Friday 21 June 2013

The ‘farce’ of airline pricing

Given the Irish government’s decision not to sell their 25% share of Aer Lingus, and the probable EU demand that Ryanair reduce its 29% shareholding in the national airline, it is possible that Ryanair will intensify its pricing competition in an attempt to get the stakeholders back to the negotiating table. This means that airfare pricing could become even more of an unfunny ‘farce’ for even savvy consumers.

Moreover, with even business class flyers resorting to budget airlines in these austere times, it is perhaps useful that NAMs familiarise themselves with the airline pricing process in order to optimise limited travel budgets.

How the pricing model works in practice
To start, new BBC research suggests we may need to reassess some of the things we think we know about air fares. For instance, many of us assume that prices only go up as the date of departure nears.

Prices on routes from London to major European cities including Rome, Barcelona and Berlin were monitored by the BBC every day for six weeks. The aim was to track how fares moved, rather than to compare prices.

The findings show that fares can actually fall and then rise a number of times during the period leading up to a flight. For instance, the price of a Ryanair flight from London to Rome in the middle of April fell on six separate occasions in the six weeks before departure.
Full details of the Ryanair and Easyjet business models and the history of the peanut airlines are available here and here.

A way forward?
Whilst current budget pricing no doubt make sense to the discount airlines, it patently confuses their consumers. In fact a cursory glance at our ‘what if airlines sold paint' example might clarify the issue from a consumer point-of-view.

However, the airfare business models are simply classic examples of demand-based pricing.

If the shopping experience counts for anything, and with price being ‘just part of the total offer package’ we should not be too surprised at the same product being priced differently in convenience/corner-shops and supercentres. The confusion arises from the fact that if selection and ease of shopping are the drivers in an enhanced shopping experience then why are comprehensive selection supercentre prices lower than limited-choice corner-shops?

Moreover, if the price differential becomes too great, an opportunity for arbitrage arises, in that it becomes more advantageous for a Mom ‘n Pop owner to buy from a nearby supermarket than from a wholesaler…, in the same way that a third party van owner can capitalise on even a 2% cross-border price difference.

These unprecedented times will eventually cause us to clarify our approach to pricing from the point-of-view of all stakeholders, or suffer the loss of our business to competitors that have the courage to be fully price-transparent…

Incidentally, the new leather seats on Ryanair are a nice addition in terms of comfort, and not yet reflected in their pricing…  Michael?

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