Pricing strategies of low-cost airlines: The Ryanair case study

We analyse the pricing policy adopted by Ryanair, the main low-cost carrier in Europe. Based on a year's fare data for all of Ryanair's European flights, using a family of hyperbolic price functions, the optimal pricing curve for each route is estimated. The analysis shows a positive correlation between the average fare for each route and its length, the frequency of flights operating on that route, and the percentage of fully booked flights. As the share of seats offered by the carrier at the departure and destination airports increases, fares tend to decrease. The correlation of dynamic pricing to route length and the frequency of flights is negative. Conversely, as competition increases discounts on advance fares rise.     

How do carriers price connecting flights? Evidence from intercontinental flights from Europe

In civil aviation, hub-and-spoke (HS) networks are used by all large carriers. The importance of this system implies that many travelers use connecting flights. Nevertheless, only scarce knowledge is available on price formation of these trips. In this paper, we focus on the fares of connecting intercontinental flights, with one stop and at least one competing direct flight. We develop a simple model of a HS network, with imperfect substitutability between direct and indirect flights and Cournot competition on every route in the network. We test the model empirically, using reported fares for flights from seven European origins, including the five major airports in Europe, to five non-European destinations. We find that the fare of a connecting flight can be expressed as the weighted average of the fare of its direct competitor, the travel times of both flights its costs and the monetary value of the utility attached to the trip. The weight of the direct fare decreases as product diversity increases.     

Hub premiums in European civil aviation

We investigate the practice of carriers that charge higher fares for flights leaving from their hub. We analyze this phenomenon by relating fares to distance, using the main leg of intercontinental flights for scaling purposes. Our results indicate that the practice of a mark up on flights originating from or going to hubs is not typical for the US situation. At least some European carriers charge significant premiums for direct flights from their hubs. We find that at least part of these premiums can be attributed to market power. Policy measures should be aimed at reduction of market power and consumer protection. Furthermore, the existence of hub premiums should be taken into account in regional hub policies.     

EU/US Open Skies – Competition and change in the world aviation market: The implications for the Irish aviation market

The EU/US Open Skies agreement became operational on March 29th, 2008. The 23% increase in flights between Ireland and the US in 2008 under the agreement is the highest expected increase under the agreement and is almost three times greater than the expected overall increase in air travel between the EU and the US. Open Skies increases the number of routes between Ireland and the US by 3 to 10 and allows airlines to fly directly to and from Dublin without a compulsory stop at Shannon. There are very strong economic, investment, visitor, political and ethnic ties between Ireland and the US and air travel between the countries per head of population in Ireland is 5.6 times greater than the EU average. The benefits from Open Skies include lower fares, new routes and direct services reducing the need to backtrack over European hubs, in addition to the abolition of the requirement to stopover at Shannon.     

Competing on value: Perspectives on business class aviation

This paper presents an airline consumer choice model to analyze value propositions – the benefits delivered to passengers in relation to the fares paid. The model is developed using a study of clientele flying business class, studying three premium start-up airlines Eos, MaxJet and Silverjet that provided business-class-only flights on London–New York routes. Premium airlines were compared to selected rival full-service carriers for sustainability of their business class value propositions, using preference profiles of five target customer groups that comprise the business class passenger population. We find that the three premium start-up airlines were superior in offering some appealing features at reasonable fares that were highly valued by some passengers, although they were unable to replicate some other attractive aspects in the value propositions of the incumbents. This suggests a coexistence of premium entrants and incumbent carriers would have been possible, had the environment they operated in not changed drastically for the worse, before the premium entrants had achieved the financial robustness necessary for survival.     

