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kamloops
Topic Author
Posts: 141
Joined: Thu Nov 18, 2010 6:43 pm

Airline Pricing: 5th Grade Version

Thu Feb 23, 2012 8:44 am

I work in the travel industry ,and I am tasked explaining air,pricing, and the complex world of airlines,

I have a lot of new consultants who have little or no experience in the travel industry,

and find myself losing their attention and/or speaking above them (not my intention, but happens too often) but in the end more confused, than they started off.

I was hoping to know any thoughts on explaining air, pricing, routing, and so much more, but in a way that average joe, could relate and appreciate


[Edited 2012-02-23 00:57:43]
 
offloaded
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RE: Airline Pricing: 5th Grade Version

Thu Feb 23, 2012 12:14 pm

Good luck with that. After 12 years I can't explain it as half the time it doesn't seem that logical, but essentially it is supply and demand. When there is less demand, prices are lower, or when the flights are empty i.e. you book early, the airlines (in general) give you a lower fare, but then they get to sit on your money for months. That helps their cashflow. Peak times, such as school holidays, Christmas etc they know demand will be high, so fares are higher. Then look at routing. If there are fewer airlines operating the route, chances are that those fares could be higher due to lack of competition. eg YYJ YVR, or FAO LIS, both short yet generally expensive and totally disproportionate in costs to longer flights.
To no one will we sell, or deny, or delay, right or justice - Magna Carta, 1215
 
Eltomzo
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RE: Airline Pricing: 5th Grade Version

Thu Feb 23, 2012 12:51 pm

If you are giving them written instructions then I'm not surprised they don't understand you!
 
Flighty
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Joined: Thu Apr 05, 2007 3:07 am

RE: Airline Pricing: 5th Grade Version

Thu Feb 23, 2012 4:35 pm

Airlines price as high as they can, without being undercut by a competitor. The market itself is very price inelastic. If there is only one airline (say in the USA), people will be willing to pay $2,000+ to fly from NYC to LA. Driving takes all week. The fact we allow competition means prices go to the lowest any airline is willing to offer. This can be money-losing as long as it is above zero. Or, it can be a very profitable level. That depends on market capacity.

During the day (and at night), pricing analysts at all carriers observe instant "bucket" fares with equal fare rules between all major competitors. It is necessary to match the lowest fare quickly. Otherwise, lots of people will book away from you instantly. As a result, airlines usually move prices the same day, or within hours or minutes of each other. Also includes baggage fees and the like.

On a more complicated level, airlines _signal_ a wish to increase prices by publishing fares as a "proposal" to the industry to match them. Either the bulk of the industry follows them or does not. In which case, the original airline has to fold its proposal and take prices back down. Or, if they want to have a discount sale, they cut prices and the industry can match them, or if not, the airline gets a huge volume boost that way.

Once the pricing structure is set (with multiple price buckets across all flights), yield analysts decide which fares should be made available across the inventory of future flights. That depends, not on industry pricing, but on how full that airline's flights are forecasted to be. If it is looking likely to sell out, they only make high prices _available_, even though there exist lower fares that the airline simply isn't offering on that particular flight. Because why offer a low price on a full flight with lots of demand pressure.

Sorry, not 5th grade but it's approximately what I have seen.
 
simairlinenet
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RE: Airline Pricing: 5th Grade Version

Thu Feb 23, 2012 7:18 pm

Quoting kamloops (Thread starter):
I have a lot of new consultants
Quoting kamloops (Thread starter):
in a way that average joe, could relate and appreciate

I didn't know that 'average joes' could become consultants these days!

If you're able to find it on YouTube or elsewhere, the TV special 'A Day in the Life of American Airlines' (or named something similar) had a good quick section on yield management. The rest of the program was also quite good in covering a lot of operational aspects.

Here's a quick primer, which covers other topics as well: http://science.howstuffworks.com/transport/flight/modern/airline4.htm
 
flpuck6
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RE: Airline Pricing: 5th Grade Version

Thu Feb 23, 2012 7:43 pm

Hello,

I see it as the law of supply and demand to be very simple.
Bonjour Chef!
 
