Not only do these pricing strategies make you spend more; you end up feeling good about it too.
This article was originally published in Dollars and Sense.
Savvy travellers who fly often will know that airlines extensively practise price discrimination against their customers. When you are seated with strangers on a flight, chances are that all of you would have paid different prices, even though you are all seated together on the same flight.
Why can’t airlines simply have a fixed fare for each route and category that they fly on?
The reason is simple – profits. Firms are able to maximise their profits when they can effectively price discriminate their customers.
Price discrimination is a simple economic strategy where firms increase their profits by charging different prices for each customer.
How do airlines make you spend more?
1. Last Minute Travel Deals
A long weekend is coming up this month and you have no intention to travel. You had a stressful day at work and started reading some travel related articles to distract yourself from the stress. You log on to Facebook and are fed with a great airfare deal that is happening just two weekends from now. The price seems too good to be true, especially for a last minute deal, and so you snap it up the same evening after rounding up some friends to travel with.
Here’s the thing. Last minute travel deals are never offered and advertised unless the airline is sure that they will not be able to fill in those seats anyway.
Last minute deals are never guaranteed. For example, if you are planning today to travel to Bangkok during the long weekend over the May Day holiday, you shouldn’t bank on having some wonderful travel deals being offered last minute.
Airlines do hold on to some spare seats that they sell at a premium to last-minute business travellers who are not going to be price sensitive. Beyond that allocation however, any additional seats that are not sold would be lost revenue. Hence airlines push down the prices of these seats to attract leisure travellers who otherwise wouldn’t have any intention of travelling.
Last minute travel deals do not cannibalise airlines ability to charge business travellers a high premium because they are usually restricted to just a few flight days. For example, it’s unlikely that a business meeting will be held over a long weekend.
As a traveller who secures a good last minute deal, you might feel good about it. The truth however is that you and your travelling companions just bought tickets that the airline had no way of selling anyway.
2. Two-To-Go Deals
You and your partner are looking to travel to a nice overseas destination in 6 months. As luck would have it, a perfect two-to-go deal pops up just at the right time. The price is reasonable and you buy the tickets almost immediately.
Job well done…for the airlines!
One of the easiest ways for airlines to make additional profits is to differentiate between leisure travellers and business travellers. Leisure travellers are price sensitive, and will not be willing to pay a high price for their flights. Business travellers are less price sensitive and are a lot susceptible to being charged more.
For airlines to charge a premium to business travellers, they first have to limit the overall supply of the number of seats on their plane. Obviously, they can’t physically remove seats from their planes so they do the next better thing they can think of, which is to “get rid” of some seats first by letting leisure travellers book their flights early by offering a reasonable price.
What airlines are hoping for is an outcome where they would sell some of their seats at a cheaper price (e.g. $500) to leisure travellers who would not be willing to pay more. They can then sell the remaining tickets to business travellers who will book much later at a more expensive price (e.g. $1,000). This way, they get to maximise the profits from business travellers without losing leisure travellers as customers.
And since leisure travellers usually travel in pairs while business travellers are more likely to travel alone, the two-to-go deal is a great strategy to segment the target group.
As a leisure traveller, you are happy about it because you think you are getting a much better deal compared to business travellers. The truth however is that the airline is indirectly making use of you to charge other customers more, and also earning a reasonable profit from you at the same time.
3. Overbooked Flights On Economy
On every flight, there will be some travellers who will be a no-show. This doesn’t affect airlines in anyway since the person has already paid for the flight.
But what would you if you were an airline who wants to maximise profits based on this knowledge that not everyone would show up for their flight?
You can sell more tickets than actual seats you have.
For example, an airline that averages about a 5% no show among its travellers could take the risk of selling 102% worth of tickets while still ensuring that travellers who show up still get an allocated seat.
Sometimes, things don’t go as expected and an overbooked flight does indeed have insufficient seats. What do airlines do then?
Firstly, they can bump up some travellers to business class if there are still seats available. This not only solves their problem but also creates a happy traveller who now feels special because he or she is enjoying business class amenities despite paying for an economy class ticket.
Secondly, they can offer very lucrative perks for travellers who are not in a rush to travel and willing to travel on a later flight. These perks typically include free hotel stay and cash to spend.
While not everyone would be attracted to this perk, there are still some who wouldn’t mind the extra stay and some cash to spend. Though this compensation costs some money, it would still be lower than the additional profits the airlines have already made.
Both the upgrading of seats and the counteroffer of cash to take the next flight would create happy customers, despite the fact that airlines only got into the predicament due to their profit maximising strategies.
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By Timothy Ho of Dollars and Sense
DollarsAndSense.sg is a website that aims to provide interesting, bite-sized financial articles which are relevant to the average Singaporean. Subscribe to our free e-newsletter to receive exclusive content not available on our website. Follow us as well on Instagram @DNSsingapore to get your daily dose of finance knowledge through photos.
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