...Same point of departure, same destination, the same snacks. Why is it people sitting next to each other on the same flight can pay such different amounts for their tickets? Airline pricing seems to be a great mystery. The airline industry refers to their pricing game as “yield management” or “revenue management.” Meaning prices on the same plane can fluctuate widely based on available seats at the time of purchase. Even though this seems to defy logic (and textbook theory), there might just be a method, an algorithm, to the madness. In a perfectly competitive market, companies would have no power to discriminate by price. Price discrimination means that one is charging different prices to different consumers, whereby price cannot be explained by the differences in cost. In this type of environment, the price of airline seats would be a posted price and would stay the same until the flight would take off. This paper will try to rationalize the price discrimination that is ongoing in the airline industry, as well as seek to prove the optimality of certain routes via several online pricing sources. To price discriminate successfully, a company must have enough market power to be able to charge over marginal cost, and product resale is nearly non-existent. Although the resale of airline tickets is possible, it involves high search costs and does not eliminate restrictions such as blackout days or time-of-day-constraints. However, the airline industry is not predictable...
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...Fixed costs do not vary with the scale of operations, and will be incurred even if the flight is cancelled. Examples of fixed cost are the rental cost of leased planes, which is time- but not operations-sensitive, and general administrative costs such as salaries. Constant costs, which cease if the flight is cancelled but are invariant to the volume of traffic carried, are also high. Examples of constant costs are the subsistence allowance paid to the cabin crew, and landing fees, which do not depend on the number of passengers, but will not be incurred if the flight is cancelled. Variable costs, which vary with the volume of traffic carried, have traditionally been quite low in the airline industry. They include ticket commissions, baggage handling, and cabin amenities including food and beverages, among other passenger-related costs. With the recent spate of cost cutting, where ticket commissions to travel agents have been eliminated by the major airlines (with the exception of Southwest Airlines), a cap of $100 commission on international flights, and drastic reductions in the quantity and quality of meals, variable costs have gone down. To counter the effects of the September 11, 2001 terrorist attacks, U.S. airlines have reduced fares to lure back lost passengers. As a result, load factors for 2002 are estimated to be around 72 percent, but the breakeven passenger load factor has risen to 81 percent, so losses for 2002 are estimated at $9 billion. (3) Thus there is...
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...University Malaysia Kelantan (UMK) Malaysian Graduate School of Entrepreneurship and Business (MGSEB) Course Name: Financial Reporting & Controlling Course Code: GST 5033 “Revenue Recognition of AirAsia” Submitted To: Prof Dr. Zulkarnain Bin Muhamad Sori Submitted By: Mohammad Osman Goni (Matric No. P13D179F) Hayder Alwan Kadhim – P13D20F Wesam Esam Hamzi - P14D482F Assel Faisal - P14D484 VALUE CHAIN OF AIRAISA To better understand and analyze the specific activities through which AirAsia can create a competitive advantage, a value chain analysis for airline industry has been conducted as below to model AirAsia as a chain of value creating activities. The goal of these activities (Inbound logistics, Operations, Outbound logistics, Marketing and Sales, and Service) is to create value that exceeds the cost of providing the product or services, thus generating a profit margin. Figure: Sample Value Chain of Airline Industry Value Chain of AIRASIA Inbound Logistics: As inbound logistics involves different categories in airline industry for example how to schedule flights, keeping an eye on their competitors that what strategy they are adopting how to sustain in market, and how to cut off their price as they manage fuel efficiency by purchasing it advance when prices are low, and how to plan routes as they mostly plan short routes so that their costs are low. Outbound Logistics: As air Asia mostly uses their operations through online as their...
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...It is commonly known that the airline industry uses a different mechanisms to price discriminate (PD) consumers with varying elasticities of demand in terms of travel.[1] In this case study, I will investigate PD based on the day of the week a ticket is purchased. In theory, this method of price discrimination is very feasible as airfares can be easily changed on a day to day basis. For example, consumers who travel on any given day of the week but purchase on the weekend may have different PED than those consumers who purchase their tickets during the week. By comparing different days of the week and ticket prices, we can study whether the airline industry has identified this method as a valuable segmenting device. I will start this case study by defining the theory of PD then continue by assessing data regarding ticket prices and day of week of which purchased then conclude if there is enough evidence of PD. Price discrimination is the practice of charging consumers different prices for the same good or service, whereby the relevant price in each case depends on the buyers characteristics. The most common form of PD would include grouping consumers based on certain attributes and charging these groups a different price. In pure price discrimination, the price of a good or service will be set at the maximum of which each consumer is willing to pay. The goal of PD is to gain an extra slice of untapped revenue source from consumers who are willing to pay a higher price...
