Pricing Strategies in Airline Industry
PRICING, SUPPY AND DEMAND
Easyjet Essay
Hanoi, January 12, 2011
From: Trinh Phuong Thao
To: Miss Thuy and Miss Dung Hue, Integrated Business lecturers
Subject: Easyjet Essay
Table of content
Introduction.....................................................................................................2
Role of pricing.................................................................................................3
Easyjet fare fluctuation......................................................................................5
Easyjet and British Airways pricing strategies............................................................7
Conclusion....................................................................................................10
Recommendation.............................................................................................11
Reference......................................................................................................12
INTRODUCTION
In the airline industry around the world has appeared low cost carriers as major players who have created huge changes in the original service and pricing strategy. Easyjet is one of the most successful low cost short-haul ones in England as well as European.
Along with the development of airline industry and the increase of air traveling demand, low cost flights become more and more common attracting much effort to research pricing strategies in this field in order to reach improvement opportunities. There are some different methods about the way carriers hold their flights. Studying this issue can help managers understand clearly how the prices of low cost airlines in fact could be opposed with normal ones, so they can adjust their oriented goal to achieve good performance.
On the other hand, this essay provides a chance to challenge the role of pricing within four Ps of marketing mix and see its actual level of importance in the business environment. Therefore, it will bring marketing theory into reality, which shows the necessity to be flexible applying theory into changing business situation.
Generally, this essay gives out the mode operation of two airline companies heading to different priorities when they offer their products. It will study and represent the result of the comparison between a low cost carrier and a normal one.
ROLE OF PRICING
Price which is one of four Ps of the marketing mix talks about the value placed on something that is exchanged. The work of calculating the price for a product is called pricing which can influence directly business performance. These are several aspects making pricing important.
To begin, let's look at how price is different from other marketing mix factors to understand the unique role of it. While decisions and performing processes related to product, place and promotion take a long period of time to carry out or to make changes, price is much more flexible. Marketers can quickly decide to adjust a product price in order to respond to either consumers' demand or competitors' action. This nature of pricing helps organizations adapt effectively to market changes. Specially, in the time that a business is on the verge of collapse, a wise strategy on pricing can prop it up when this work can keep goods flowing out and cash flowing in. Like this, price is the most adjustable element of all marketing decisions.
Besides, contrary to cost drivers like the rest Ps, price generates revenues which influence how much a business can earn. While revenues are decided by the quantity of good sold, price is the factor that affects this figure. In other words, price puts a strong impact on customers' decisions involving their evaluation and impression of the product. If pricing is not done appropriately, organization's benefit will be damaged. When the price is set too high, consumers can turn away making all the work it has done wasted. Conversely, too low price not only results in the loss of ...
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Besides, contrary to cost drivers like the rest Ps, price generates revenues which influence how much a business can earn. While revenues are decided by the quantity of good sold, price is the factor that affects this figure. In other words, price puts a strong impact on customers' decisions involving their evaluation and impression of the product. If pricing is not done appropriately, organization's benefit will be damaged. When the price is set too high, consumers can turn away making all the work it has done wasted. Conversely, too low price not only results in the loss of additional profit when customers are willing to pay more but also creates an impression that the product quality is not good. Pricing then is a distinctive process for the reason that its outcome provides the foundation of both recovering costs and making profit.
In addition, pricing and organization objective are connected closely. Pricing is affected by corporate strategy and then needs to be considered both in the view of satisfying customers' demand and in the view of reflecting business aspiration. Because price can be a communicator to customers, the impact of pricing can make company target become more or less attainable. Towards company image, an unsuitable price can lower its position in the market. Therefore, the price has to be worked out with careful research and analysis to avoid the situation that consumers misunderstand organization characteristics.
Furthermore, there is no weapon that can rival and respond to competitors' actions better than price. The use of this weapon, however, is also very dangerous when it can drive a price war that contains a possibility of losing organization market share. Hence, it is necessary to understand company's position, examine cautiously market situation and prepare for competitors' responses before trying to attract customers with product price. It produces evidence that pricing requires much effort to do or it can lead the organization to a big mistake.
