Airline Employee Explains How Fares Are Really Decided, Case Study Example

Airlines are profit maximizers, and accordingly they price airfares in such a way that maximize revenues, ceteris paribus. Read through the answers to the questions in the first article, identify and link those factors together, while explaining each of them clearly.

According to the article “Airline Employee Explains How Fares are Really Decided”, airlines utilize several techniques in order to ensure that they are able to maximize their profits. Although consumers believe that a lot of extras are involved in the price decision process, such as allowing better priced flights on certain days, this is essentially myth because the airline companies would not profit from this type of promotion. Put simply, airlines will typically sell tickets for the same price, proportional to the travel distance. Longer flights will cost more money, as will long international flights that provide meals. Gasoline is a major contributor to these price differences. The second most important factor regarding price calculations is the popularity of the travel destination and the time during which the travel takes place. Popular travel seasons, such as Christmas and spring break will cost more money because more people want to travel. The only aspect of travel popularity that will offset the cost of a ticket is if the airline company desires to fill up the airplane to maximum capacity. In order to ensure that their net income is able to offset the costs of operating the plane and flight cancellation is not an option, airline companies may offer lower ticket prices in order to encourage passengers that would not typically travel to a particular destination to do so.

The author begins by explaining his role as a fare revenue manager. Ultimately, this is the individual who is responsible for analyzing the price of airline tickets in order to ensure that the company is making maximal profit. The major factors that impact price decisions include the particular route, season, and supply and demand that exists for a variety of different trips. Since this information is constantly changing, the fare revenue manager is responsible for keeping up with these trends and making informed decisions. For example, when the demand for a flight is low and the supply is high, it is likely that the price of the tickets will decrease, although additional factors will be considered in the decision making process as well. It is important to emphasize that not just one individual has this job and that there are several people filling this role. Furthermore, although the aforementioned calculations are important, a major factor directing price is competition. For example, if certain airline companies have the sole rights to travel to a certain airport, they will be able to significantly increase the price of their tickets and their profit will therefore increase as well.

It is important to consider many of the myths of involved in the calculation of ticket prices. When we hear these myths, it’s important to ask ourselves what the airline industry stands to gain from enacting these types of deals. The most common myths include the belief that there is a best time of day or a time of week to buy airline tickets and that “mistake” airfares are occasionally posted for promotional purposes. Ultimately, selling tickets for different prices at different times would not lead to enhanced profit. The cost of a flight to its destination is independent of when it is sold, so there is no logical reason for this type of practice. The fare revenue manager argues that while each airline loads its fares onto their websites at different times of day every day is true, he indicates that these numbers change regularly based on the market, rather than the time of day. Therefore, these prices are constantly changing, but the date and time is not a driver of this force. The only factor that should be considered in this aspect is when sales are announced. Typically, sales and deals are posted on Mondays, or other days of the week for different companies. When this occurs, other airlines may drop their prices as well in order to remain competitive. As weather conditions, the availability of seats, and other factors alter, it is likely that ticket prices for airline seats will shift as well.

Rather than having promotional intent, airlines that post “mistakes” actually do so due to human error rather than intent. The author of the article provides an example in which someone intends to lower one fare, but the computer will lower the fares of all other tickets as well. These errors can result in major losses in revenue and are not taken lightly; the more damage that an airline employee causes the worse the punishment will be. This has ranged from simple warning to firings. Most of the time, the airlines will simply just suffer for these mistakes in order to prevent their reputation from becoming damaged. Unlike changing the prices according to competition and other factors, these mistakes have no real purpose and can be extremely detrimental to the companies.