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hOMSaR
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RE: Airline Pricing: 5th Grade Version

Fri Feb 24, 2012 12:13 am

One thing I find a lot of people have trouble understanding (perhaps because they never took an economics class, or if they did, they didn't pay attention), whether it deals with airline prices or with other products/services, is that in a free market, prices have nothing (or almost nothing) to do with costs. Prices are dependent on the demand curve for a given market. Demand doesn't care what the cost to provide it is.

The product/service airlines are selling is transportation from point A to point B on a certain schedule. Airlines have a very complex model of pricing which probably couldn't be explained to the average fifth grader. Part of the reason for the complexity is because there are many (thousands, perhaps millions?) of possible point-A-to-point-B-on-schedule-C combinations, each of which could, individually, appeal to its own market with its own price/quantity demand curve. Airlines are able to take advantage of this with powerful computers and a staff full of folks whose job it is to figure this stuff out.

Other airlines have taken advantage of the fact that most airlines complicate things, by offering "simplified" fare structures to passengers, but even those have a bit of complexity to them.

Things like fare buckets or classes, restrictions (such as Saturday night stay/minimum or maximum stay requirements, etc.) and whatnot are part of that complexity, which determines the A-B-C package that the passenger is buying. That doesn't even include things like fees and taxes, etc.

People will look at an IND-ORD fare and wonder why it's higher than an IND-ORD-DEN fare, but they don't realize that it's not an individual seat on an individual flight that they're buying, but an itinerary that they are buying.

So, bottom line, I don't think you can really come up with a "5th Grade Version" of a class on airline pricing. If it were really that simple, you wouldn't have thousands of threads on a.net and elsewhere, and hundreds of news articles, complaining about/making fun of it.
I was raised by a cup of coffee.
 
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Stitch
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Joined: Wed Jul 06, 2005 4:26 am

RE: Airline Pricing: 5th Grade Version

Fri Feb 24, 2012 12:18 am

Quoting kamloops (Thread starter):
I was hoping to know any thoughts on explaining air, pricing, routing, and so much more, but in a way that average joe, could relate and appreciate..

Two words - Yield Management

The goal for any airline is to sell each seat for the maximum amount they can. Hence the myriad fare rules and fare buckets.

Back in the days when this information was effectively proprietary (only the airlines and travel agencies knew it), Yield Management worked quite well because customers just assumed the price they paid was the price everyone else on the plane paid, where in actually every seat could have been sold at a different price.

The first assault against Yield Management was when services like CompuServe allowed individual travelers to access the airline reservation systems (Apollo, Sabre, etc.) and see this information and use it to get a good deal. Then the Internet hit and all this information became even easier. And then travel sites used search engines and anyone could get a good price and Yield Management's effectiveness collapsed as everyone knew what everyone else was paying and you could see how what day or time you chose - or even routing - could affect the price.
 
Viscount724
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RE: Airline Pricing: 5th Grade Version

Fri Feb 24, 2012 1:07 am

Quoting homsar (Reply 7):
Airlines are able to take advantage of this with powerful computers and a staff full of folks whose job it is to figure this stuff out.

The subject is a little advanced for 5th graders, but you may want to have a look at the websites for the major providers of pricing and revenue management systems. Here is a start:

Sabre
http://www.sabreairlinesolutions.com...rvices/pricing_revenue_management/
(see the various links on the left side)

Lufthansa Systems
http://www.lhsystems.com/solutions/a...ine-management-solutions/index.htm
http://www.lhsystems.com/resource/document/pdf/br/br_profitline.pdf
http://www.lhsystems.com/resource/do...ent/pdf/pb/pb_profitline_price.pdf
http://www.lhsystems.com/media/2009/jun_09_03.htm

SITA (older and less advanced than Sabre and Lufthansa Systems but still widely used)
http://www.sita.aero/content/fares-management-pricing-0
http://www.sita.aero/product/airfare-price
http://www.sita.aero/file/525/Fares_...Distribution_positioning_paper.pdf

airRM (popular with small to medium-size carriers, especially LCCs. Used by Ryanair, Air Asia, JetBlue and WestJet)
http://www.revenuemanagement.com/products.html

Aviator (also intended for smaller carriers; not many customers yet)
http://resourceandrevenue.com/?page_id=26
http://resourceandrevenue.com/wp-con...ges/Aviator_Revenue_Management.pdf

[Edited 2012-02-23 17:18:10]
 
kamloops
Topic Author
Posts: 141
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RE: Airline Pricing: 5th Grade Version

Fri Feb 24, 2012 5:03 am

Quoting simairlinenet (Reply 5):
I didn't know that 'average joes' could become consultants these days!

