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Pricing in Highly Competitive Marketplaces

For the most part, the airline industry has been in overcapacity and hostile operating conditions since it was deregulated many years ago. During that time, the industry produced many pricing schemes and even more competitors. Over the last few years, the competitors have decreased, while the pricing schemes have burgeoned.

Many competitors fell away as the industry learned the difficult lesson that all airfares have to be the same or customers will choose the lower cost airfare. TWA, Eastern and Pan American were major carriers who disappeared in intense price competition. Nor did this price competition spare discount airlines. People Express no longer exists, nor does Presidential Airways, among many others.

But the industry learned something a few other industries have also learned. Most customers focus only on the quoted price. They don’t always consider the fees that might accompany their purchase. The airline industry developed an extensive list of add-on benefits for which they charge an extra fee. The list is long and growing. There are fees for checked bags, oversized luggage, priority seating, pets, unaccompanied minors, additional leg room, meals, drinks and snacks. Most of these fees are new over the last three to four years as airlines have found creative ways to increase their revenues by offering a la carte pricing. (See the Perspective, “Discovering Hidden Pricing Power” on StrategyStreet.com.)

These fee revenues have helped the airlines but they have a down-side for the airlines as well. When fees are not transparent, customers learn to distrust the answer when they search for the price of airline tickets. Many customers have learned that the quoted fare will not be the final price they must pay. (See the Symptom & Implication, “Customers are more price sensitive” on StrategyStreet.com.)

Abhorring a vacuum, several companies have rushed to offer information to the consumer about these often hidden fees. Today, companies such as TripAdvisor.com and FlyingFees.com, offer tools to calculate fees for various options a customer may choose while flying. These current tools have limitations. But the travel industry heavy hitters are about to join the battle. The giant, Sabre Travel Network, is about to introduce a broad-based suite of products that will enable travel agents and consumers to specify the services the consumer anticipates using and then see the full price of the ticket, plus the fees, the customer will incur. Further, travel companies are working to standardize the way that airlines include fees in their reservation systems. Some people expect these pricing benefits to be available within the next year. This is very similar to what has happened in the automobile rental industry. An auto renter can easily determine the total cost of the rental before signing on the dotted line.

Until now the airline industry has been able to charge different fees for the same service. For example, a consumer sending an unaccompanied minor on Southwest Airlines pays no additional fee. The same service on Air Tran brings a fee of $39. The service at Continental, Jet Blue and Alaska Airlines costs $75. If you want to fly an unaccompanied minor on the legacy airlines, Delta, American, United and U.S. Airways, the fee is $100.

Much of this pricing freedom is likely to erode as the travel companies bring more pricing information to the consumer. Most consumers will continue to operate the way they have in the past. They will ignore the fees and search for the lowest fare. However, enough consumers will pay attention to the full cost of the airline trip. These people will move their business if prices seem too high for the extra benefits they prefer to buy. This is likely to commoditize the price of these extra benefits.

The airline industry has done the consumer a service with its fee-based pricing innovations. Those customers who wish to fly for the lowest possible price can chose options that have few benefits. Those who want more benefits can chose those and pay for them accordingly. This is a sensible and helpful pricing strategy in a hostile market, for both the airline industry and the consumer.

Posted 3/23/09

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