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...Airline Ticket Pricing The basis of airlines competition for passengers and a larger share of the market are based on: i. Frequency of service and departure schedule on each route served ii. Price charged, relative to other airlines, to the extent that regulation allows for price competition iii. Quality of service and products offered ‐‐airport and in‐flight service amenities and/or restrictions on discount fare products Passengers on the other hand choose combination of prices, flight schedules and product quality that will maximize the utility of taking a flight. Therefore, it is in the interest of each passenger to have the best service for the lowest price possible on a flight that departs at the most convenient time (Peoples, 2012). Price elasticity is a measure of how responsive consumers are to price changes or consumers' price sensitivity to changes in price. From the law of Demand, we know for certain that an increase in the price of a product will always result in a decrease in the amount demanded and vice versa. That is, we know the direction of the change. Price Elasticity answers the question: When price goes up, how much does the quantity fall. Knowledge of price elasticity helps a firm to accurately forecast the impact of price changes on unit sales. Price elasticity also helps the firm determine an optimal pricing strategy to max profits. The understanding of the price elasticity of demand for a given company's services can guide the firm in...
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...One of the industries which perhaps has shown the most changes in market model is the airline industry in the United States. The airline industry can be analyzed different before and after deregulation and before and after the terrorist’s attacks of September 11th. These events have changed the industry in terms of both airfares and market concentration in major airports. Prior to deregulation in the 1970’s the Department of Transportation (DOT) served its goal by looking after the public interests. Once the focus of the DOT shifted to assuring airlines were operating under strict safety standards and procedures this gave a chance for airlines to take on any domestic route it felt capable of performing. Deregulation resulted in structural changes for airlines. Following deregulation, most of the largest airlines began to operate in the now well known hub-and-spoke system, which allowed for efficient connections for passengers from small- and mid-sized cities, but it also has increased airline concentration at hubs. As a result, the net effect has been to increase the choice of carriers at non-hub cities and to increase the frequency of service but also to increase the market concentration at hub cities. According to Parkin, (2011) most governments use a mechanism for allocating airport boarding gates and facilities, in some cases it even allows for competitive bidding for boarding gates and landing rights thus encouraging competition among airlines, and it also might encourage...
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...Information systems are critical for take-off in the airline industry Textbook, pp. 186-187 What are the advantages for an airline of using a revenue management system? Are revenue management systems a competitive advantage or simply a new necessity for doing business in the airline industry today? What other industries could benefit from the use of a revenue management system? How could an airline use customer information to gain competitive advantage? What types of metrics would airline executives want to see in a digital dashboard? How would an airline’s revenue management system be used for decision support? 1. Problem identification What are the key problems affecting the business? What are customers saying about the service and the product? What is the root cause of any decline in revenue or production time? 2. Data collection Why are certain processes falling short? What are the immediate steps the company can take to adjust the current processes to improve them? Who are you listening to, and are they actual or complaints or rumours? What departments are struggling? 3. Solution generation What are some of the solutions you have for improvement? What are some of the solutions your management team has? How will you go about collecting all the best solutions? 4. Solution testing Are these solutions long-term or short-term solutions...
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...Case Study 1: QuickFlix 1. Will the video store die out, or will there still be a place for it in the world of Quickflix? Quickflix's long-term plan is to wean all its customers off discs. Quickflix bought Bigpond Movies' disc-only customers when Telstra abandoned its disc delivery service, so Quickflix will be keen to convert these Bigpond refugees to streaming customers as soon as possible. Quickflix will struggle to wean customers off DVD completely until the NBN reaches critical mass and makes streaming practical for everyone. Even then customers are unlikely to abandon discs until the streaming service offers the same range of movies as the disc service. Of course there's also the fact that the quality of streaming services falls short of discs. With Quickflix you can enjoy home delivered DVD and Blu-ray rentals and instant streaming of movies and hit TV shows to your internet-connected devices. No need to be stuck with long term agreements, set top boxes and hidden costs. 2. Will the video streaming part of Netflix eventually put the DVD part out of business? There’s a reason Netflix has held on to its DVD business for so long: It’s incredibly profitable. Forty-seven cents of every dollar Netflix customers spend on DVD subscription plans are pure profits. The contributing margin of streaming is far lower, largely due to the high costs of content licensing. That’s why Netflix has long used the money it has made from DVDs to build out its streaming...
