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Airline pricing

Airline industry ideal for price discrimination

Apr 10, 2011

Airline pricing is based on several factors. Economists will tell us that this industry is ideal for price discrimination.

Americans have an interesting expression ‚Äď ‚Äėbeing nickel-and-dimed.' Nickel and dime are slangs for the five-cent and 10-cent coins. The expression is meant to convey disgust at being charged for every little thing. Welcome to air travel.

Southwest Airlines is a low-price airline, focused on travel within the US and Mexico. There are no seat reservations in this airline. You line up at the gate based on a number that is generated specifying your position in the line. Once you board the aircraft, you are free to sit where you want. But if you would like to be in the first group that enters the aircraft, an extra $10 when you buy your ticket will give you that right. The payment may be worth it if you dislike sitting in the middle in a three-seater row.

But Southwest allows you to check-in two bags at no extra charge. Other airlines charge extra for every bag you check in but you can pick your seats, if you are early enough, in an online check-in system. US Airways charges extra for an aisle seat or a window seat, or in the exit rows. American Airlines charges extra for a seat in the front rows and you get to board early. Continental Airlines charges you for the facility of holding a ticket without paying for it for three days. The Irish carrier, Ryanair, even seriously considered charging for use of the toilet in the aircraft, but wisely desisted.

Baggage load

Jet Blue gives you all the plantain chips you can eat for free, but charges you extra for the second checked-in baggage. Oh, and almost no airline serves you food in-flight anymore on domestic routes. The stewards will give you packed sandwiches for a charge.

There was a time when travelling by air put you in a different class (one in which you could afford it or your employer thought you were worth it). So, only important people travelled by air. It was special. Even today, Indian newspapers will refer to someone having ‚Äėair-dashed', to convey a sense of importance and urgency. Otherwise you would ‚Äėrail crawl,' I guess.

The hostesses of Indian Airlines would first come around with a tray full of sweets and you could pick more than one while avoiding eye contact. Then you were given a towelette to freshen up and forget the grime of land travel outside as your plane took off. Soothing music would fill the air. You would be invited to unbuckle and stretch in your seats, while the stewardesses worked furiously to warm your food and bring it in trays, and you had a choice of entrees and beverages.

I knew all this would begin to disappear when first the music stopped and packed food was rapidly handed out on both sides of the aisle as the stewards looked straight, without a smile on their faces. But that is the price we paid to make air travel affordable.

In the US, the deregulation of the industry in 1978 brought new players and raised strident competition, which lead to dropping fares and profitability.

Cost factor

Airline pricing is based on several factors. Economists will tell us that this industry is ideal for price discrimination.

The seller has some control on the price, buyers have different price elasticities of demand, and resale of the ticket by the buyer is not possible. Thus each ticket can be sold at a different price, depending on when you book, how you book, the day you book, and so on. Software programmes can constantly calculate the empty seats remaining and price them while maximising returns. Yet, competition eats away all those margins. Hence, the tendency to raise revenues from wherever possible.

From a customer point of view, being nickel-and-dimed may not be a bad thing. I pay for the basic cost of getting from place A to place B. Everything else is extra. Why should I pay for food (that used to be included in the price) if I don't want to eat it or like to bring my own? Why should I pay for someone else having the convenience of carrying their household stuffed in two suitcases?

I can see how some services need to come as part of a package and not be charged on an as-required basis. Like fire services, but not air travel.

Required service

In October 2010, fire-fighters in rural Tennessee allowed a house to burn down, while they stood by and watched, because the owner had not paid the $75 fire service charge for the year. They had turned up in response to a neighbour's call (who had paid the fee) and who feared the fire would spread to his house.

Several small towns in the US, working on limited budgets, charge fees after they render the service, so residents have been surprised at receiving hefty bills.

In some ways, others have begun to be affected by these changes in rules. When an airline charges extra for any bag checked in, passengers try to buy the biggest allowable carry-on bag and stuff all their items into it. This has begun to delay baggage checks at airports, as security personnel take more time checking suspicious items in baggage being carried on board. This hurts all travellers, and the security authorities have requested airlines to at least allow one bag free.

Optional services

The airline industry in the US does face several other challenges. A recent study shows that complaints about airlines have gone up significantly. Moreover, while the number of air travellers increase, airlines are reducing the number of fights and seats to match demand and supply. As fuel costs rise, they are going to look for more creative ways to raise revenues.

In coming years, airlines expect that 15 per cent of their revenues will come from optional services. These could include not just the ones we are seeing now, but also phone rentals, airport transfer services, destination maps with advertising on them, and destination activities like music and entertainment tickets. I even have other ideas for their consideration; like extra charge for a smile from the stewardess, and a discount for a seat that will have a child sitting in the one behind it.

Airline industry ideal for price discrimination

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