What Is The Pricing Strategy Of Airlines? Why Are The Airfares So High? 🛂
With the holiday season nearing, people wonder if airlines will lower ticket prices to create a more festive atmosphere. Yet, various factors indicate this probably won’t happen. Numerous studies predict that airfares will remain expensive in the coming years. In such a costly market, airlines face the task of crafting a pricing strategy that strikes a balance between maximising profits and providing real value to their passengers.
Airlines grapple with the daunting challenge of finding the right pricing strategy amidst today’s sky-high fares. On one hand, they seek to maximise profits to stay afloat in an increasingly competitive industry. On the other hand, they must offer genuine value to passengers who are often looking for more than just transportation from point A to B. This dilemma becomes even more critical in a market where operating costs, fuel prices, and other factors continuously fluctuate. Striking the delicate balance between profitability and passenger satisfaction is a constant struggle, demanding innovative approaches and careful consideration of market dynamics to ensure airlines remain both economically viable and appealing to travellers.
In this article, we will discuss why lowering prices may not be an immediate option for airlines. Then, we will explore how airlines can create customer-focused pricing strategies to find the right balance between profit and passenger satisfaction amid high airfares. We argue about the importance of airlines investing in understanding market trends and passenger preferences for smarter pricing choices.
At Taylor Wells, we believe that building a robust reputation and fostering loyal customers is a valuable asset for airlines. By the end, you will have insights into how airlines can ensure the long-term viability of their pricing strategies.
Why Are The Airfares So High? What Is The Pricing Strategy Of Airlines?
With the year-end holiday season drawing near, people are wondering if airlines will reduce airfares or continue to keep them high. Travellers are eager for lower prices to make their holiday journeys more budget-friendly, while airlines must balance the desire for revenue with the aim of offering competitive offers to entice passengers. Here’s why we believe that airfares are unlikely to decrease anytime in the near future:
1. Current global prices are high
According to the Airports Council International, airfares in the Asia-Pacific and Middle East regions have experienced a significant increase of 53 per cent in nominal terms or 35 per cent in real terms compared to 2019. This surpasses the global average increase. Meanwhile, Australians who intend to travel domestically can expect a price hike of 16 per cent since 2022 and 13 per cent compared to 2019. International flight fares have risen by approximately 52 per cent compared to 2019, with a 14 per cent increase compared to the previous year.
2. Intense competition
When there’s fierce competition, it can indeed lead to attractive low-base fares. But here’s the catch: airlines often tack on extra charges for stuff like luggage, choosing a seat, and in-flight goodies. These extra fees can really beef up the overall cost of a ticket. So, while customers might score a sweet deal on the base fare, add-ons can make their ticket cost more than they expected.
3. Demand is high
Even though airline ticket prices have gone up, people are still itching to travel by air. The data says that in bigger countries demand for domestic travel is bouncing back to nearly 100% of what it was before the pandemic. And for international trips, it’s at about 80% of where it was in 2019. So, what does this mean? Well, it suggests that airlines can probably keep those higher prices going because folks are still eager to jet off to their favourite destinations, even if it costs a bit more.
4. Airlines use dynamic pricing strategy in full swing
Airlines are increasingly utilising dynamic pricing, adjusting their rates as they go due to high demand and not enough planes to go around. So, when travellers are booking flights for holiday seasons long-haul trips, or anything not on sale, they can expect to see higher prices.
5. War in Ukraine
The conflict between Russia and Ukraine caused significant disruptions in the aviation sector, including the use of longer, indirect flight routes, increased fuel expenses, challenges with securing airport slots, and difficulties in managing flight crews. All these issues are still driving airfares even higher.
Discussion On The Pricing Strategy Of Airlines Amid International And Domestic Flights Price Increase
Overall, we can safely say high airfares are here to stay for this and next year. Some even say till 2025. In a high-priced market, establishing a strong reputation and cultivating loyal customers becomes a valuable asset. The crucial point is for airlines to adopt a well-balanced pricing strategy that optimises profitability while delivering genuine value to their customers.
Balancing Profit and Passenger Value in Developing The Pricing Strategy Of Airlines
Here are five customer-centric pricing approaches that airlines can develop and implement to strike a balance between maximising profits and delivering real value to passengers in the context of expensive airfares:
1. Tiered Pricing
Airlines implement tiered pricing to cater to a diverse range of passengers. By offering distinct classes like Economy, Premium Economy, Business, and First Class, each with its own amenities and price points, airlines provide passengers with options that align with their preferences and budgets. For instance, a passenger seeking luxury and comfort may opt for First Class, while a budget-conscious traveler may choose Economy. This approach maximises value perception because passengers perceive they are getting precisely what they pay for, whether it’s extra legroom or gourmet meals, enhancing their overall satisfaction.