I work for a company, where you can pay, to become a private travel consultant, so I get a lot of people with little or no experience in the industry, and usually are in their second or third career.


i appreciate your response,
 
atpg5
Posts: 11
Joined: Tue Jun 14, 2011 2:11 am

RE: Airline Pricing: 5th Grade Version

Fri Feb 24, 2012 5:25 am

I have used this in high school:

IF AIRLINES SOLD PAINT . . .

Customer: Hi. How much is your paint?

Clerk: Well, sir, that all depends on quite a lot of
things.

Customer: Can you give me a guess? Is there an average
price?

Clerk: Our lowest price is $12 a gallon, and we have 60
different prices

up to $200 a gallon.

Customer: What's the difference in the paint?

Clerk: Oh, there isn't any difference; it's all the same
paint.

Customer: Well, then I'd like some of that $12 paint.

Clerk: When do you intend to use the paint?

Customer: I want to paint tomorrow. It's my day off.

Clerk: Sir, the paint for tomorrow is the $200 paint.

Customer: When would I have to paint to get the $12
paint?

Clerk: You would have to start very late at night in
about 3
weeks. But
you will have to agree to start painting before Friday of
that week and
continue painting until at least Sunday.

Customer: You've got to be *&%^#@* kidding!

Clerk: I'll check and see if we have any paint available.

Customer: You have shelves FULL of paint! I can see it!

Clerk: But it doesn't mean that we have paint available.
We
sell only a
certain number of gallons on any given weekend. Oh, and
by
the way, the
price per gallon just went to $16. We don't have any more
$12 paint.

Customer: The price went up as we were talking?

Clerk: Yes, sir. We change the prices and rules hundreds
of
times a day,

and since you haven't actually walked out of the store
with
your paint
yet, we just decided to change. I suggest you purchase
your
paint as
soon
as possible. How many gallons do you want?

Customer: Well, maybe five gallons. Make that six, so
I'll
have enough.

Clerk: Oh no, sir, you can't do that. If you buy paint
and
don't use it,

there are penalties and possible confiscation of the
paint
you already
have.

Customer: WHAT?

Clerk: We can sell enough paint to do your kitchen,
bathroom, hall and
north bedroom, but if you stop painting before you do the
bedroom, you
will lose your remaining gallons of paint.

Customer: What does it matter whether I use all the
paint? I
already
paid
you for it!

Clerk: We make plans based upon the idea that all our
paint
is used,
every
drop. If you don't, it causes us all sorts of problems.

Customer: This is crazy!! I suppose something terrible
happens if I
don't
keep painting until after Saturday night!

Clerk: Oh yes! Every gallon you bought automatically
becomes
the $200
paint.

Customer: But what are all these, "Paint on sale from
$10 a
gallon"
signs?

Clerk: Well that's for our budget paint. It only comes in
half-gallons.
One $5 half-gallon will do half a room. The second
half-gallon to
complete
the room is $20. None of the cans have labels, some are
empty and there
are no refunds, even on the empty cans.

Customer: To hell with this! I'll buy what I need
somewhere
else!

Clerk: I don't think so, sir. You may be able to buy
paint
for your
bathroom and bedrooms, and your kitchen and dining room
from
someone
else,
but you won't be able to paint your connecting hall and
stairway from
anyone but us. And I should point out, sir, that if you
paint in only
one
direction, it will be $300 a gallon.

Customer: I thought your most expensive paint was $200!

Clerk: That's if you paint around the room to the point
at
which you
started. A hallway is different.

Customer: And if I buy $200 paint for the hall, but only
paint in one
direction, you'll confiscate the remaining paint.

Clerk: No, we'll charge you an extra use fee plus the
difference on your

next gallon of paint. But I believe you're getting it
now,
sir.

Customer: You're insane!

