COMPETITIVE FARE EVALUATION AND DILUTION MANAGEMENT

To respond to competitive pricing changes, airlines should tailor their pricing based on market segments, market strength and product comparison to reduce the risk of dilution and achieve competitive pricing.

From outside of the industry, airline pricing looks random and complicated. Fares can be changed and distributed multiple times throughout the day. With so many pricing changes over multiple markets, quick and effective decision-making is imperative. So how does one determine how to react to a competitor’s pricing?

There are three key pricing concepts to keep in mind when talking about competitive fare evaluation:

• Dilution — Dilution is the difference between how much customers are willing to pay and what they actually pay. Effectively minimizing dilution is central to pricing success.

• Customer segmentation — Different customers have different travel needs. People traveling for business want more flexibility and less pricing restrictions, and are also willing to pay higher fares to meet their travel needs. Conversely, people traveling for vacations and visiting friends and relatives are willing to accept more travel restrictions (advance purchase, minimum stays) in return for lower fares. When evaluating a competitive fare, it is critical to know the type of market segment that is being targeted.

• Elasticity — Elasticity measures the sensitivity between changes in price and quantity of demand. When a change in a fare results in a high change in quantity demand, it is elastic. It is inelastic when a change in price has little effect on quantity of demand. Because airline fares change frequently, it is difficult to calculate the exact elasticity of a fare change. That said, there are some general attributes to determine elastic or inelastic fares:

• Business-type fares tend to be inelastic; lowering the fare does not result in an increase of demand to offset the discount.

• Small and remote markets also tend to be inelastic because the traffic base is too small to stimulate significant demand.

• Vacation destinations, visiting friends/relatives and student markets tend to be elastic. Lowering fares may spur more travel in general, and make some consumers shift between modes of transportation, such as from bus or train to airplane.

Competitive pricing activity comes from a variety of sources. The primary source of published fare information is fare distributors such as ATPCO and SITA. ATPCO transmits international fares on scheduled intervals through most of the day, seven days a week. Fare management tools, such as Sabre AirVision Fares Manager, provide information on analyzing fare changes.

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