Understanding the Chaos of Airline
Understanding the Chaos of Airline Pricing
By Alex Kons
I. INTRODUCTION “The airline industry’s pricing system is a billion-dollar house of cards in which every customer is a futures speculator and Economics 101 is turned onto its head” (Fredrick, 1995). This statement highlights one of the most hidden frustrations that many air travelers feel. Airline pricing is so distorted that often a full-fare paying passenger is seated next to a passenger who paid more then three hundred percent less for his or her ticket. What makes this situation so exasperating is that each passenger is receiving the same quality of seat and in-flight service, regardless of the airfare each paid. This paper will attempt to uncover the forces that have created this chaotic pricing system that has confused and annoyed passengers in today’s air travel industry. Very few other industries have undergone anything like the drastic changes that have rocked the U.S. domestic airline industry in the past twenty years. Over this time period, the industry has evolved from a system of long established airlines flying a regulated route structure to a dynamic, free market environment where new airlines emerged and disappeared seemingly overnight. Recently the industry has become more characterized by massive market dominance by a small group of major airlines. Given its past volatility, there is little doubt that the industry will continue to transform over time. All the while, air travelers have continued to seek an understanding of all the chaos. The focus of this paper will be on developing a model that demonstrates the effect two specific exogenous shocks had in creating the airline industry’s current pricing system of vast airfare dispersion amongst passengers on the same flight. The model developed establishes that certain airlines have used market segmentation and price discrimination tactics as a result of these exogenous shocks. The organization of this paper is as follows. Section II provides
By Alex Kons
I. INTRODUCTION “The airline industry’s pricing system is a billion-dollar house of cards in which every customer is a futures speculator and Economics 101 is turned onto its head” (Fredrick, 1995). This statement highlights one of the most hidden frustrations that many air travelers feel. Airline pricing is so distorted that often a full-fare paying passenger is seated next to a passenger who paid more then three hundred percent less for his or her ticket. What makes this situation so exasperating is that each passenger is receiving the same quality of seat and in-flight service, regardless of the airfare each paid. This paper will attempt to uncover the forces that have created this chaotic pricing system that has confused and annoyed passengers in today’s air travel industry. Very few other industries have undergone anything like the drastic changes that have rocked the U.S. domestic airline industry in the past twenty years. Over this time period, the industry has evolved from a system of long established airlines flying a regulated route structure to a dynamic, free market environment where new airlines emerged and disappeared seemingly overnight. Recently the industry has become more characterized by massive market dominance by a small group of major airlines. Given its past volatility, there is little doubt that the industry will continue to transform over time. All the while, air travelers have continued to seek an understanding of all the chaos. The focus of this paper will be on developing a model that demonstrates the effect two specific exogenous shocks had in creating the airline industry’s current pricing system of vast airfare dispersion amongst passengers on the same flight. The model developed establishes that certain airlines have used market segmentation and price discrimination tactics as a result of these exogenous shocks. The organization of this paper is as follows. Section II provides
References: Bailey, Elizabeth, Graham, David, and Kaplan, David. Deregulating the Airlines. MIT Press: Cambridge, 1991.