Clerk: Thanks for painting with United.
All gave some....Some gave all
 
bohica
Posts: 2457
Joined: Tue Feb 10, 2004 3:21 pm

RE: Airline Pricing: 5th Grade Version

Fri Feb 24, 2012 5:48 am

Quoting atpg5 (Reply 11):


Classic.   
 
User avatar
airportugal310
Posts: 3693
Joined: Sun Apr 11, 2004 12:49 pm

RE: Airline Pricing: 5th Grade Version

Fri Feb 24, 2012 6:12 am

Quoting atpg5 (Reply 11):

Quite possibly the best thing I have read in awhile!
“They bought their tickets, they knew what they were getting into. I say, let 'em crash.”
 
WAC
Posts: 147
Joined: Sat Nov 29, 2008 10:31 am

RE: Airline Pricing: 5th Grade Version

Fri Feb 24, 2012 9:36 am

Yield Management/Revenue Management and airline pricing is very complex and should only really be taught to people that can manage economic theory and/or have had an extensive marketing and sales. You should forcus me on the marketing and sales aspect of pricing than actually teaching them airline pricing and YM/RM.

The main aspects airlines change their pricing is down to:

- restrictions and conditions, the more restrictions the less the price is, the less restrictions, more the price is
- available seats on a flight, i.e. how many have been sold, tthe move that have sold the more pricier it gets, demand is thought to be high
- total available seats on a route. i.e how many seats are there on a route whether LHR-MIL LHR-XXX-MIL, i.e. capacity/supply.

Concepts they should now is load factor and ticket conditions/restrictions.

The most important they most understand is perishability of the airline product. This is the underlying motive for airlines to charge different prices, once the flight has taxied they can not sell the seat...

A good excercise to do is a form of role play.



Get some cup cakes, a variety is needed (or any perishable item).
You can use money to raise for charity or use monopoly or token money.
Put all the cup cakes on the table but divide them by variety and then divide them by times being baked
1st day allow one of your student to be the baker. Do give them any instruction other than try to cash in the most revenues


2nd day you are the baker
Put all the cup cakes on the table but divide them by variety and then divide them by times being baked
Allow your students to be come customers,
Show them that due to baking times, supply is constrained and effects demand
The perishability of the cup cakes means those that are not sold will reduce in price as closing time nears
Those that are in high in demand will go up in price as supply can not meet demand.
Impose any other RM/YM tactics you like

This should allow the students to understand WHY airlines charge different price but not how. Best to leave the how to the RM/YM professionals, we have a difficult time already trying to teach our collegues in finance and marketing department...
 
Flighty
Posts: 9963
Joined: Thu Apr 05, 2007 3:07 am

RE: Airline Pricing: 5th Grade Version

Fri Feb 24, 2012 1:37 pm

Quoting Stitch (Reply 7):
Yield Management's effectiveness collapsed as everyone knew what everyone else was paying and you could see how what day or time you chose - or even routing - could affect the price.

That's a half true statement. It is true that people learned how to fly cheaper, when time permits (fly on Tuesdays or Saturdays.. and so on). It probably helped lift airline load factors and helped people fly cheaper.

But, day to day, the clogged airline systems rely extensively on yield departments to allocate capacity to the right fare bucket, to make the most money and avoid selling out. Just as true now as it was back then. As aircraft get more full, YM gets more critical. Pricing, perhaps, gets less critical.
 
PPVRA
Posts: 8590
Joined: Fri Nov 12, 2004 7:48 am

RE: Airline Pricing: 5th Grade Version

Fri Feb 24, 2012 2:29 pm

Quoting WAC (Reply 13):

I would add this: bake 100 cupcakes everyday and they must all be sold by 6pm everyday ("flight" leaves at six). Unsold cupcakes by this time must be donated at zero revenue.

Goal is unchanged: raise the most revenues to try to 1. cover all your costs and 2. build the highest profit margin you can, if you can!

To make it more realistic, turn the game into teams, and make sure all cupcakes are exactly the same. All airlines provide exactly the same thing: transportation from point A to point B. Nicer seats, food, entertainment are frivolous to the example. People will pay substantially more for a cupcake with special filling in it compared to an airline seat with PTVs (percentage wise).

edit: allow them full pricing flexibility to increase revenues and/or sales

[Edited 2012-02-24 06:31:26]

[Edited 2012-02-24 06:33:21]
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