First-class airline travellers' perception of luxury goods and its effect on loyalty formation

This study examines how first-class airline travellers' perception of luxury goods influences the formation of their loyalty to first-class flights. Based on the proposed hypotheses, a conceptual model was developed and tested using empirical data collected from a sample of 202 first-class airline travellers in the USA. The results indicate that the five types of perceptions of luxury goods (e.g. quality, hedonism, conspicuousness, exclusivity, and the extended self) were generally associated with consumer attitudes towards first-class flights and thus led to well-being perceptions and perceived price fairness. In addition, well-being perceptions enhanced perceived price fairness, customer identification, and loyalty. Finally, alternative attractiveness moderated the relationship between consumer attitudes towards first-class flights and perceived price fairness. The results have important theoretical and managerial implications.     

Measuring the economic effects of bilateral liberalization air transport

This paper develops a model that measures the equilibrium changes and welfare consequences of liberalizing the fare, entry and service levels of a bilateral air transport agreement. The model also provides measures of the distribution of gains and losses across the consumers and airlines of each country involved in the bilateral as well as those of any third foreign country that may be affected through traffic diversion as a result of changes in the bilateral. In our model, service quality aspects are treated in the framework of hedonic price theory by specifying the quality-adjusted price (quantity) as a multiplication of the observed price (quantity) by the reciprocal quality index function (the quality index function). The model is illustrated using the Canada–Japan bilateral to assess alternative combinations of changes to fare, frequency and entry restrictions. We report the outcomes for market share, airline profits, fares and consumer welfare.     

The formation of the tourist's loyalty to the tourism distribution channel: how does it affect price discounts?

Given that distribution agents who wish to maximize long‐term business profits should not only attract new consumers but also keep them loyal, this study analyses the variables that determine the consumer's loyalty to distribution agents for tourism. Although retailers in the service industry employ price discounts on products to motivate short‐term sales, they often establish promotional policies without considering their effect on the long‐term business results. This paper presents an empirical study of the effect of price promotions on tourists who travelled with a package tour. The results indicate that price discounts do not erode consumer loyalty directly, and that the key to obtaining loyal consumers is to offer package tours that customers perceive as providing high‐quality service. Copyright © 2007 John Wiley & Sons, Ltd.     

The economics and geography of regional airline services in six countries

Do the determinants of service and pricing on “regional” routes – linking towns and smaller cities to main trunk routes and/or to each other – differ from the established results from the literature? We study all flights (about 3000) on all regional routes (about 250) with scheduled airline service from one of about 130 regional towns or cities, in regional airline markets in six countries: Australia, Canada, New Zealand, Norway, Sweden, and a sample of three U.S. states which closely resemble the other regions studied. For each flight we have observations on up to five prices offered at different times before flight date. We also have equipment type and social-economic data. Overall, our results give qualified support to the standard gravity model of the extent of service between city pairs, though with two interesting differences: operators on regional routes have greater flexibility in the size of aircraft they can deploy, which results in a finer-grained variability of service offerings and, the presence of competition on regional routes has a large effect on the total supply of seats. We are able to successfully estimate a well-specified airfare model, which shows strong effects of competition on prices, quite substantial intertemporal price discrimination, and interesting differences between regional and main trunk route pricing.     

Making public transport financially sustainable

Over the past two decades, Germany has improved the quality of its public transport services and attracted more passengers while increasing productivity, reducing costs, and cutting subsidies. Public transport systems reduced their costs through organizational restructuring and outsourcing to newly founded subsidiaries; cutting employee benefits and freezing salaries; increasing work hours, using part-time employees, expanding job tasks, and encouraging retirement of older employees; cooperation with other agencies to share employees, vehicles, and facilities; cutting underutilized routes and services; and buying new vehicles with lower maintenance costs and greater passenger capacity per driver. Revenues were increased through fare hikes for single tickets while maintaining deep discounts for monthly, semester, and annual tickets; and raising passenger volumes by improved quality of service, and full regional coordination of timetables, fares, and services. Those efforts by public transport agencies were enhanced by the increasing costs and restrictions on car use in German cities. Although the financial performance of German public transport has greatly improved, there are concerns of inequitable burdens on labor, since many of the cost reduction measures involved reducing wages or benefits of workers.     

