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_________________________________Pricing the service
8. Pricing the service
8.1 Pricing issues
Price is a key element in the airline strategy, it must be acceptable for targeted
customers and must reflect accurately the other marketing mix elements. The value of
the service is the value attached to it by the service provider and it must correspond with
the customer’s perception of value. Airlines offer a range of products at various price
levels to meet the needs of different target segments who have different needs and
spending power. The business segment commands a higher price as passengers pay for
more flexibility, comfort and self-fulfilment. But even in this segment where
passengers due value good service costs increasingly matter when the choice is so wide
and there is a recession in sight.
Every company adopts different pricing strategies. British Airways has a pricing policy
which is geared mostly to market conditions. Virgin Atlantic follow its pursuit of
offering a superior service undercutting competitors fares. All the airlines have official
published fares and these tend to be pretty close to each other, especially in business
class where they are usually identical.
The price eventually established for a service will be subject to different elements,
notably costs, pricing strategy, organisational objectives, the structure of the market, the
life cycle stage, prices charged by the competition etc. (see Illustration 8.1).
Target
segment
Pricing
strategy


Organisational
objectives and 
positioning
Life cycle
stage

Market
 structure and
regulation
Price Product X

Demand level
and elasticity

Competitors’
price

Costs
Illustration 8.1 - Establishing a price
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_________________________________Pricing the service
Break even analysis and price elasticity
A good starting point for pricing a product is a break even analysis to take account of
fixed, variable costs and overheads. Price elasticity of demand in relation to actual
revenue is another key element to consider. Demand levels vary continually during the
year and in years depending on economic conditions, the product life cycle, peak
periods, marketing and promotional effort and degree of substitutability of the product.
Regulatory constraints
Regulatory measures imposed by government and other bodies can also affect pricing
decisions. Safety requirements can increase costs and therefore be passed onto the
customers. The Civil Aviation Authority together with single market legislation
supervise fares charged by airlines on European routes. In 1995 for example the CAA
has prevented 8 proposed fare increases for long-haul carriers flying from British
airports. CAA position however is that flexible economy fares should be cost related but
it is up to each airline to charge what it wishes for business class.
Competitor pricing
Competitor pricing is a focal point in pricing a product. The airline industry however is
one where very slight differences exist on the same routes among different carriers.
Competitors tend to keep prices in line with others trying to avoid price wars, especially
in the premium passenger markets. If airlines see opportunities for keeping prices high
they take them. When filling capacity becomes difficult because of over supply then a
price war is likely to start, but hardly on the premium segments. Virgin Atlantic is an
exception to this rule as the airline’s disclosed objective is to benefit passengers through
lower fares on those routes where other airlines take advantage of bilateral agreements
or absence of competition to keep prices artificially high. In addition indirect
competition on short hauls is increasingly becoming a matter of concern as seen with the
Channel Tunnel with fares down to compete with trains and ferries competitive prices.
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_________________________________Pricing the service
Organisational objectives
Organisational objectives affect pricing strategies. British Airways for example, which
being a floated company feels more than Virgin Atlantic the pressure of shareholders
and the stock exchange on its decision making, tend to maximise current profit. Virgin
Atlantic instead goes for a more Japanese approach to the market in an attempt to
maximise growth. Other objectives which will affect the pricing strategy might be
enhancing the image of the organisation as a price leader or position it high in consumer
perception as a company offering high quality, high price products.
Positioning
This relates to the way consumers perceive and evaluate the product. Price can convey
the feeling that a certain brand stands out of other competitors’ brands. Different target
will have different perception of price and some will be more sensitive than others
(leisure market).
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_________________________________Pricing the service
8.2 Pricing strategies
There are different strategies an airline can adopt. Some examples related two the two
airlines will give an idea of the main differences.
Price skimming
It consists in skimming the cream off the market by offering a product at a high price on
a low volume basis. This can be easily referred to premium passenger markets for
products such as British Airways Concorde, First, and business classes, and Virgin
Atlantic Upper Class and Premium Economy.
Penetration pricing
In this case the price is set at a low level in order to attract high volumes of sales and
build up market share, this strategy can help establishing a strong market position. The
strategy is specially suitable
when entering highly competitive markets such as
international airlines. Virgin Atlantic used the attractiveness of superior service at lower
prices to enter the North Atlantic market in open competition with the well established
British Airways.
Cost plus pricing
This is based on adding a required margin or mark up on the total costs. Even if used as
a suitable starting point it is not the best criterion to determine a price as it doesn’t take
in consideration key factors shown in Illustration 8.1.
Marginal pricing
This is based on the cost of the last unit of output, for example the cost of carrying an
extra passenger on a plane; this will be probably equal to the cost of the meal and drinks
served on board and very low in comparison with the overall costs of fuel, maintenance,
staffing and so on. Therefore where there is spare capacity reduced fare passengers are
preferable to empty seats, provided the price charged is at least equal to the cost implied
by the marginal passenger. This concept is at the basis of British Airways and Virgin
Atlantic discounted fares, special offers in off peak times and stand by (see Table 81).
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_________________________________Pricing the service
Promotional pricing
Promotional pricing in the airline industry is a well known tactical tool consisting in
pricing reduction to match seasonal variations in demand or fill in spare capacity.
Neither BA nor Virgin sells discounted fares for business class, though some travel
agents sometimes offer modest discounts by splitting their commissions.
Differential pricing
Airlines also adopt differential pricing offering the same service at different prices
depending on traffic peaks or other characteristics such age (pensioners) or being in
education (students).
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_________________________________Pricing the service
8.3 Fares comparison
The two airlines tend to compete with each other on the basis of service and network
provided with Virgin Atlantic slightly advantaged in the first field and British Airways
dominating in the second. Prices tend to be matched to each other even if there’s no
precise correspondence between BA and Virgin class structures.
BA and Virgin have started their competition on transatlantic routes engaging in
transatlantic price wars. The first shots were fired by BA (with a significant reduction on
50 routes) to pre-empt Virgin’s penetration strategy. Virgin’s response was to reduce
fares to NY and LA by over £ 100 resulting in fares £1 below BA’s ones on those
routes. With time Virgin has extended its network bringing competition on the most
profitable routes. Now Virgin is about to bring the price war in the European market
where airlines still overcharge their premium passengers on many routes.
Some fares are reported below to give an idea of the two airlines approach to pricing
strategy.
British Airways charges £5,660 for a return ticket on its unique Concorde from London
to New York. 80% of Concorders (about 500,000 passengers) are loyal repeat travellers.
Virgin Upper Class better compare with BA First in terms of service. But BA £4,188 for
a return ticket from London to New York in First is well above Virgin Upper Class
price.
Upper Class and Club World charge the same £1181 for a one way ticket from London
to New York but with the already stated difference in service.
BA unrestricted economy fare is £678 for World Traveller for a round trip to New York,
while Virgin’s Premium Economy fare is £ 856 and Virgin’s Economy class fare is
£678.
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_________________________________Pricing the service
Differences in prices charged for different classes are better shown in Table 8.1.
British Airways
London -NY
Virgin Atlantic
London-NY
Class
return (1993)
Class
return (1995)
First Class
£3,900
Upper Class
£2408
World Club
£2614
Premium Economy
£870
World Traveller
£700
Economy Saver
£688
Apex
£288
7 day Apex
£588
Special promotion
£200
21 day Apex
£448
Special promotion
£179
Table 8.1 - Fares comparison
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