Running Head: Airline Ticket Prices

Airline Ticket Prices Janetbea Mitchell Grantham University

Airline Ticket Prices

Abstract In this paper the apparent confusing pricing strategies of the airlines will be discussed. It doesn't make much sense to many people why airlines will charge the same price for a short flight as they do for a much longer flight. In this paper the focus will be on just a couple of the reasons as to why this can happen. Included in the reasons, is how the cost of various flights can come into play when airlines make a decision on how much to charge for a particular flight.

Airline Ticket Prices Airline Ticket Prices Since the deregulation of airline ticket pricing it has been confusing even to many experts, when it comes to how a particular airline determines its ticket pricing for various destinations. Some of the explanation for the variance in airfare pricing is simply the result of

managerial decisions and strategies. But when it comes to specifically determining the reason for a particular pricing structure within a single airline, we come to discover that there are many different reasons as to why prices are set as they are and at times may seem to be confusing to the consumer. For instance, as is mentioned in the instructions for this paper, it can seem very illogical for an airline to charge the same price for a short "hop" from Denver, Colorado to Casper, Wyoming as it does for a flight from Denver to Orlando, Florida. There can be a variety of reasons for such a seeming enigma. For instance, one of the first reasons that has to be considered is local competition. If there are a number of other airlines that are offering the same flight to Orlando, then it is much more likely that with the competition for business, there will be a lowering of prices that could even reach the point of being equal to the short flight to Casper, Wyoming. There can be a lot of area for an airline to play with its prices since over 80% of its costs are set by the time the flight is scheduled (Borenstein, 2011). So the majority of all the costs for a particular flight are set and known by the time the flight is scheduled. Thus it is much easier for an airline to foresee how cheaply they can offer prices for that flight to their customers. If there are, as mentioned already, a number of airlines offering that same flight to Orlando, which is much farther away than Casper, Wyoming and extremely more popular, it is easy to see how the various airlines would compete to offer the flight as cheaply as possible. Knowing how much investment they will have in that flight allows them to all settle on prices that are competitive with each other, and all of

Airline Ticket Prices

this without collusion. Plus, we can never overlook the simple related fact that sales quantity can make up greatly for reducing the price on something. So a flight that will be in high demand is going to sell a lot of tickets and as a result, the airline is willing to accept a much smaller profit on each ticket because they know that through quantity of sales they will still make a substantial profit. Also, the demand for a certain flight and the number of airlines that offer it can affect the pricing. While almost every airline is going to be offering flights to Orlando, Florida, which is a tourist spot, there is likely to be very few that offer flights to Casper, Wyoming since it is very unlikely that there will be very many people who will be making that flight. So with demand being so small and possibly only one, or very few airlines offering that flight, they can set a price that might seem to be higher than necessary, given that the flight to Orlando is the same price. In reality, it is due to lack of demand and very few offerings for that particular flight that results in the price being just as high for that short flight as it is for the longer flight to Orlando. This is in direct opposition to the regular thinking on supply and demand. Usually, when people think of supply and demand, they assume that with less demand that prices will come down. In this case it actually results in the cost being higher. So in the last two examples, we see two completely different direct results coming from high demand for a service or product, showing how demand is very closely related to the supply chain and how supply can result in a different result when it comes to demand. Costs do come into play for airlines when it comes to pricing, but not in the conventional way some people might think. While it definitely costs more to fly to Orlando than it does to Casper, an airline will not charge more for that flight for the simple reason that it wants to maintain its customer base and thus has to compete with other airlines offering the same flight

Airline Ticket Prices and even if that means that they have to offer prices that come close to barely covering their costs, they make up for it in other ways, such as offering much less popular flights and charging

higher prices for them. In such a way, even if the costs of the longer flight are much greater, they can make up for any lack of profits on its offerings for that flight by making more money on its offerings of flights to destinations that are much less popular. This in itself can explain why the price of a short trip to Casper, Wyoming can be the same as or even more expensive than a flight to a highly popular place such as Orlando. Another reason to consider as to why this might happen is to consider what we mentioned earlier, and that is the fact that at least 80% of all costs are set by the time a flight is scheduled (Borenstein, 2011). Knowing what the costs are allows for the flexibility that we mentioned already, but it also means that if the costs of both flights are known, then the total of both can be taken into account and thus a minimum allowable price can be figured for the Orlando flight and the Casper price can be set so as to make up for some of those lost profits that the airline wants to make up for from the Orlando flight. So when it comes to airline pricing, it is not always a matter of prices being set in the conventional supply-and-demand method. Different managerial styles can come into play as to how the pricing is handled and with competition being more regional among airlines, high cost flights can be offered at much lower prices than normal when it is deemed possible to make up for that lost profit by offering flights to less popular destinations (Chi, 2009). This is one of the ways that some of the smaller airlines have been able to get a foothold in the market, even now. They come in and offer flights to less popular destinations at much higher profits than they would see if they were flying to tourist hotspots. Then with those profits they are able to expand

Airline Ticket Prices and as they get a foothold, they are able to start offering those flights to more popular destinations in order to compete with the larger airlines. So, in conclusion, it may seem like backwards thinking to offer a longer more costly

flight at the same price as a shorter less costly flight, but in the long run it is this kind of business strategy that allows for airlines to stay competitive and still bring in a respectful profit.

Airline Ticket Prices References Borenstein, S. (2011, November 12). What Happened to Airline Market Power? Retrieved December 23, 2013, from https://ipl.econ.duke.edu/seminars/system/files/seminars/068.pdf Chi, J. (2009, April 10). Carriers pricing behaviors in the United States airline industry. (W. K. Talley, Ed.) Transportation Research, 45e(5), 16. Retrieved December 23, 2013, from http://www.njrati.org/wp-content/uploads/2010/03/TRE482.pdf