2. Customer Loyalty Programs
Airlines invest in robust loyalty programs to nurture a loyal customer base. These programs reward frequent flyers with points, miles, or elite status upgrades for their continued patronage. In return, loyal customers gain access to exclusive benefits such as complimentary upgrades, priority boarding, and lounge access. These initiatives create a sense of recognition and value for loyal passengers, fostering long-term relationships and a positive passenger experience.
3. Ancillary Services Customisation
Airlines empower passengers by allowing them to customise their travel experience. This customisation can include choosing specific meal preferences, in-flight entertainment options, and baggage allowances on an individual basis. By providing a menu of ancillary services a la carte, passengers feel in control and can tailor their journey to their exact preferences, ensuring they receive the specific value they desire while avoiding paying for services they don’t need.
4. Dynamic Fare Bundles
Airlines employ dynamic fare bundling to encourage passengers to choose bundled services at a discounted rate. These bundles typically include essentials like baggage, seat selection, and meals. By offering these packages at a reduced price compared to purchasing services individually, airlines incentivise passengers to opt for the bundled options, increasing overall revenue while enhancing the perceived value of the package. Passengers perceive greater value in getting multiple services at a lower combined cost.
5. Flexible Fare Structures
Airlines introduce flexible fare structures to provide passengers with options for modifying their travel plans with ease. This flexibility can encompass free or low-cost ticket changes, refundable fares, and open-jaw itineraries. Especially in uncertain times or when travel plans change unexpectedly, passengers appreciate the freedom to adapt their plans without incurring substantial costs. This flexibility enhances the perceived value of the ticket, making passengers feel they are receiving more than just transportation.
Implications Of A Future-Proofed Pricing Strategy For The Airlines Industry
Pricing focus and capability are critical for airlines, directly influencing revenue and competitiveness. Airlines must strike a balance between profit and passenger value through effective pricing strategies, adapting to market dynamics, and leveraging data analytics. Investing in advanced technology and fostering a pricing-focused culture, along with continuous monitoring and adaptation of pricing strategies, are key steps for airlines to maximise profitability and customer satisfaction in the dynamic aviation industry.
Our findings show that with the right set-up and pricing team in place, incremental earnings gains can begin to occur in less than 12 weeks. After 6 months, the team can capture at least 1.0-3.25% more margin using better price management processes. After 9-12 months, businesses often generate between 7-11% additional margin each year as they identify more complex and previously unrealised opportunities, efficiencies, and risks.
Fostering a pricing-centric culture within the organisation is essential, achieved through comprehensive training programs and cross-departmental collaboration to ensure that pricing decisions align with overarching business goals. Furthermore, continuous monitoring of pricing performances and active solicitation of customer feedback will provide valuable insights for refining pricing models and strategies, ensuring agility and responsiveness to market changes and passenger preferences, ultimately strengthening pricing capability and focus.
Our findings show that when a business builds and embeds commercial pricing capability across the business; bolstering its internal pricing skills and capabilities to build a sustainable pricing system, it can generate at least 3-10% additional margin each year while protecting hard-earned revenue and volume. This is at least a 30-60% profit improvement straight to the bottom line.
Crafting a pricing strategy that effectively balances profit maximisation and passenger value is crucial for airlines in today’s competitive and high-priced market. To achieve this balance, airlines must invest to increase their understanding of market dynamics and passenger preferences, enabling informed pricing decisions. Moreover, fostering a pricing-focused culture within the organisation and encouraging cross-functional collaboration ensures that pricing strategies align with broader business objectives.
Additionally, continuous monitoring and adaptation of pricing strategies and gathering customer feedback, are essential to stay responsive to market changes and passenger expectations. By implementing tiered pricing models, personalised options, dynamic fare bundles, and flexible fare structures, airlines can provide passengers with choices while optimising revenue. Ultimately, these strategies not only enhance profitability but also cultivate customer loyalty, contributing to long-term success in the ever-evolving aviation industry.
For a comprehensive view of maximising growth in your company, Download a complimentary whitepaper on Future Proof Your Pricing Strategy.
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