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Case study: the airline manager dilemma
This cartoon video exposes an easy decision problem of an airline manager of one flight. How to increase his profit with a single price strategy?
Congratulations! You have just been appointed as the new manager of the world-renowned, fictional, international airline, ENAC Wings! Okay, maybe it’s quite a small airline.
Let’s start with a simple example: a single plane, an A320 fitted with 200 seats, operating on a single route between Paris and London. The ticket price is currently €400, and you have sold 120 tickets at that price by the time of the departure. Your duty as manager is to maximise your profit, so you need to calculate your revenue for this flight. Your revenue is €400 multiplied by 120, which gives €48,000.
This isn’t bad, but it isn’t good enough. Your capacity for this flight is 200 passengers, and you only sold 120 tickets!
Your load factor, which is the ratio between the occupied seats and the total capacity, is quite low at 60%. You plane will be nearly half-empty! As your operating costs cannot be changed, the only way to increase your profits is by increasing your revenue. How might you achieve this? Perhaps you could adjust the ticket price. Consider the consequences of a price change. In which direction would you change the price? Would you increase it or decrease it?
Choosing the right price is not an easy job. For this simple business case, we suggest that you jump into the shoes of an airline manager. Now let us imagine what could happen when setting a price at an arbitrary level.How many customers are willing to pay that price for that flight? How many seats will be filled at that price and what will be the revenue of the flight? And most importantly: how could you play with the price in order to improve your profits?
Join the discussion
In your opinion, what would be the effects of a price change on the plane load factor? And on the airline’s profits? Intuitively, what would be your strategy as a manager?Before proceeding to the next step, share your insights with your fellow learners. Remember to read and respond to other learners’ comments, too.
This article is from the online course:
An Introduction to Pricing Strategy and Revenue Management
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An Introduction to Pricing Strategy and Revenue Management
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