According to the author, the biggest ticket price changes occur “at 21 days, 14 days, 10 days, 7 days and 4 days”, which usually occurs as a consequence of advance purchase restrictions. In these situations, the airline is not changing much about how tickets are being bought are sold and prices are generally subject to availability. In many cases, this results from the less expensive tickets being bought first and the more expensive tickets are more likely to be available closest to the time of the flight. Therefore, seats with extra leg room or those located in first class cabins are likely to be sold last. In some cases, these seats will never be bought, and rather given to passengers to compensate for flight inconvenience or be awarded to them for giving up their flight opportunity on the behalf of another passenger. Although this process doesn’t impact the profitability of the airline company directly, its inability to sell the more expensive seats can result in less profit. Therefore, it is essential for them to ensure the flight is filled to the most reasonable capacity in order to ensure that the flight is worthwhile financially. A way of doing is to transfer passengers between flights in order to better serve them.

Sometimes people find that they can wait until last minute to purchase tickets with cheap fare and other times the fare will increase. This is mainly due to whether the flight is filling up and if advance purchase restrictions are applicable. In many cases however, popular flight routes will have additional seats known as “dump seats” that are in place in order to ensure that additional passengers will be able to be inserted. Essentially, the seats that are filled before the dump seats are done so to ensure that a flight will be able to make enough revenue to cover operations costs. The remaining seats can be sold as well, but this will make the company additional profit. Generally, these seats are filled last after the company has confirmed that the flight will be worthwhile. This also ties in to why some flights are cheapest on certain days of the week. Dump seats are less expensive because they are in excess. Flights that leave on Tuesday, Wednesday and Saturday have the greatest numbers of dump seats and are therefore the cheapest days to fly. This phenomenon is less likely to be observed on days in which greater numbers of passengers fly.

A major complaint concerning airline sales is that it appears that only a portion of tickets are available for these prices and that popular flights are not included. This is true and it is important to act on sale prices being offered quickly or else they will sell out. These promotions are typically used to sell seats on airplanes that are less popular, or require the buyer to purchase the tickets far in advance so the company is able to account for the amount of additional passengers. It is important to remember that these offers are meant to benefit the airline company rather than the passenger and that the passenger can benefit if they are willing to travel at a less popular time or on a less popular day. This ties in to the company’s want to increase their net profit and offering cheaper tickets in order to fill up an airplane that would otherwise be empty is a strategic way of doing so.

Lastly, a lot of customers complain that there are very few award seats handed out. This is not true, but the customers who want these free seats must be willing to travel at off peak times. Only a limited amount of seating is available during heavy travel times. This practice is also related to the airline company’s want to increase their revenue. If they give away too many seats on planes travelling during peak hours, they will not be compensated for a high priced ticket. Therefore, while airlines are willing to give incentives to their customers, it must be done according to what is most beneficial for them. Thus, it is important to consider that award seats have certain restrictions and using airline miles to acquire them should be done with this thought in mind.Essentially, airlines aren’t losing profit because they aren’t really giving anything away; they are simply giving a frequent passenger a seat in a plane that wouldn’t have had a passenger otherwise.

In conclusion, the prices that are generated by airline companies are directly tied in to their ability to generate profit. A majority of the myths concerning airline prices are incorrect and any trends concerning differing prices on different days of the week are due to responses to competition and the varying times in which prices are uploaded to the company website. An important aspect of what guides the price of airline tickets is supply and demand; occasionally companies will sell tickets for a lesser price or enable promotional prices in order to fill an airplane to maximum capacity. Therefore, it is important to consider that airline price decisions are made in accordance to what will enhance profit, rather than for the benefit of the customer.

Explain the pricing strategy that airlines adopt according to the second article. To what extent does consumer information play a role in the success of such pricing strategy?

According to the article “How to Get Cheaper Airline Tickets by Using a Fake Location”, a ticket’s point-of-sale can impact its price. Therefore, airline tickets are sold more cheaply to people in certain locations due to assumptions about their income. In order for airline companies to maximize their profits, they must be able to sell tickets to the greatest number of individuals. To make these tickets more accessible to people across the world, airline tickets are therefore reflective of a location’s economy. For example, it would be less expensive to purchase a ticket in the Middle East than in the United States because their GDP is significantly lower. Although it would not be worthwhile to travel to a foreign country specifically with the intent of purchasing an airline ticket, this article explains how the system can be tricked into thinking that a computer is located somewhere else.