Last but not least, changing a price or setting new price is a difficult work. To increase sales or profit, price may be adjusted according to product life cycle, scarcity in the market, time period and social situation. Affected by these factors, demand is different and altering price can give businesses more chances to have profit. But changing too much may damage organization stability under consumers' point of view, so marketers should not overuse it. Moreover, when a new product enters the market, pricing is very important because it can decide whether or not the product can attract customer and create good attitude towards buying it.
In summary, pricing can bring to organizations both opportunity and threat, which of them is base on the judiciousness of decisions marketers make. Therefore, this process should be done step by step carefully.
EASYJET FARE FLUCTUATION
After consulting carefully flight fares of Easyjet company, the result shows that there are various fares not only for different flights that have the same route but also for the same flight with the same class. Through investigating these differences and even the factors that can drive this situation comes the conclusion that the fares of flights can be diversified according to three aspects. One is about location and two are related to time preparation.
Location here means the place that flight will take off. The difference of departure spot can lead to the difference of the amount of money customers have to pay. For flights on January 4th at 7 am, if customers went from Luton to Amsterdam, fare was £ 78.99 but if customer went from Amsterdam to Luton, fare was € 104.99 which is equal to £ 87.68. Other flights have the same condition showing that fares are affected by local authorities' policy and different carriers' charge.
The second aspect making up the variation of fare is the time that the flight leaves in a day. Below is an example of time schedule of the flights from Luton to Amsterdam on Tuesday, January 4th, 2010.
Ordinal
Fare
Time
Departure (Luton time)
Arrival (Amsterdam time)
78.99
7:00
9:10
2
58.99
5:00
7:10
3
58.99
8:15
20:25
As can be seen from the chart, the flight at 7 o'clock was more expensive than the others. It took an additional of £ 20 in comparison with the flights which left at 15 pm and 18:15 pm. It is because there are higher demands for early morning flight on weekday when customers have business trips. By contrast, on Friday flight fare on late afternoon can require more money than other flights on the same day for the reason that there are many people who go on short holidays on the weekend.
Finally, the most importance aspect that influences the price of an Easyjet flight is the different period between the day customers order ticket and the departure day. The chart below reveals the changes in fare of a return flight from Luton to Amsterdam through time.
The fares here are calculated by summing up the outbound and inbound flights. The chart shows that though the highest fare could fluctuate but the lowest one only had downward trend. It means the further time customers booked advance was, the less money they had to spend. This was because when the departure day came, demand for that flight increased and the fare became more expensive.
EASYJET AND BRITISH AIRWAYS PRICING STRATEGIES
British Airways is an traditional airline in England. In order to compare its pricing strategy with the one of low cost airline Easyjet, let's take a look at the graph below that shows two carriers' cheapest return tickets on the same day. There is a small difference that the route of British Airways flights is from London City Airport for the reason that this carrier do not have flights in Luton.
British Airways fares were much higher than the ones of Easyjet. Booking one day advance, Easyjet fare was equal to two-third of British Airways fare. While Easyjet lowered its fare much when the time booking advance lengthened, British Airways also did that but with less decrease. If customers order their ticket three months before their trips, Easyjet offered them the fare that was less than 50% of British Airways fare.
The difference was base on the pricing strategy that each carrier used. Easyjet had only one class that was offered with the same fare but the fare was depended on the day customers buy tickets. By contrast, British Airways did not change their fare over time. It provided a wide range of classes which had different services and the ticket price was decided on which class customers chose. However, the fare of British Airways on the graph was also higher at the time near departure day. Because the lowest fare which was limited was sold more quickly, the day before the flight did not tend to have any cheap ticket left. Hence, though using two opposed strategies, one rule was the same - customers were more likely to be able to buy a lower fare by booking early.
However, there was a strong difference between Easyjet and British Airways. It was the disparity between the cheapest and the most expensive fares. The table below will state it more clearly.