Competitive responses to low cost carrier entry

Recent research has found that the entrance of a low cost carrier leads to lower prices on routes it has entered. This paper extends this analysis by examining the impact of route entry by a discount carrier, ValuJet into an established carrier’s hub, Delta, and by examining price changes on routes not entered by the low cost carrier. We found that Delta lowered its fares on competitive routes terminating in Atlanta and on routes flowing through its Atlanta hub in response to competition by ValuJet. We did not find evidence that Delta increased fares on non-competitive routes (either those terminating in Atlanta or flowing through Atlanta) to compensate for lost revenues on the competitive routes. This final result runs counter to the conjectures of the DOT and supports the argument that firms practice rational economic pricing in their hub-and-spoke networks. ©     

Optimal purchase timing in the airline market

This paper presents general patterns in airline pricing behaviour and a methodology for analysing different routes and/or carriers. The purpose is to provide customers with the relevant information they need to decide the best time to purchase a ticket, striking a balance between the desire to save money and any time restraints the buyer may have.The study shows how non-parametric isotonic regression techniques, as opposed to standard parametric techniques, are particularly useful. Most importantly, we can determine the margin of time consumers may delay their purchase without significant price increase, specify the economic loss for each day the purchase is delayed and detect when it is better to wait until the last day to make a purchase.As an application, we analysed air fares for routes from Madrid to London, Frankfurt, New York and Paris over the course of two months, taking into account advance-purchase ticket sales of up to 30 days. We found that the consumer has a margin of 18 days prior to departure within which to purchase a ticket without any significant economic penalty.     

Border effects for domestic and international Canadian passenger air travel

An augmented gravity model of passenger air travel between five Canadian airports and destinations within and without of Canada reveals a substantial border effect. After controlling for GDP, populations and distance, the number of seats offered on domestic routes is about six times the number on international flights. This result is consistent with the border effects found in studies of international merchandise trade.     

Localized competitive advantage and price reactions to entry: Full-service vs. low-cost airlines in recently liberalized emerging markets

This paper empirically investigates price reactions to the entry of the low-cost carrier Gol Airlines in the Brazilian domestic market in 2001. Given the substantial reduction in unconditional yields of the incumbent airlines on routes actually entered by Gol, we perform an econometric analysis of the determinants of pricing power along with the analysis of the pattern of price reactions by incumbent legacy carriers. Using data from a panel of routes disaggregated at the airline level, we obtain that (i) both airport and route presence are relevant at explaining pricing behavior; (ii) price responses vary significantly according to flight distance and the amount of seats supplied by the entrant, in the sense that the shorter the route, and the more the seats offered by the newcomer, the stronger the price reactions from the incumbents, with significant point estimates in the range 22–26% in yield reduction for routes as short as 350 km (approx. 195 miles). More generally, the results shed light on the impacts of airline deregulation in emerging markets and the issue of localized competitive advantage due to product differentiation in the industry.     

Greek domestic air transport–industry and policy developments From post-World War II to post-liberalization

The aim of this paper was to examine the developments in the Greek domestic air transport market which have most recently been affected by the liberalization process in the EU towards the single aviation market. Liberalization of the Greek domestic market was profound, ending 35 years of Olympic Airways complete monopoly on all air transport activities. Developments include new privately owned airlines, inter-regional routes, lower fares in real terms on routes with competition, innovation, improved services and wider consumer choice. Increased competition stimulated demand in the domestic market that reached record levels achieved in the mid-1980s. Market consolidation started in late 1999.     

Weekend effect in airfare pricing

Internet traffic during weekends is lighter than at weekdays, allowing airlines to adopt a distinctive pricing policy during the weekend. By analyzing the daily airfares for 1000 US domestic routes, this study tests whether a weekend effect exists in the level and dispersion of airfares. It finds a strong weekend effect for airfare dispersion, but not for price level. This suggests that different arrival timing of online consumers during the weekdays motivate airlines to adopt a distinctive pricing mechanism during weekends, by offering occasional discounts while maintaining the same fare level on average.     

