers used pricing to capture market share on international routes via their home base (Doganis 1991). In the immediate post-deregulation phase of the domestic airline market in the US, competition, particularly of new entrants was the major driving factor for airlines in their pricing decisions.
The two basic pricing strategies are differentiated in aviation are cost-related and demand-related pricing. Their rational is critical to the understanding of price differentiation and yield management employed by airlines (Doganis 1991):
For efficiency reasons most governmental and regulatory bodies are in favour of the cost related approach. This has been stipulated both by the Commission of the European Communities and the US Civil Aviation Authority. However, in practice airlines follow a demand related strategy. The reasoning behind this choice and a wide number of issues related to this approach will be discussed in the following chapters. Whatever kind of principles carriers decide to follow, it is an advantage if the pricing structure remains simple and easy to use. Otherwise the costs to train their sales staff and travel agents might reach an unfavourable magnitude (Holloway 1997).
In order to be able to implement demand-based pricing strategies, airlines must differentiate their customers according to what they are willing to pay for the service provided. The price of an airfare is driven by the individual customers value 5 Aviation Management, Sem. 2 - 1998 U of Sydney - Paul Freudensprung
perception of the service (Holloway 1997). In the literature price differentiation and discrimination are often used with a different meaning, sometimes synonymously.
There are two main reasons behind airlines differentiating the price of their services. Firstly, carriers try to shift demand from peak to non-peak periods. Secondly, carriers try to stimulate demand, which otherwise would not have been available to consume the service produced (Holloway 1997). Airlines try to exploit the different price elasticities among customers to reduce the consumer surplus and transform it into revenue for themselves (Hanlon 1996).
The service provided by airlines is perishable by nature. As soon as the door of the aircraft is shut, any seat not filled with a passenger is lost. Airlines try to reduce this 'spoiled inventory'. As a couple of authors state, airlines are willing to carry extra passengers for a very low price, as the marginal cost of this extra passenger is a meal, airport passenger charges and a little bit of fuel (Doganis 1991, Hanlon 1996). Therefore price is the incentive used to convince potential passengers to come forward and use these available seats.
Seminar Paper, 14 Pages
Diploma Thesis, 161 Pages
Diploma Thesis, 308 Pages
Diploma Thesis, 131 Pages
Diploma Thesis, 107 Pages
Diploma Thesis, 129 Pages
Diploma Thesis, 112 Pages
Thesis (M.A.), 144 Pages
Thesis (M.A.), 170 Pages
Research Paper (undergraduate), 40 Pages
Diploma Thesis, 77 Pages
Diploma Thesis, 185 Pages
Research Paper (undergraduate), 77 Pages
Diploma Thesis, 89 Pages
Diploma Thesis, 126 Pages
GRIN Publishing, located in Munich, Germany, has specialized since its foundation in 1998 in the publication of academic ebooks and books. The publishing website GRIN.com offer students, graduates and university professors the ideal platform for the presentation of scientific papers, such as research projects, theses, dissertations, and academic essays to a wide audience.
Free Publication of your term paper, essay, interpretation, bachelor's thesis, master's thesis, dissertation or textbook - upload now!