市场学case10pricing.docx

1、市场学case10pricingCompany Case 10 (pricing)USAIRWAYS: THE AIRLINE PRICE WARSSuppose you wanted to fly from Seattle to San Jose, California. The fare in June 1995 would have been $22; in 1997, it would have been $59. the fare from Detroit to Minneapolis which is roughly the same distance would have bee

2、n 4216. obviously, airlines dont set their fares based on distance. So, why do these fares vary so greatly?One reason is the contrast between operations of discount airlines such as Southwest (the Seattle-to-San Jose route) and a major airline such as Northwest Airlines (Detroit to Minneapolis). Sou

3、thwest Airlines, known as the Love Line because its original home was Love Field in Dallas, Texas, is a no-frills airline. It offers no food services, complimentary drinks, extensive baggage handling, or other amenities. It flies a limited number of direct, usually short, routes, carefully selecting

4、 its routes based on the popularity of the flights. If lots of passengers normally take a certain route, then Southwest might choose to operate only on that route. Also, Southwest frequently flies into alternative airports rather than the most popular airport. The Seattle-to-san Jose route is a good

5、 example of a Southwest route. There are many passengers flying from Seattle to the San Francisco Bay area of California. So, Southwest cuts fares on that route to lure passengers, and cuts costs by flying into a nearby alternative airport in this case, San Jose.When Southwest began operations at Se

6、attle, competing airlines routinely charged fares to San Francisco ranging from $89 to $119. southwest entered with prices between $39 and $59. one of the local airlines reduced its prices to $25 and Southwest responded with $22. how did this price-war tactic work? Not so well. After instituting the

7、 $22 fare, a 137-seat Southwest Boeing pulled away from the gate in Seattle with only 19 passengers on board. The revenue from the flight was $418, compared with a cost of $6,567.04 not exactly a recipe for success. Things were so bad that the flight attendant jokingly asked passengers to shift to o

8、ne side of the plane so that when they taxied past the competition, it would look like the plane was full. Even if he airplane had been full, revenues would not have covered half the cost of the flight.If fare wars result in such losses, why do airlines engage in them? The primary cause is relativel

9、y flat air traffic growth. Although the number of flyers grew rapidly after World War II, the rate of growth slowed greatly in the 1980s and 1990s. In 1991, the number of airline seats sold actually declined. Facing lower traffic, airlines cut routes and parked surplus aircraft in the Southwestern d

10、eserts. Cut-rate companies then leased these surplus planes at low rates and went into business. So, reductions by the major airlines actually provided the inexpensive planes that fueled competition. As competition increased in a flat market, fares had to decline, with the result that many major and

11、 discount lines were forced into bankruptcy, including Eastern, TWA, Braniff, and Mark Air.This explains the situation in Detroit, where you would probably have been flying Northwest Airlines, not a discount airline. Because Northwest carries 74 percent of Detroits outbound passengers, it has a lock

12、 on the Detroit to Minneapolis route. With little competition, it can charge higher prices. In fact, Northwest is the nations highest-priced airline.“Any passenger who pays more than 30 cents a mile is probably being overcharged,” asserts Tim Hannegan, assistant director for aviation competition for

13、 the General Accounting Office, watchdog for the U.S. Congress on federal programs. Using data from 1996, Consumer Reports evaluated milege and fares. Northwests average cost for flights up to 300 miles was 68 cents per mile. Examples of other Northwest fares and mileage are: Detroit to Traverse Cit

14、y, $154 or 74 cents a mile; Detroit to Kalamazoo, $228 or 90 cents a mile; Detroit to Grand Rapids, $135 or $1.12 per mile. According to the Consumer Reports study, USAirways was the second most expensive airline at 58 cents a mile, and Southwest was the least expensive at 17 cents a mile. Northwest

15、 called the studys data flawed, saying that the study ignored fixed costs for flights on routes with few passengers, which raises its overall costs. To get the kind of lock on an airport and routes that Northwest has in Detroit requires airlines to service all routes, not just the most popular ones.