Estimating welfare changes from efficient pricing in public bus transit in India

Three different and feasible pricing strategies for public bus transport in India are developed in a partial equilibrium framework with the objective of improving economic efficiency and ensuring revenue adequacy, namely average cost pricing, marginal cost pricing, and two-part tariffs. These are assessed not only in terms of gains in economic efficiency, but also in changes in travel demand and consumer surplus. The estimated partial equilibrium price is higher in all three pricing regimes when compared to the current price. As a result, consumer surplus falls in all three cases. The price increase is much larger with average cost pricing compared to marginal cost pricing or two-part tariffs, and hence a larger fall in demand and consumer surplus occurs due to average cost pricing. While there is a gain in economic efficiency from marginal cost pricing and two-part tariffs, this improvement comes at the expense of reduced public bus transit demand and consumer surplus, given the price inelastic public bus transit demand estimated for India. Given the mobility needs and the developmental concerns of a growing economy such as India, the challenge for policy makers is to balance the gains in economic efficiency in the public bus transit sector against other social, political, and developmental goals.     

A tale of airline competition: When full-service carriers undercut low-cost carriers fares

The pricing of low-cost carriers (LCCs) compared with traditional airlines has been extensively investigated since their inception in the air transport market. Abundant empirical evidence attests that, on average, LCCs' fares (per km) are lower than those usually offered by full-service carriers (FSCs). Such literature, however, paid virtually no attention to the conditions under which LCCs lose their convenience compared to traditional airlines. The purpose of this study is to investigate the occurrence of LCCs sometimes offering higher fares than FSCs on competing flights. By using a dataset expressly collected for this purpose, we are able to quantify its frequency and suggest some possible explanations. These findings concur to cast some questions on the widely held preconception of vertical differentiation between LCCs' and FSCs’ offered services. Further research will be needed in order to understand the relative weight of the suggested factors.     

Network industries in collision: aviation infrastructure capacity,financing and the exposure to traffic declines

This paper discusses how various aviation infrastructure service providers have dealt with the fall off in airline traffic following the terrorist attacks in the US on September 11th. It shows that these organizations have relatively high fixed costs and low incremental costs for providing services. As such, small changes in traffic have large impacts on revenue because revenues are generally proportional to activity. However, because of the high component of common and fixed costs, airport and ATS provider costs do not change in proportion to activity. When traffic declines, revenue shortfalls can arise because most airport and ATC systems operate on a simple cost recovery basis. The responses to the events of September 11th have also caused substantial increases in security costs. To the extent these costs are passed forward to system users, they will increase the price of travel and impact patronage further. Airlines also have substantial fixed capacity costs. The declines in traffic are often felt as an erosion of yields and fares as carriers seek to maintain traffic loads for the capacity they are going to operate. In general, the ability to pass along cost increases from providers to airlines or from airlines to passengers depends on relative supply and demand elasticities. Because infrastructure provision is often a monopoly, and the demand for airline services is price elastic, we suggest that most of the cost increases will be borne by the airlines. We also suggest that short-haul flights will be most severely impacted because the fees and taxes are a larger proportion of the fare for these flights. We also examine the extent to which additional infrastructure costs imposed on operators may exacerbate the downturn in their traffic.     

Channel coordination,trade credit and quantity discounts for freight cost

In this paper we consider vendor-buyer channels subject to trade credit and quantity discounts for freight cost. We deal with the problems of determining the vendor’s credit period, the buyer’s retail price and order quantity while still maximizing profits. We focus on how channel coordination can be achieved using trade credit and how trade credit can be affected by quantity discounts for freight cost. We show that profits for both parties increase under channel coordination when the credit period is kept within an appropriate range. This range becomes wider as the discount for freight rates increases.