Commercial Airlines
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Transcript of Commercial Airlines
COMMERCIAL AIRLINESJames Lannon
Jacqueline EganJames Keady
INTRODUCTION
Introduction
Introduction
INDUSTRY STRUCTURE
Background
Industry: Travel Product:
Transportation to and from Destination
Customers: Those with disposable income and need/desire for extensive travel
Distribution: Varying levels
Background
Organization Competitive Marketplace
Consumer Good Extensive buyers and sellers Perfect Information Homogeneous product
Costs are reflected in the product price
Organization
CompetitionAirline Deregulation Act October 24, 1978 Removed gov’t controls 1973 Oil Crisis and stagflation- Congress feared
a repeat of the Railroads Penn Central Railroad had just collapsed in the largest
Bankruptcy in history Deregulation has created a more competitive
marketplace
Competition
Competition
Major CompaniesAmerican Airlines
We know why you fly.
Founded 1930 Revenue: $22.7 Billion 5th largest airline in
world Bankruptcy
Major CompaniesUnited Airlines
Let’s Fly Together
Founded1926 Revenue: $37.1 Billion One of world’s largest
airlines with 2nd largest fleet- 703 planes
Merger with Continental
Major CompaniesSouthwest Airlines
A Symbol of Freedom
Founded 1967 “Low Cost” Airline Revenue: $15.7
Billion Largest US airline
with fleet of 708 planes
PRICING STRATEGIES AIRLINE INDUSTRY
Pricing Strategies 2nd Degree 3rd Degree Bundling & Tying Predatory Pricing
2nd Degree Price Discrimination Price Dispersion
Variation in prices for the same item Versioning
Variations of a product or service at different prices to different groups of customers First Class vs. Coach seating
Price Dispersion Increases with competition Increases with variation in the population Decreases with homogeneity of the
market Increases when there are more differing
product attributes A firms responsiveness to price dispersion
decreases when their market share increases
Price Dispersion The expected difference in fares paid is
36% Airlines likely to have 20 or more
different fares on one given flight
3rd Degree Price Discrimination
Dynamic Pricing Time-based pricingAdvanced Booking High valuation vs. Low valuationCapacity Constraints Optimal Allocation
Dynamic PricingPeak-Load Pricing Different demands for the same good
during different periods of the day, month, or year
Congested times vs. Off-peak times Reflects variations in opportunity cost
Results in higher price during busy period and lower price during off-peak periods
Peak-Load PricingExample: Flights for airline X between two
uncongested airports during off-peak periods will experience no price dispersion
Flights for airline X between one airport during a congested period and one airport during an off-peak period will experience price dispersion There is a variation in opportunity cost
Dynamic Pricing
Dynamic Pricing
Dynamic Pricing
Dynamic Pricing
Dynamic PricingIt can be observed that: Prices increase as takeoff approaches There are season peaks over the summer
months and winter holidays There has been a general trend in
increasing airline fares over the past 15 years
Advanced Booking Selling a good or service prior to its
delivery or usage Can increase profits when buyers are
uncertain about future valuation Allows for market segmentation Prevents loses on cancellations
Advanced BookingYield Management Systems Less price sensitive people are not willing
to purchase in advance Advanced purchases are made only by
low valuation people Segmentation of High-fare and Low-fare
consumers
Advanced Booking Allows for Options
Advanced contracting of a ticket with no specified date or time
Allows for maximum gain of consumer surplus and revenues
Capacity Constraints Optimal Allocation The most profitable allocation of High-
fare and Low-fare prices More attractive to buyers because it
guarantees services Allows for maximum consumer surplus
Predatory Pricing There are many different Airlines who
compete against each other for market share The big 6 are United, Delta, American, US Air,
Southwest, and Jet Blue The airline industry is made up for profit by
publicly owned corporations which have a fiduciary responsibility to earn profits for their investors and share holders. This is one of the reasons that Predatory Pricing
takes place in the Airline Industry.
Predatory Pricing continued..
Since there is constant competition in the airline sector, many Airlines conduct ruthless pricing campaigns to oust other airlines from their spaces. By doing this they can potentially drive them out
of the space and capture more of the market share
Drastically lowering prices from a regional airlines fare forces the smaller airline out of the market.
This forces customers to pay full boat and allows the larger airlines to earn huge margins on the flights
Predatory Pricing a Case Study Dallas-Fort Worth is the third largest
airport in the country. It serves 55 million passengers per year American Airlines flies 61% of these
passengers from this airport Complaint filed by Department of Justice
American Airlines uses its dominant position to deprive consumers of competitions benefits.
