Attention Passengers: Please Pay $2 per Toilet Visit

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You may think this is a joke! No, seriously airlines have considered charging you an extra fee for each of your visits to the in-flight toilets.  This ridiculous plan has even triggered a reaction in US Congress, where a bill has been filed to ban airlines from charging passengers to use in-flight toilets in American flights, reported on time.com.

The toilet fee reflects a fact that price discrimination commonly exists within airlines and most airlines are deploying the most complex pricing schemes on the planet to extract maximum money from their passengers.

Pay less, Get less. Want more? Pay more.

One of the pricing strategies most airlines are fond of is two-part tariff: Lure you in with low base fare – then trick you into paying more. When they started this many years ago, they first came for your meals and drinks, then your bags, your entertainment, your pillows, your legroom, your seat selection, your payment method, your ticket’s conditions, your desire to escape middle seat and other numerous ‘creative” items… Now they even started looking at your toilet … Will they stop? People joke perhaps the next one that would be charged is the oxygen you breathe in flights.

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Everything Costs! Source: wsj.com

Tony Webber, ex-Qantas Group chief economist, said in The Sydney Morning Herald that he counted up to 20 add-on charges from Jetstar, add-on service revenue could be up to 21% of all passenger revenue of airlines, Qantas, Jetstar and Virgin all charge you sky-high surcharges that could be up to double-digit percentage of your base airfares if you pay with cards.

Same flight, different prices? Even same seat, different prices!

McAfee & Velde’s study indicates American Airlines changes half a million prices per day given that American Airlines carries around 50,000 passengers per day. Borenstein & Rose (1991) shows the expected fare difference between two passengers on a route averages 36% of the average ticket price on the route.

Traditionally airlines allocate the whole cabin into three classes to charge different prices. Several years ago they found premium economy class is the most profitable. So they make it four classes now. Haberberg and Rieple (2008) show airline profit could be increased by nearly 25% if customers are segmented into 4 categories: first class, business, premium economy and economy and charged with different prices compared with the result without segmentation.

Even within the same class, it is highly likely that the passenger sitting next to you pays a different price. Cheapair.com said United Airlines published 43 different one-way economy class fares for flights between Los Angeles and Chicago.

Airlines have deployed dynamic pricing (yield management) and new technology  to maximise revenue by calculating the most they can charge each customer for a plane ticket, making airfare difference even wider than ever.

Airline’s Yield Management Tracks You. Source: Los Angeles Times

Airlines integrate all three typical pricing strategies (cost-based, competitor-based and customer value-based) into their comprehensive algorithms to track and calculate demand, capacity, time, competition, history and even your personal data to set the highest possible prices accordingly. For example, when their systems detect that more customers than usual are doing the same online search and are making the same purchase, they may simply increase the price.

A study shows American Airlines and Delta Airlines earn extra $500 million and $300 million per year respectively with the deployment of their yield management systems.

Have airlines complex prices gone too far?

Airlines are in business to make money. They can’t be blamed, right? However, are their complex prices the best strategy in terms of publicity, company image, social responsibilities, and even profit? Homburg, Totzek & Krämerb’s study shows customers are more likely to choose a simple price over a complex price even when a simple offer is more expensive because complex prices negatively affect customer’s price fairness perception. What is the implication from this? Should airlines re-consider their complex pricing strategy?

 

 

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