16、Not only is Northwest expensive, travelers also give it low ratings on factors such as on-time arrivals, ease of airport check-in, and convenience of scheduling. A survey of business travelers on nine major carriers, conducted by J.D. Powers and Associates, found Northwest below average in customer

17、satisfaction for flights under 500 miles and only average for longer flights. The best-rated airlines were Continental, TWA, United, American, and Southwest. All this suggests that competition among airlines results in lower and better service.Airlines dont compete only on price. They also offer spe

18、cial promotions. For example, Southwest has launched a mileage war in which it gives fliers in the Rapid Rewards Program double mileage credits on flights between 20 selected Western cities. That means that a flier might qualify for a free flight by flying Southwest only four times in one year. Othe

19、r airlines have used tie-in offers. For example, in a recent promotion, anyone purchasing an Aurora Limited Production Numbered Gold Roller Ball pen in a specified time period received 500 bonus Delta SkyMiles. Purchasers of an Aurora Sole Three-Piece pen set received 1,000 bonus miles. Sometimes mu

20、ltiple airlines will participate in a promotion. Customers who purchased a 35 mm Samsung camera received a 32-page Travel Saver booklet offering discounts on travel, including a certificate for $500 in airfare discounts good for several airlines.With all this competition, how can an airline get a “l

21、ock” on an airport? Usually, the airline uses the airport as a hub. When it first negotiated with the airport, the airline may have contracted to provide service on a large number of routes and to use most of the available gates. In return, the airport was assured of a steady stream of revenue from

22、the airline and avoided the need to negotiate with a large number of airlines. Over time, however, passenger traffic grows and many airports expand so that they have more gates than are needed by the main airline. This creates a situation in which discounters and other airline still has competitive

23、weapons that it can use to defend its market.The most obvious weapons are price, size, and lots of cash. Consider the situation that existed in Charlotte, North Carolina. Charlotte, with 1.2 million inhabitants, is the second largest city in the Southeast, but its Douglas International airport had n

24、o discount airlines. The Atlanta-to-Charlotte route was heavily traveled and expensive. Douglas International even had 21 available gates out of the total of 64. This seemed to be a ripe situation for a discount airline such as ValuJet. Yet ValuJet chose at first to ignore the Charlotte market, inst

25、ead starting service on routes producing much less business than would have been realized between Charlotte and Atlanta.Why did ValuJet avoid Charlotte? The most formidable obstacle in Charlotte was USAAirways Group, which had 94 percent of all flights into and out of Charlotte. If a discounter ente

26、rs the market, USAirways will cut fares to defend its market. A fare war actually would be more costly to USAirways has much higher costs than ValuJet. However, USAirways had the cash to survive a long fare war ValuJet did not.But fares and costs are not the whole story. USAirways also had connectio

27、ns to many other cities to which passengers wanted to travel. So, although USAirways cost more, it was also more convenient for flyers. Notes Ray Martin, sales manager for Southern Bag Corporation, “You can get back home quickly and easily.” That is very important to the business travelers, who make

28、 up only 48 percent of air travelers but who account for 66 percent of airline revenues. Without access to connecting flights, a discounter would have trouble cracking the Charlotte market unless it also established flights to Atlanta, Washington, New York, and other popular destination.Another fact

29、or is the willingness of communities to offer incentives to airlines. “Were starting to see a lot of support from communities that know we have other choices,” says David Ulmer, vice president of planning for ValuJet. For example, in Newport News, Virginia, a city-operated economic development group

30、 paid ValuJet $1.9 million. In Jackson, Mississippi, the Chamber of Commerce provided free advertising for the airline. With so many cities anxious for their services, discounters can pick and choose where they want to go. There is no need to enter a sustained battle with a major airline such as USA

31、irways in Charlotte.Eventually, however, the easy pickings ran out, and ValuJet chose to enter the Charlotte market anyway. To do so, it had to offer fares that were 68 percent below those of USAirways and Delta its major competitors. Moreover, neither the airport nor the city used financial incenti

32、ves to lure ValuJet they didnt want to upset their contracts with USAirways. Of course, USAirways responded with lower prices so that, eventually, lower fares will prevail on the more popular routes, but it may mean higher fares on less popular routes.Questions:1.What internal and external factors a

33、ffect pricing decisions in the airline industry?2.What marketing objectives have the various airlines selected?3.Which airline industry costs are fixed and which are available? What implications does this cost structure hold for airline operations?4.What is the nature of demand and competition in the airline industry? Does demand diff