Pricing Strategies for the Airlines

The modern airline industry has gone through numerous changes since the late '70s. These changes have impacted the airlines' pricing strategies and the airlines' revenues.

Since the deregulation in 1978, U.S. airlines have been employing a model referred to as yield management or dynamic pricing. This model allows airlines to manage the seat capacity of each airplane while obtaining the highest price for each seat. Yield management is a complex methodology based on availability, customer demand and competitor pricing. As a result, pricing of individual seats is constantly in flux.

Although yield management is still the primary method for pricing individual seats, four major outside forces have forced the airlines to find other ways to manage their pricing strategies and increase their revenues.

The 1978 Airline Deregulation Act shifted control of the airlines from government control to a more free-market based model. The modernization of the industry provided airlines with more flexibility to run their businesses as they saw fit, and resulted in many operational changes. Specific developments included airlines adding more routes to under-served areas, the development of the hub-and-spoke system, the introduction of newer airlines and lower pricing. With lower prices, more customers took to the skies, which further helped to grow the industry.

In the 1990s, the Internet became part of our daily lives. We also saw the rapid expanse of online travel websites and flight aggregators. Sites like Priceline and Orbitz bought discounted or unused seats from the airlines and then sold them to the public at cheaper prices. Although the companies had different business models (Orbitz allows customers to choose specific flights and Priceline.com patented the 'name your price' business model where customers name the price they are willing to pay), they were all successful. Airlines benefited because in addition to employing the traditional yield management pricing strategy, airlines could guarantee revenue while purging their inventory of unused seats.

In the 1990s and early 2000s, low-cost regional carriers like Southwest Airlines came to prominence. While some employed the traditional pricing strategy of dynamic pricing, others changed their business model completely. Southwest provides shorter trips (point-to-point-method), offers one seating class, smaller planes and fixed pricing, which has resulted in lower prices and more customers.

The gradual rise of oil and gas prices from 2002 until the present has dramatically cut into airlines' revenues. In addition to ticket prices, airlines are imposing fees as part of the pricing strategy to increase profits. What started as fees for upgrades has expanded into fees for meals, baggage, seating assignments and more. And, these fees make a difference. Airlines are expecting up to $400 million in revenues from a la carte pricing alone.