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...Question 2. Are revenue management systems a completive advantage or simply a new necessity for doing business in the airline industry today? What other industries could benefit from the use of a revenue management system? Why. Since customers can compare fares from all competitor with few mouse clicks. Today airlines fares have become almost totally visible and thus airlines are forced to implement system. if a fares too high, some potential customers could be lost, if the fare is too low, the airline loses out on potential revenue earned. Yes it is necessity for doing business in airline industry, now days airline rely heavily on the use of revenue MIS. These systems forecast the demand for a flight at various fare levels based on historical demand. Without computers, this task would be impossible. The reason for this is large airline with hundreds routes and multiple fare classes, the mathematical modeling required is beyond that of a human being. So I think both of them are critical in airline industry. Hotel. Because revenue management allows it provide bedrooms for the right customers at right time for the right price, based on analytics and predictions revenue management provides. Question 3. How could an airline use customer information to gain competitive advantage? Airline could select those most purchased customers and investigate their profile information to learn their habit in purchasing airlines and competitors, and airlines could improve their business...
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...Refer to the discussion of the New York-San Juan pricing decision in the case. What additional information should Doug Santoni collect to decide on a response to Eastern's pricing initiative? In response to Eastern’s pricing initiative, Doug Santoni should collect several bits of information before deciding on an appropriate rejoinder. First, he should know the volume of the passengers that travel along this route, for both American Airlines, and it’s main competitors, Eastern and TWA. This will allow him to make the correct downstream calculations such as changes in revenue, profits/losses, and capacity along the New York-San Juan route. A breakdown of the busiest times/routes (for all airlines, but especially American) would be useful to determine which flights need to be targeted, if any, with a response. Most of the other information Doug should collect relates to the makeup of the passenger types. How many passengers are traveling for business versus pleasure? Knowing this could again help predict capacity and revenue changes. While the makeup is divided fairly evenly into three categories (business, leisure, and locals), what is their specific makeup during the peak and slow seasons? The latter is when Eastern has tended to target with low one-way fares in the past, and it would be good to know who purchases those tickets at the time. If the low point is coming from a slow in leisure and/or local passengers, a price drop may be needed to increase passenger...
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...Refer to the discussion of the New York-San Juan pricing decision in the case. What additional information should Doug Santoni collect to decide on a response to Eastern's pricing initiative? In response to Eastern’s pricing initiative, Doug Santoni should collect several bits of information before deciding on an appropriate rejoinder. First, he should know the volume of the passengers that travel along this route, for both American Airlines, and it’s main competitors, Eastern and TWA. This will allow him to make the correct downstream calculations such as changes in revenue, profits/losses, and capacity along the New York-San Juan route. A breakdown of the busiest times/routes (for all airlines, but especially American) would be useful to determine which flights need to be targeted, if any, with a response. Most of the other information Doug should collect relates to the makeup of the passenger types. How many passengers are traveling for business versus pleasure? Knowing this could again help predict capacity and revenue changes. While the makeup is divided fairly evenly into three categories (business, leisure, and locals), what is their specific makeup during the peak and slow seasons? The latter is when Eastern has tended to target with low one-way fares in the past, and it would be good to know who purchases those tickets at the time. If the low point is coming from a slow in leisure and/or local passengers, a price drop may be needed to increase passenger...
