Airlines Try New Pricing Moves

With high fixed costs and perishable products, airlines have long been the poster child for “yield management”, “revenue management”, and other sophisticated statistical methods for optimizing profit. Or minimizing losses. While travel is up, airlines are still looking for ways to maximize the return on their investment.

One approach is to unbundle products and services that fliers have traditionally consumed in bundled form. In flight meals and soft drinks now cost money on most domestic carriers on most domestic routes. Now Delta sells HBO movies, Northwest charges $15 for exit row seats, and Skybus will charge to check bags and board early. (See the NYTimes article, free registration required.) As Skybus says, “Why should your ticket price include your neighbor’s dinner?”

While unbundling makes a lot of statistical sense– you can target microsegments of people with different needs and price sensitivity– it adds to the already confusing mess of airline pricing, and to the uneasy feeling that the airlines are taking advantage of you. The article mentions an analogy by Henry H. Harteveldt, of Forrester Research, likening flying to going to the movies. “The popcorn is extra,” he notes. However, even if people feel that $5 popcorn is ridiculous, the overall movie experience is pretty good. Flying is not entertainment, especially not these days. If airlines focused more on the customer experience, instead of having disgruntled staff stuffing angry travelers onto dirty planes, people would likely perceive the same pricing model in a different light.

In a less-noticed, but more momentous development, airlines have also started deeply discounting business class fares on routes that tend to leave these seats empty. Business fliers contribute disproportionately to the bottom line on business-heavy routes at certain times. On other flights and at off-peak times, the premium cabins are desolate. Travel expert Joe Brancatelli notes these pricing disparities in a recent column.

– If you need to zip from New York to London tomorrow to close a deal, expect to pay British Airways about 10 grand roundtrip to sit in its newly renovated Club World business-class cabin. But if you want to fly this summer and can book before the seasonal promotion ends this week, the price will be about $2,500.

– Headed to Tokyo? A flight from San Francisco on Japan Airlines tomorrow will cost you more than $7,300. But book as little as three days in advance and you may snag one of JAL’s midweek “business saver” fares and pay just $4,600.

– Lufthansa normally charges $10,718 (including the fuel surcharge) to fly roundtrip to Frankfurt from Los Angeles. But the German carrier’s recent “summer business class” sale cut the price to $2,988 roundtrip.

Not exactly cheap, but much lower than typical business fares. The airlines are betting that many of their well-heeled business fliers will pay a little more to enjoy their typical comforts when going on vacation. As long as the “fences” are good, what do they have to lose?

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