In the market, the price is commonly defined by the interrelations between demand and supply. It can be observed that within the airline industry, the prices influence demand to a large extent. By measuring elasticity it is possible to identify the responsiveness of the number of demands for the airline services to a change in pricing policies.
The increase in the company’s prices was accompanied by the changes in demand for flights means that the provided services can be considered elastic. As it can be observed in the period from 2009 to 2011, the demand for flights is responsive to changes in prices. However, the factors that influence the demand change can be of various characters, and in the given case they are more likely to be influenced by the overall situation in the market, for example by the foreign currency exchange or price competition.
When the companies charge higher prices and fees for the products and services, it usually means that the demand is inelastic. There is the lowest demand for the flights at the most inconvenient time and days of the week. The optimal results in pricing can be attained when both departure dates and purchasing dates are targeted.
Price can be considered as one of the most significant factors in the customer’s choice. The prices and the clients’ incomes may be considered as the crucial variables explaining airline service demands. Consequently, to increase the demand elasticity, the organization needs to change prices to make the products and services more attractive to customers who prefer lower costs. Organizations can expect that by purchasing cheap tickets at a particular time of the day the less price-sensitive customers will provoke an increase in profit. However, it is possible to assume that as the result of the given strategy, the demand for the tickets in other time periods may decline.
The companies often attempt to achieve greater financial results by changing the pricing models. For example, charging fees separately from the basic flight flare becomes a frequently used pricing strategy in the Airline industry.
Charging fees for the checked baggage provokes the rise in the overall price of the tickets purchased by travelers. It is possible to assume that the no-fee or all-inclusive pricing strategies that were traditionally applied by the airline companies in the past seem more attractive for the customers. Therefore, due to competition in the market, the demand for the services of the airline companies that charge fees separately may be low and inelastic. However, at the same time, the fees can influence the revenues positively. In this case, the company may try to disguise the information about the fees that are not included in the basic fare to maintain demand at the same level and increase profitability as well.
As it is observed by the airline industry researcher in the case study, the excess capacity may negatively impact organizational profitability. Instead of trying to expand carriers’ capacity, the companies may implement the alternative pricing strategies that would provoke customers’ attraction. For instance, the company may stick to the traditional no-fees strategy by offering the customers the flight fare with no additional charges for flexible and slightly higher prices. Or on the contrary, the airline organizations may sell their services according to the a la carte pricing model that allows the clients to purchase each service separately (meal, checked baggage, choice of the seat, etc.) according to his/her individual needs and interests.
Although the given strategy is not commonly used in the industry, it allows the attraction of the customers with low-income and middle-class customers. Although the hidden fees charge contributes to revenue growth, it can be regarded as an unethical managerial and pricing decision. The consideration of the stakeholders’ interests, customers in particular, positively affect the organizational image and customers’ loyalty that lead to profit increase. Therefore, airline companies need to be focused on the improvement of service quality and safety. As a result, profitability will increase.