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...Airlines charge different prices to different group of consumers for the same or similar product (price discrimination). Airline companies can segment customers with different price sensitivity- have different demand curves Tickets are offered at a different price depending on when you purchase it, at what time of the day, day of the week, services you purchase and cannot be resold. By offering different fares airlines are creating consumer groups who in turn will self select based on their elasticity of demand. This is an example of second degree price discrimination. The consumers pay different prices for different amount of quality of the good purchased. Having market power, airline companies charge higher price to business travelers who are willing to pay more. Business travelers usually do not purchase in advance they do not select their travel dates and time they travel. Their ticket is not bound by restrictions (time, day of the week etc.) they do not chose when to fly and the cost is covered by their company. The other segment of customers are more price elastic and unwilling to pay higher prices. However, their ticket comes with restrictions attached to it. A firm is setting the price of its products given the market conditions and its desire to maximize profit. Since it sells the same product to different segments its marginal cost is the same for both groups. Most of the cost for a flight are fixed cost and are well known in advance. As the variable cost (food...
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...Lincoln University Literature review Question: Discuss the potential contribution that chicory could make to New Zealand farming systems Title: Chicory’s (Cichorium intybus) agronomic principles, contribution to farming and the associated limitations- an analysis Summary Chicory (Cichorium intybus) is an increasingly popular crop that is excellent in providing high quality feed and high mineral content to grazing animals. Chicory is fast to establish and competitive for its resources given the right conditions, thus has high yields that occur in autumn, spring and summer. Yields expected, range from 8- 10t/ ha which consist of green leaf tissue which is valuable to New Zealand farms. The aim of the report is to find out the potential contribution of chicory to New Zealand farms by its agronomic principles, main advantages and the associated limitations. The literature covered in the findings is from Australian and New Zealand journals and websites, majority being by New Zealand researchers. Findings suggest that chicory is beneficial to New Zealand system under the right conditions following certain guidelines and recommendations. Deer and lambs can do better on chicory rather than the traditional ryegrass (table 1). Other findings suggest that climate change will have an impact on plant growth in chicory. Introduction Chicory is classed as a forage crop that belongs to the Asteracea family. It is commonly used as a specialist summer feed crop which is vital...
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...SZABIST Financial Management FOOD FOR THOUGHT Problem Set 1 Faizan Ahmed 1 SZABIST Financial Management Fair Value Valuation Relevant Formulae… Faizan Ahmed 2 SZABIST Financial Management Question # 1 Construction of Yield Curve… • Given the PKRV rates available under the sheet named RELEVANT DATA in the excel workbook provided FOOD FOR THOUGHT – SET 1, you’re required to do the following: – Construct a short-term yield curve and comment on its shape; – Construct a long-term yield curve and comment on its shape. Faizan Ahmed 3 SZABIST Financial Management Question # 2 Valuation of Government Securities… • Consider its January 03, 2011, you’re required to calculate the fair values of the following government securities: Treasury Bills Days to Maturity PIBs Initial Maturity Years to Maturity T-Bill – A 9 PIB – A 30 Years 3 Years T-Bill – B 117 PIB – B 7 Years 5 Years T-Bill – C 360 PIB – C 15 Years 11 Years • Suppose State Bank of Pakistan (SBP) in its monetary policy announce a hike of 50 basis points in the discount rate. Please revisit your fair value calculations after accommodating the increase in your discount rates (Assume that the surge in discount rate affects every tenor equally). *Look up the sheet named RELEVANT DATA within the excel file for appropriate discount rates. Faizan Ahmed 4 SZABIST Financial Management Question # 3 ...
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...Dynamic Pricing = Price Discrimination Dynamic Pricing, the idea that prices will change according to the level of demand. Dynamic Pricing is one version of price discrimination that delivers prices to consumers based on their personal attributes and other environment related events. The different attributes are collected by the producer/retailer and are based on bits of information, like age, financial gain, and/or region one inhabitants. The price is then individualized to the consumer. Many consumers find this practice to be harmful and many companies pre-internet commerce found this practice to be overly expensive. But, now that we are out of the dark ages, companies such as Amazon, Best Buy, and (our country’s favorite) Wal-Mart could possibly be able to proceed with this idea if it weren’t looked down upon so feverishly. As for the short term aspect concerning both dynamic pricing and the retail industry, it definitely has some problems to overcome if it were to ever succeed for a long term. Because the idea is based strictly on demand, this is hard for the retail world. Most items sold in retail are items that can become quickly outdated simply because they no longer fashionable. Also it is harder to discriminate buyers when the price is published in multiple places all over the internet. As is well known from the provided literature, the Airline industry is a respected industry that also contains price discrimination. The discrimination is seen when boarding a plane...
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