Living Economics

Fare Game
The pricing strategy of charging premium prices for business travels and deeply discounted prices for leisure travels has fallen apart amid a slowing economy and fear of on-air terrorist attacks.

Airlines have long priced their seats according to the price sensitivity of their customers. They offered deep discounts with restrictions like advance-purchase and Saturday-night stays to lure leisure fliers who could plan ahead. Business travelers, thought to be less sensitive to price, paid premium prices for unrestricted last-minute bookings with no-penalty refund.

This pricing strategy worked very well in the boom years of the 90's. In 2000 alone, business fares were raised six times. At its peak, business travelers were paying 10 times as much in airfare as leisure fliers for the same coach seat. Not surprisingly, United Airlines estimated that in the late 90's, 9% of its passengers (mostly business passengers) accounted for 46% of its revenue.

But as the economy weakened in 2000, more companies asked their employees not to fly first or business class or to fly low-fare carriers in order to save money. Not surprisingly, in the first quarter of 2001, the percentage of passengers paying full-fare coach fell to 7% from 12% a year earlier. Those buying first-class tickets dropped to 2% from 3%.

To counteract this greater price sensitivity of business travelers, Northwest Airlines introduced BizFlex fares on flights between Minneapolis/St. Paul and major cities in February 2000 that offered a 50% discount off full-fare prices with 14 days' advance purchase, and a 40% discount with 10 days' advance purchase off walk-up, round-trip business fares with no Saturday-night stay. United belatedly made similar discount offers to several cities served from its Chicago hub in August 2001. In addition, some airlines have started discounting their hitherto sacrosanct first and business-class airfares with advance-booking and stay-over restriction in June 2001.

But other airlines have not aggressively followed suit until after the September 11, 2001 terrorist attacks with suicide airliners. The fear of terrorism has further reduced the demand for flying among business and leisure travelers already weakened by the slowing economy. After the attacks, passenger traffic dropped by at least 30%. Even after reducing flights by 20%, most remaining flights of major airlines are still less than the 65% break-even load factor. In view of such weakened demand and aggressive competition from low-fare carriers, major airlines have since widely adopted the price-discounting practice for business travelers long offered to leisure travelers.

Without additional terrorist attacks, the skittishness of business and leisure travelers may well subside after a while. But after some successful experience with online videoconferencing and a taste of discounted prices, it may be hard for airlines to revert to the old pricing strategy of fleecing business travelers. With lower revenues and higher union labor costs, some airlines have been forced to cut cost on its meal services.

References:
  • Brannigan, M, Carey, S. and McCartney, S. "Fed Up with Airlines, Business Travelers Start to Fight Back". WSJ, 8/28/01.
  • Costello, J. "Airlines Maintain Pricing Strategy For Business Fares Despite Cutbacks". WSJ, 10/1/01.
  • Fonti, N. "Slower Economy Puts Lid on Increases in Airfares; Lighter Demand Has Some Carriers Resorting to Discounts in First Class". The Atlanta Journal and Constitution, 5/26/01.
  • Khan, S. and Woodyard, C. "Airlines Offer Deep Discounts on First, Business Class". USA Today, 6/28/01.
  • Trottman, M. "The Airlines' Big Question: To Cut or Not to Cut Fares". WSJ, 9/27/01.
  • Woodyard, C and Khan, S. "Businesses fed up with high fares". USA Today, 8/14/01.
Access Tools
• Advanced Search
• Browse Micro
Comparative advantage (14) Competitive strategy (27) Costs and opportunities (53) Entrepreneurship (3) Externality (28) Free Market Solutions (17) Free Ridership (3) Game Theory (22) Incentives (13) Income Distribution (25) Information (19) Labor Market (24) Marginal optimization (33) Market Demand (17) Market Entry (9) Market Exit (2) Market Intervention (12) Market Structure (29) Market supply (4) Material Flow (2) Miscellaneous (3) Price Discrimination (17) Pricing Strategy (46) Profit maximization (48) Property Rights (42) Regulation (16) Rent Seeking (2) Risk Taking (12) Scarcity (10) Tastes & Preferences (27) Taxes (7) Technology (9) Type of goods (31) What Price Means (27)
• Browse Macro
Boom and Bust (9) Budget Balance (12) Comparative advantage (13) Economic Development (1) Economic Indicators (6) Fiscal Policy (12) Incentives (1) Income and output (25) Income Distribution (5) Labor Market (6) Money and Credit (20) Regulation (5) Rent Seeking (1) Saving (6) Taxes (4) Technology (1) Trade and Foreign Exchange (30)
• Glossary
List All
Search

• Microeconomics Lectures • Macroeconomics Lectures
Instructor
• Instructor Log in • Sample TOC • Demo/Register • Video Tour
Student
• Student Log in
Close
Instructor Log in

Class
Close
Student Log in


Open Menu
Term
Definition