Continued.. The Department of Justice continued by
saying, “when small airlines try to compete against American, American typically responds by increasing its capacity and reducing its fares well beyond what makes business sense.” This allows American to drive smaller airlines
out of the market
Vanguard Airlines Small airline based in Kansas
Profitable flight for Vanguard was the Kansas to Dallas route
Started this route in January 1995 By April 1995 American had flooded the
market Upped flights from 8 to 14 per day Matched Vanguards fare of $80 per trip
continued American continued an all out war on
Vanguard Used similar tactics against them on all routes
which flew to Dallas Wichita, Cincinnati, and Phoenix
Vanguard was forced out of Dallas-Fort Worth hub all together
Perfect Example of Predatory Pricing
Once Vanguard pulled out of the Dallas Hub American, almost immediately cancelled extra (unprofitable) flights and raised routes fares by 50 to 80 percent Bragged that Kansas city route went from
being the “worst” to the “best in the west”
Transportation Law Paul Dempsey, director of Transportation
Law program at University of Denver describes airline pricing Says it is a “homicidal mission to destroy the
low-cost airlines.” American vs. Vanguard is a perfect examply
Benefits of a Big Budget American was able to absorb the short
term costs of increasing the number of flights out of Dallas American executives concluded, “the short
term cost, or impact on revenue, of “aggressive” (predatory) pricing can be viewed as the investment necessary to achieve the desired effect on market share.”
In other words, price so low that smaller airlines can’t compete so they are forced to exit the market.
Predatory Pricing is Hard to Prove
Supreme Court established 3 criteria for proving an instance of predatory pricing. Prices must be below an appropriate measure
of cost These artificially low prices must be capable of
driving rivals from the market The perpetrator must have a reasonable
prospect of using its monopoly power to recoup its short-term losses.
Deregulation Since 1978 when deregulation, no
government regulation on price, went into effect, courts had not heard a single predatory pricing case against an airline. (2001) So hard to prove because cost of flying an
extra passenger is practically nothing How to compare ticket prices
Business-Coach, Advanced or Same Day Purchase, bonus frequent flyer miles for different routes.
Bundling and Discounts Many Airlines give customers different
types of incentives to fly with them rather than the competition. Frequent Flyer Miles Drink Coupons Flight &Hotel Discounts
Frequent Flyer Miles Airlines often offer repeat customers
“miles” for flying with them as a type of Loyalty Program Each mile on the trip represents a mile that
they can redeem at a later date for another free or discounted flight
By doing this airlines are able to increase consumer loyalty Consumers want to use same airline so that they
can accumulate miles for free trips
Continued… Frequent Flyer miles also can be used for
increased benefits Travel Upgrades Access to Airport Lounge Priority Bookings
This is an example of 2nd Degree Price Discrimination
2nd Degree Discrimination Two-Part Tarrif
Price to get on the Plane Another cost for food, movies, alcohol, etc.
Example American Charges $150 one way to Miami
If you want to watch the movie you pay $2 for headphones, and if you want to drink you pay $7 for beer.
Bundling Many times Airlines will work with travel
agencies. Allow for people to book flight and hotel at
same time Easy for the consumer, much less expensive By doing this they increase flyers because
they feel like they are getting a better deal
Continued.. Bundling also allows airlines to charge
premiums at peak times of the year, while still offering discount Spring break packages are more expensive if
you do not book them in a package Successful because marginal costs of bundling
hotel and airfare are low Travel agency fee offset by more volume in sales
because of discount
Analysis and Recommendations
Airlines have fallen on tough times since the financial crisis of 2008 Many airlines struggling to survive because of
decreased travel and increased maintenance and fuel costs.
Many fleets are aging and are starting to need to be replaced Airlines will have to take on huge amounts of
debt to finance new planes
Investor Outlook Investing in an airline would be a risky
investment to take on The amount of debt vs. revenue that an
airline actually has is huge. Money made per seat sold actually is quite
low If market stays on current upswing,
airlines potentially could be more profitable. Pending low fuel costs
I would not suggest investing in Airlines at this point
Suggestions Airlines should have better customer
loyalty programs Increased loyalty means increased revenue for
every happy customer Having better miles programs will make
customers want to fly more to receive the benefits sooner. Making a trip to the Bahamas cost 20,000 miles
rather than 30,000 miles could increase loyalty Continue offering flight packages and bundling
with hotels to make travel easy and affordable.
Suggestions… Have tighter regulations on predatory pricing
Allowing more competition in the market will drive prices down
Less expensive flights will increase peoples travel plans Smaller airlines can enter the market, and buy planes
from large aging fleets of the market leaders This way the small airlines can get business going, and the
large airlines will have capital to finance improvements on their fleet
Stop nickel and diming customers. Charging $2 for headphones, rather than giving them
out and keeping the customer happy could make a huge difference with regards to customer loyalty.