The airline industry in Europe is characterized by stiff competition from different major players. Some of the biggest airline carriers in the continent are British Airways and Ryan-Air. These two airlines are based in England and Germany, respectively, and they have been in operation for many years. This paper will do an in-depth analysis of the pricing strategies employed by these two airlines to determine and after that determine whether the two approaches have been successful in pushing the objective of the airlines of attracting more customers and becoming leading players in their industry (Baye & Prince, 2017). An overview of the two airlines’ pricing strategy shows that it is driven by the principles of offering competitive prices for its services as the main during force to ensure that customers choose them over their competitors in their industry.
The theory of 3rd-degree price discrimination using a graphical model
This pricing strategy involves price discrimination, where a business organization charges different prices for the same product or services in different market segments in its targeted markets. Third-degree discrimination is based on clients’ ability and willingness to pay for goods and services at the prices proposed by the organization. Many airlines in the united states such as southwest airline have used this strategy for many years succefully (Smith, Leimkuhler, & Darrow, 1992). This means that the prices charged by an organization for its products bear little relation to the cost they incurred during the production of the products (Oliveira, & Huse, 2009). When doing price discrimination, business organizations typically separate the markets in two ways, geographically and in time. For instance, these two airlines can charge different ticket prices for overseas customers if they estimate that the demand for their services is more inelastic than the prices they charge in their home countries of England and Germany. This is what can be referred to as customer profiling and discrimination. For instance, if the airlines discover that demand for their products is inelastic and it does not change by an in increase or decrease in prices, then they can decide to charge higher prices in such markets (Puller, Sengupta, & Wiggins, 2009). This is an excellent strategy as it helps increase their profit margins and cover the losses or low profits margins they get in markets where their markets are very elastic meaning that the demand for their tickets is susceptible to ant increase or decrease in prices. Graphically, third-degree discrimination can be shown through the graphs done below.
How the airlines practice price discrimination
The airline industry is characterized by high competition between players, and this calls for each airline to recognize that they have to come up with different strategies that can help them gain a competitive advantage over other players in the industry. British Airways and Ryan-air have recognized this fact, and they have a pricing strategy that uses in a bid to make them attract more customers and remain competitive in the industry. These two airlines have developed a new booking system for their tickets, which is known as the New Distribution Capability (NDC). This system takes a large amount of data and information on the profiles of their potential customers before they sell their tickets to them. This allows these business organizations to know how they can price their tickets for each customer. This allows these airlines to offer their customers with air tickets with personalized services as well as prices. For example, a passage might be offered a ticket with an inflight movie or with copious legroom and wide seats at a relatively lower price than what other clients not enjoying these services might.
People buying these tickets have the option of providing personal data to the airlines. It is essential to mention that collecting personal data from customers and storing them without their consent is illegal. These airlines should always ensure that they collect this data with the consent of their customers, as this is the only way they can avoid being sued for breach of privacy by their clients. This is very bad for their business as it could lead to loss of customers and the collapse of an airline (Berry & Jia, 2010). For this reason, airlines use a method where people buying air tickets have the option to give personal details to the organizations. The personal information the airline gives may include one’s age, nationality, marital status, shopping history, travel history, previously purchased services, whether they are traveling for holiday or business, and whether they are frequent flyers (Berry & Jia, 2010). This information is essential as it gives airlines data they can use to profile their customers. Customers will be offered different prices for a plane ticket depending on what the collected data represents, and if they prefer any additional services such as a special meal, sure seat, or any other facilities then such a customer will be required to pay extra to enjoy these services. For example, a frequent flyer that is always traveling for business trips can have there are fair lower than people who fly less frequently and when they do; they are going for a holiday. This strategy of price discrimination is used in addition to the ones applied in overseas markets where the demand for airline tickets is not elastic.
Is the data providing evidence of price discrimination?
The data collected shows that these two airlines, as well as other players in the industry, practice price discrimination. This is evident in the fact that two sets of travelers traveling to one destination and at the same time can be charged different prices is enough to prove that these airlines practice price discrimination (Berry & Jia, 2010). The airlines also charge incredibly high prices in foreign. These prices are so high when compared to the prices they charge in their home market of Europe. This strategy is meant to increase the profit margins of the overseas operations as the profit margins realized in Europe are always very low. From the table below, it can be seen that the two airlines have increased their revenue collected from airline tickets. Even though the table shows that Ryan-Air performs way better than british Airways, both have have shows an increase in the amount of money collected from 2016 and 2017 respectively
Data collected of the two airlines after price discrimination for the year 2016 and 2017
£ 11,443 million
€7.151 billion (2018)
€7.697.4 billion (2018)
From the above discussion, it is evident that the price discrimination used by British Airways and Ryan-Air has been successful in attracting more customers. This has led to an increase in the number of customers the airlines serve. An increase in the number of customers leads to an increase in sales revenue, and this has always been the bottom line of these airlines. However, the profit margin realized by these organizations is still low, and it is the role of the management teams to ensure that they operate more efficiently to reduce their operations costs.
Baye, M. R., & Prince, J. T. (2017). Managerial economics and business strategy (9th ed.). New
York, NY: McGraw-Hill Education
Berry, S., & Jia, P. (2010). Tracing the Woes: An Empirical Analysis of the Airline Industry.
American Economic Journal: Microeconomics, 2(3), 1–43.
Oliveira, A. & Huse, C. (2009). Localized competitive advantage and price reactions to entry:
Full-service vs. low-cost airlines in recently liberalized emerging market transportation Research Part E: Logistics and Transportation Review, 45(2), 307–320.
Puller, S. Sengupta, S & Wiggins, N (2009). Testing Theories of Scarcity Pricing in the
Airline Industry,” Discussion paper, National Bureau of Economic Research.
Smith, B. C., Leimkuhler, J. F., & Darrow, R. M. (1992). Yield management at American
Airlines. Interfaces, 22(1).
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