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Anyone who has traveled via commercial airline, even on an infrequent basis, knows there is a bewil-
dering plethora of fares for the same route. Besides the standard first-class and coach fares, there
are discount fares for round-trip travel and for travelers who book two or more weeks in advance,
leave during the week, stay over Saturday night, or fly standby. The fare structure is daunting not
only for travelers but also for the airlines. In determining the standard coach fare on a particular
route, the airline has to consider (1) the cost of the flight (including fuel, labor, and administra-
tive costs), (2) the historical pattern of business and leisure use on the route, (3) overall economic
conditions (which affect travel demand), and (4) the prices charged by competing airlines.
Together the airlines mount some 31,000 domestic flights each day, and they repeatedly alter prices
on their computerized reservation systems as conditions change.
Among airlines, the name of the game is yield management: how to price seat by seat to gen-
erate the greatest possible profit. For instance, airlines typically sell higher-priced tickets to business
travelers who cannot take advantage of supersaver and other discount fares. At the same time, they
sell other seats on the same flight at sharply lower prices to attract price-sensitive vacation travelers.
A classic example of yield management is the competitive route between Los Angeles and Kennedy
Airport in New York.^1 During June 2004, the cabin of a 158-seat aircraft along this route featuredCHAPTER 3 Demand Analysis and Optimal Pricing
CHAPTER 3 Demand Analysis and Optimal Pricing
There’s no brand loyalty so strong that the offer of “penny off”
can’t overcome it.
A MARKETINGAPHORISMAirline Ticket
Pricing(^1) These fares are reported in “Equalizing Air Fares,” The Wall Street Journal(August 17, 2004), p. B1.
Fares that vary widely according to strength of demand, not distance, are reported in S. McCartney,
“You Paid What for That Flight?” The Wall Street Journal(August 26, 2010), p. D1.
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