Introduction
Price represents one of the primary determinants for successful revenue and profit generation for virtually any company operating in any industry. Airline companies operating within their domestic or international markets are no exception in this regard. It is ultimately the pricing strategy that each company choses to employ that will determine the competitive position of the airline carrier within its industry, as well as its ability to attract customers.
The Airline industry has experienced significant change over the last few years, particularly in the years following the September 11th terrorist attacks of targets in the United States in 2001. Since then, increased pressure has been placed on airline firms to modify the manner in which they operate, while also maintaining a strong competitive position. To gain a deeper understanding of the strategies that today’s airlines employ with regard to ticket pricing, the following paper will examine these strategies in greater detail, as well as the implications and specific outcomes that are related.
Comparative Analysis of Airline Pricing Strategies
One of the biggest factors that has changed the airline pricing strategy of airline companies is the entry of low-cost airlines that provide no additional frills to passengers. Some of these frills that are not provided include the use of an online booking system, no free in-flight catering, use of secondary airports in major destinations and the use of homogenous flights. These are in fact, innovative cut-backs that have allowed these airlines to offer customers one low cost for their travel .
Other than not providing frills, these low-cost airlines have a pricing model that is based on fare levels, load factors and operating costs. In this sense, the structure of revenue as well as the determination of the right price are as important as reducing the operational costs of the airline . A study conducted by Zhao and Zheng (2000) show that an excellent pricing strategy can increase turnover anywhere from two to five percent. Hence, it can be concluded that some low-cost airlines such as RyanAir have been successful because they have come up with innovative ways to reduce the ticket cost, and this has led to the phenomenal growth over the last few decades .
This pricing strategy brings up the next important factor, which is competitive advantage. Airline companies have a competitive interaction with each other to stay on top of the changing demand, that I turn, determines the price of a ticket . The ability of an airline company to understand and predict the demand for a particular sector or for a particular time of the year are decisive factors in the pricing model . The demand for a sector along with market competitiveness impact the fare dynamics and the resultant pricing decision of an airline company .
However, some studies have shown that the presence of other airline companies have little impact on the pricing strategies of low-cost carriers. This idea has been proved by Pitfield (2005) by observing the flights that originated in Nottingham East Midlands in 2003. The data collected through this observation shows that there is no impact of the presence of other airlines on the pricing of low-cost airline. The only factor that affects pricing is the demand alone .
While this idea is true of low-cost airlines, it is a different ball-game when low-cost and full-cost airlines operate in the same sector. In fact, there is mixed opinion on the impact of one another when it comes to pricing. A study by Alderighi (2004) shows that full-cost airlines tend to decrease the cost when low-cost airlines operate in the same segment. However, another study by Barbot (2005) shows that full-cost and low-cost airlines operate on separate levels, which means, the low-cost carriers do not compete with full-cost carriers when it comes to attracting customers. Both these studies are contradictory, and it opens up more room for discussion.
Further studies between low-cost and full-cost airlines show that route length and route frequency are the key differentiators between the two airline segments. Passengers who travel for more than 12 hours at a stretch would like to have in-flight catering and other entertainment options that will make their journey smooth. Such passengers who travel on a longer route prefer full-cost airlines even if costs more. As a result, full-cost airlines have an advantage over low-cost airlines on longer routes .
On the other hand, people who travel within the same country or for a shorter trip duration, typically less than six hours, tend to choose low-cost carriers because they can do away with expensive in-flight entertainment and catering. In this segment, low-cost airlines have an upper hand as is evident from the strategy followed by Southwest Airlines.
Another important determinant of an airline company's pricing strategy is its operating cost that includes the cost of fuel. A report by IATA shows that the airline industry's fuel bill was $212 billion in 2014, and this is five times more than the price of fuel that existed in 2002 . These fuel prices and the volatility that comes with it has made pricing difficult for airline industries. Furthermore, there is intense pressure on airlines to reduce their cost of operations without compromising on the quality of service so that they can accommodate the rising fuel prices without increasing the cost of tickets .
Going forward, it is going to be difficult for airline companies, whether they are low-cost or full-cost, to price their tickets . One of the areas they can tap into is technology, especially big data analysis. This analytical tool can help airline companies to better predict market demand as well as fuel prices, so that they can plan ahead for the future.
Conclusion
Upon completion of the comparative analysis of pricing strategies, it has become clear that pricing is one of the most difficult and important aspects that directly impact the potential success of an airline company in generating revenue and competing against other firms within the industry. Many strategies have been employed by airlines, particularly during the 21st century as air travel rules and regulations have changed dramatically. These strategies took into account the air travel process, as well as the entirety of the firm’s value chain, which include demand for air travel, route length, competitor pricing, cost of fuel and operational cost to come up with the right fare that will bring in more passengers in each flight. Prevailing literature on this topic indicates that the low-cost carrier strategy has become most popular among contemporary airlines as a result of changes in customer value perceptions of the air travel process. This suggests that airlines today must place significant emphasis on effectively meeting these new value perceptions through low cost pricing or the provision of additional services that increase customer perceived value. Firms that do not take decisive action to develop and implement an effective pricing strategy will likely not last long within their industry, nor will they present much of a threat to their competition.
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