British airways is the largest airlines in the UK based on their fleet size. They follow various yield management techniques to extract maximum revenues from their customers.
"Yield management is a method which can help a firm to sell the right inventory unit to the right type of customer, at the right time and for the right price." (Anthony Ingold 2000, p. 3) Yield management can result to price discrimination. British airways offer various prices for the customers depending on the class and date of travel. The price variation for the same journey depends on various factors and can better be explained by the following economic theories.
Price discrimination exists when a particular firm charges different prices to different customers for the same product or service, regardless of costs. By practicing price discrimination, airlines are able to earn greater profit, since buyers with greater willingness and ability to pay often pay higher prices than do those with lesser willingness and ability to pay.
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British Airways encourage their customers to book the tickets well in advance of their journey date by lowering the prices of future journeys. This way, they can estimate their cash flow well in advance and they also understand how full the flight is going to be. It helps them determine the charge towards the journey date depending on the demand. If the demand increases towards the date of journey, the prices are increased accordingly. If the demand is less than the capacity of the flight, the flight still has to leave with empty seats which are perishable commodities. In such cases, the airlines may quote the lowest price compared to their competitors in order to gain market advantage and to make best use of left over seats. This type of price discrimination is called second degree price discrimination which involves businesses selling off their services deemed to be surplus capacity at lower prices than the previously published/advertised price. [Price discrimination - www.tutor2u.net]. The phenomenon of price discrimination is outlined in Table 1.
Price elasticity of demand
Price elasticity is the measure of change of quantity demanded per unit change in price. Price elasticity is affected by various factors like substitutes, necessity and duration. British Airways makes use of price elasticity of demand to divide their customers into two categories depending on their necessity of travel. Low necessity customers like visitors are often flexible to date changes. They look for better deals well in advance of their journey. High necessity customers are those like in business travelers whose journey dates are more likely to be fixed and do not have flexibility to change their travel dates. Their journeys are unplanned until close to journey date. So British Airways offers various pricing patterns for customers according to their needs. A visiting customer whose dates are flexible and plans in advance are offered a lower price if booked in advance. Business customers whose dates are fixed will be willing to pay higher amount towards the departure date. So they are making the maximum profit from every class of people taking advantage of their needs.
Both the concepts - price discrimination and price elasticity of demand are better understood through the prices shown in following table (collected from official British airways website - www.britishairways.com - on 6th December 2009)
Law of demand
According to the law of demand, quantity demand of a product or service varies inversely with its price. This applies to the number of seats allotted to a particular class in the flight. British airways run a very few flights with business class between Aberdeen and London. Since the price of business class travel is very high, demand for this class is very low and hence only a few seats are allotted to business class passengers. Also it can be noticed that there are no price changes in this class along with the date. As the prices of economy class tickets are low, they are abundant in quantity to serve more number of customers. The price of the ticket is then decided based on the number of seats available and the demand of the ticket on a particular day. This procedure can better be explained by the supply and demand graph shown below.
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Demand curve helps to determine the relationship between the price of service and the demand of service. In the case of British airways, the supply of services is mostly constant. However, the demand varies depending on various factors like day of the week, seasonal changes, time of travel, etc. All these factors keep shifting the demand curve (D1 and D2).
The above graph helps the British airlines to determine what price is to be fixed for certain demand on a particular day. As discussed, when ever the demand curve moves (demand changes), the price also changes accordingly.
Finally I conclude stating that British airways is following various yield management techiniques. By doing so, they are maximising on their revenues by charging different amount to different customers based on their necessities and willingness to pay. This price variation is also explained using various economic theories like price discrimination, price elasticity of demand and demand graph.
- Anthony Ingold, Ian Yeoman, Una McMahon-Beattie (2000). "Yield management: Strategies for the Service Industries" Edition II
- Sylvain Daudel, Georges Vialle, Barry K. Humphreys (1994). "Yield management: applications to air transport and other service industries"
- Microeconomics, Price Discrimination [online] - Available from http://tutor2u.net/economics/revision-notes/a2-micro-price-discrimination.html (Accessed between 01-12-2009 and 06-12-2009)
- British Airways official website [online] - Available from http://www.britishairways.com (Accessed on 06th December 2009)
- Demand curve [online] - Available from http://en.wikipedia.org/wiki/Demand_curve (Accessed on 04th December 2009)