This article demonstrates that consumer information plays an important role in the success of pricing strategies. The author of this article demonstrated this concept by searching the price of a flight between two cities in Colombia using U.S. flight search engines and then repeating the search using Google ITA, asking for the price in pesos. Ultimately, he found that approximately $30 can be saved on a flight using just this method alone. It is not surprising that the airline companies calculate ticket prices in this manner because they use a lot of the purchaser’s personal information in order to determine what price their ticket should be. If a ticket is purchased through a personal computer on the internet, the website is able to determine a variety of information including websites that are visited most frequently and demographic information. Most of this occurs before any information is actually inserted in order to purchase the ticket. In some situations, such as the one in which the author discusses, it is certainly possible to trick the computer into thinking that you are currently located in another country, which makes this process easier. When more complex systems are being used that can track the location of a user’s IP address, it may be necessary to utilize programs that either hide the IP or use an IP that is hosted in a different country.

To fully understand the importance of the pricing strategy that airlines adopt in order to sell tickets to individuals from different countries, it is necessary to consider other aspects of their strategies. As discussed in “Airline Employee Explains How Fares are Really Decided”, airline fares are decided based on a variety of factors that aim to enhance the company’s profit. This occurs from two points of view; the purchaser and the company. The company is likely to adjust price on the basis of availability and how it could best minimize loss. The company minimizes this loss in part by offering plane tickets to people in other countries. Therefore, citizens in Latin America can purchase tickets to other nations, and they can do so at a price that is reflective of their average income. Computers are able to detect when an individual is in their home country to some extent, and this is verified by determining the language and type of currency that the customer is most comfortable with. By providing this information, therefore, it is possible to confuse the type of consumer information that the airlines receive.

A majority of airlines compute mathematical summaries of who their customers are and the prices that they are willing to purchase tickets at for a variety of different situations. Ultimately, computers are able to match certain descriptive information to these parameters and based on this information determine which ticket price the viewer should be offered. Therefore, slightly altering the information that a website is able to detect can alter the ticket price that is available for the individual. Even though the author of this article discusses a situation in which tickets are bought for flights in a foreign country and are priced significantly differently for United States residents and Colombian residents, this occurs to some extent within countries too. For example, it has been reported that people who buy tickets in the Northeast United States are likely to face slightly higher ticket prices than those living in the southern part of the country. Analysts have attributed this to the difference in average income between these two groups of people. Since salaries and living costs are higher in the Northeast, ticket prices are higher as well. Therefore, it would be possible to use the method explained in this article to pretend that you are in a different part of the country, although less savings would be accrued than pretending you are in a different country.

A major consideration in the decision to purchase a ticket for a lesser price using this system is the cost related to purchasing something using a different currency. Often, credit card companies will charge the consumer for this service. However, it may be worthwhile to make the purchase if a significant enough price change is offered. An ideal strategy would be to determine which countries are offered lowest ticket prices by airline companies. As stated above, this is likely based on the economy and average income of the company. After playing around with locations, this will become apparent. Interestingly, the ways in which airline companies use consumer information can be used to benefit the consumer as well. It is important to remember the vast wealth of information that airline companies generate in order to enhance their profits, because this same information can be used by consumers to ensure that they are getting the best possible deal on their airline tickets.

In conclusion, airlines allow tickets to be sold for different prices in different locations in order to maximize profit. They do so to ensure that the greatest amounts of tickets can be sold, which in turn prevents planes from flying when they are not at maximum capacity. Furthermore, although these companies prefer to sell tickets at higher prices, they acknowledge that a majority of international return trips can benefit from accommodating the natives of that country. Therefore, prices are generated to reflect the economy and income of the foreign nation. However, it is simple to take advantage of this use of consumer information because consumers who are able to identify this trend can pretend they are in foreign countries in order to receive better ticket deals.