Common Pricing Practices of Airlines - Essay Example

The pricing policies and methodologies are enforced on the basis of market traits and industry requirements in the airlines. Although an airline remains in full consideration to market and industrial characteristics for the implementation of pricing strategy, it can be affected by certain obstructions coming in the way of airlines. These constraints constitute environmental, technological, political, and legal concerns.
Airlines in different countries of the world are owned by both private and public owners and the pricing policy takes into consideration all the prominent players of the aviation industry, such as airports, ground transports, customers, and freight forwarders. Apart from that, they consistently endeavour to maximise their profits and minimise costs paid to airport authorities (Adler et, el., n.d.,). Obviously, this objective is achieved through the means of a proper pricing policy.
The current practices of airline pricing include the cost-based pricing method that takes into account all the costs encountered during the operation such as landing charges, passenger diverging charges, air tariffs, cargo charges, loading and unloading charges, security expenditures, engine charges and other charges applicable to specific situations. For instance, some airlines charge higher for night air travels while some charge noise charges in order to fund the suspension schemes concerning noise created by aircraft on the airport (Adler et, el., n.d.,). Some airlines also go for peak-period pricing, which refers to pricing at a higher rate for some specific business seasons while lower for the others. Although these methods are widely in practice within most airlines, few airlines charge different prices at different levels of services, seasons, markets, etc.
-2- Relation of Pricing Practices with Costs, Investment Decision and Aircraft Capacity
Pricing practices prevailing among the airlines are closely knitted with the various costs, investment decisions and aircraft capacity. In fact, pricing decisions are taken while considering all of these factors, as the price can seriously affect them. An efficient pricing practice can lead an airline to alleviate costs, maximize revenues and operate efficiently with maximum utilization of aircraft capacity.
Airlines base their pricing policy most prominently on costs, which are mainly the charges imposed on the airlines by the airport authorities plus other technological, aircraft maintenance and security expenditures. Airline pricing evidently reflects the exacerbation and alleviation of various costs encountered during flight operations. As the costs rise, prices go up and vice versa. Therefore, the major concern of airlines while devising an efficacious pricing policy remains to minimise the charges, fees and tariffs paid to airports for the purpose of maximising their revenues.
Airline pricing practices can further be related to investment decisions. Airlines do base their investment decisions on pricing through cost estimation in a way as discussed by Banker and Johnston (1993). They say that airlines base their investment decisions after estimating their costs drivers. Pricing is determined with the objective to minimise costs and enhance revenues. The revenues are in turn considered to further enhance their investment into innovative technology to get a competitive edge over the other airlines in the industry. These investment decisions can only be made once all the costs likely to be encountered in the year are estimated well by the airline. Therefore pricing leads to the estimation of various costs, which in turn takes an airline to devise its investment decisions.
For instance, during a peak period, an airline decides to charge a higher price for air travel due to increased demand. Now, this will need consideration on the part of the airline to evaluate the aircraft capacity to sustain such pressure.  Adler et, el., (n.d., p11) says that airline “capacity needs to be sufficient to meet this peak need and slot allocations need to be organised to enable such network patterns. Without the ability to fly in waves, a more fully connected network will develop with the resultant loss of efficiency and higher prices for passengers”. This signifies the relationship between proper pricing and the capacity required to justify the price. Hence, pricing practices undertaken by the airlines are closely embedded with the costs, investment decisions and aircraft capacity. Read More