Easyjet
British Airways
Booking time
day advance
3 months advance
day advance
3 months advance
Cheapest price
Price
05.98
50.98
57
20
Difference
51.90%
23.57%
Most expensive price
Price
35.98
55.98
207
32
Difference
58.83%
36.23%
With Easyjet, the fare could be lowered by more than half if customers booked three months advance. This was the way Easyjet attracting customers when they had chances to obtain so cheap ticket benefiting their financial situations. Besides, British Airways tickets which was varied by classes did not fluctuated this much. In other words, the discrimination among this high cost airline did not exceed 40%, which ensured the quality of services even when customers chose the lowest class.
Then the biggest distinction between low cost carriers and high cost ones was the service. In order to evaluate these airlines, it was worth asking whether or not Easyjet provided services like British Airways. The answer was yes but with an additional fee, which could make the low fare become much more expensive. The clearest evidence was about check-in luggage. Including in flight fare of British Airlines was one piece of checked baggage which was up to 23 kg and two pieces of permitted hand baggage. On the contrary, the fare of Easyjet just covered a handbag but not a check-in one. Traveling with a heavy luggage requires more money invested.
Booking time
Easyjet
British Airways (luggage included - 23kg)
Total
Luggage included (23kg)
day advance
Cheapest
05.98
65.98
57
Most expensive
35.98
95.98
207
week advance
Cheapest
65.98
25.98
31
Most expensive
66.98
26.98
57
month advance
Cheapest
55.98
15.98
20
Most expensive
79.98
39.98
47
3 months advance
Cheapest
50.98
10.98
20
Most expensive
55.98
15.98
32
In the case customer book advance for checked baggage at Easyjet, they will receive £ 18 saving, which means they need to pay £ 18 for a check-in luggage that weighs 20 kg and £ 14 more for each additional kilogram. Generally, to bring a checked bag that was 23 kg like the allowance of British Airways, Easyjet customers had to pay £ 60, a big amount of money in comparison with total flight fare. Like this, cost for traveling with Easyjet is equivalent to going with British Airways.
However, for people who is on a tight budget and do not need to carry much belongings traveling, Easyjet is still a very good choice with the fare which is much lower than high cost airlines.
CONCLUSION
Pricing is an important process in the marketing mix that can influence business profit and development. There are some strategies for pricing that is applied by organizations which do not target the same market segment. Among them are two carriers, one follows more traditional method of pricing in airline industry and one tries a newer mode.
With different pricing strategy, Easyjet and British Airways aim at different customers. While Easyjet tries to create the cheapest fares with the lowest costs, British Airways focuses more on quality of services on flights. Each method has its own advantages and disadvantages which can suit customers in various situations.
RECOMMENDATION
There is no perfect pricing strategy which businesses should follow completely. Depending on the market segment and customers each company want to approach as well as strengths and weaknesses of the company, it should investigate to find out the strategy that is the most suitable.
As can be showed from this essay that for both high and low cost carriers set their fares base on the length of period before the departure day, so it is suggested that the sooner customers order their ticket, the cheaper fare they can own. Therefore, planning your trip advance brings much financial benefit.
Before choosing Easyjet or British Airways for you flight, something should be considered - which luggage is included in your trip and how heavy it is. Bringing baggage that weighs too much may require more money. In short, the fee for additional luggage should be plus on flight fare to know the total amount of money each carrier offers.
REFERENCE
. Frances Brassington and Stephen Pettitt, Essentials of Marketing Second Edition, Chapter 7 'Price'
2. KnowThis.com, Importance of Price, Retrieved from http://www.knowthis.com/principles-of-marketing-tutorials/pricing-decisions/importance-of-price/
3. Oded Koenigsberg, Eitan Muller and Naufel J. Vilcassim (October 2007), Easyjet Pricing Strategy: Should Low-Fare Airlines Offer Last-Minutes Deals?
4. Keith J Mason, Pricing Strategies of Low Cost Airlines
5. Simon Smith, The Strategies and Effects of Low-Cost Airlines
