Airline Industry

Airline Industry

Kristy Clark Doskocil

Axia College University of Phoenix

Why do airlines offer a lower airfare with the purchase of a ticket 14 days in advance? The answer is quite simple; airlines know that a person going on a leisure flight will be purchasing a ticket 14 days in advance and flexible. For a person traveling on business their schedule is not flexible and they will not be able to stay overnight in most cases. Airlines can setup the supply and demand for the flights with this information and increase prices in order to make the difference for the seats that did not sell for leisure flights. Airlines determine the demand and supply of tickets that are purchased by passengers that are flexible and not flexible. Airlines also look into which days most people travel and if they stay the night at their final destinations.

The price of tickets brings about the supply and demand equilibrium for the supply of airline tickets. If there is an increase of profits that will bring about the supply of tickets in turn will reduce the price of airline tickets. If the profits decrease the price of tickets will rise and thus will slow down the demand of airline tickets. If the prices rise to high the demand will not be met and will not recreate the equilibrium of the supply and demand that is needed for airlines to operate. Airlines also have a fixed route and schedule for certain times and days of the week. With the airlines using this method they will use the revenue management to help with the distribution of supply and demand. Mr. Scott D. Nason, American Airlines says, "I believe that there will be (at least) four primary drivers":

pricing transparency

computing power and database manipulation

understanding of consumer behavior (especially web analytics)

consumer tolerance for being 'RM'd'

The pricing transparency that Mr. Nason, is referring to is the fact that consumers have many more options today of comparing prices for tickets that airlines offer. The airlines will need to update their systems so they will be able to see the competitors ticket prices. Consumers are now able to visit search engines such as Travelocity, Yahoo, Kayak, and Expedia to compare and find the cheapest airline tickets. They no longer have to call an airline and ask what the cost of a ticket will be for the dates of travel. Being able to take in the information of frequent fliers and website visitors airlines will be able to offer a better selection in the future to the demand of the consumers. Airlines will also look at the behavior of consumers. This will help airlines decide how important it will be to a consumer if they purchase a ticket for the last seat or they will be flying around the holidays. Ticket prices will be what the consumer is willing to pay for the first seat or the last seat of a flight.

So how will it play out? To borrow a trite phrase, 'The Customers will decide'. They will determine such critical factors as:

the importance of loyalty and loyalty programs

tolerance for non-refundability Ð'-- paying a hefty price for holding inventory versus the hotel/rental car model

transferability Ð'-- should/will a customer that bought a non-refundable be able to transfer usage

predictability Ð'-- how important will it be to customers to 'know' that a fare is fair, that it won't go down later, that it isn't materially higher than from a different channel or a competitive service?

I will make my predictions, as long as no one goes back and measures my accuracy ten years hence:

1. I believe that loyalty programs will get better and even more important than they are today. Airlines will make it even more worth your while to keep using them, to the exclusion of competitive options, through the use of escalating benefits. And their use of personal data about you will enhance these offerings. And you'll like it, too.

2. Airlines will have to find a better way to balance the inventory holding costs and the customer's need for some flexibility. They will use inventory controls and bid prices to govern which changes are free or inexpensive and which ones are not.

3. Security concerns will continue to limit the buyer's rights to transfer tickets, but airlines will figure out how to allow buyers to transfer the value of the tickets and the rights to a specific seat on a specific flight to a new customer.

4. Airlines will never agree on the need for fare predictability. Some will market themselves as 'every day low fares', and some will market their last seat availability for their best customers, who pay the 'best' (ie the highest) fares. Just like in other retail business. (Nason, 07)

Runway gridlock on the other hand is also affecting the airline industry. Many airlines will lower the prices of tickets due to reasoning that there are delays. This is a positive for consumers. A negative result for other consumers purchasing tickets at airports that do not have as many delays will be higher. This can insure that the airlines will be able to recoup the difference in the loss of tickets due to delays and the purchase of tickets are higher prices for a different airport. Raising the prices could alleviate some congestion, but airlines do not see that will help. The AP reports:

That strategy "will do nothing more than reduce service to small communities, reduce job growth and raise fares for commercial passengers," Zane Rowe, senior vice president of network strategy at Continental Airlines Inc., told the Senate subcommittee on aviation operations, safety and security. Joe Kolshak, executive vice president of operations at Delta Air Lines Inc., agreed. (Economist, 2007)

If low fares suggest underpriced air infrastructure, the increase in pricing is necessary. Many passengers could gladly pay a little more in airfare for the exchange of being more certain that they will arrive around their stated arrival and departure times. If consumers would be willing to pay for a ticket with a slight increase so that they could use runways could be a gain for efficiency of the airlines. Airlines could have congestion pricing which would be to avoid the increase in the small jet travel which is increasing to avoid delays.

On average an airline can lose up to $1.07 for each minute that a flight has been delayed.