Plane fares are frustrating. From the time someone searches for a flight in the morning, until they book it later in the week (or day), the price changes. And don’t even get started about how little leg-room and seat space there is in the economy class section! But then again, the economy class is not how airlines make money. How does an airline make money on fares?
First class and premium cabin seats!
Here is an example of a flight’s pricing: British Airways 777, round-trip, non-stop between London and Wash. D.C.
- 224 seats total
- 122 economy seats @ $876/seat = $106,872
- 40 premium economy seats @ $2,633/seat = $105,320
- 48 business class seats @ $6,723/seat = $322,704
- 14 first class seats @ $8,715/seat = $122,010
The front sections of the plane account for 45% of the seats, but generate 84% of the revenue! While this model does not always hold true, in general airlines get 66% of revenue from the premium, business, and first-class seats.
In essence, airlines are able to sell the same service (transportation) to different people, at vastly different prices (enhanced amenities and the onboard experience). Airlines realized that passengers could be segmented into two categories: tourists, and business people.
What else will future air travel hold?
Group Activities and Discussion Questions:
- Pricing is usually a complex topic. Discuss the six steps for pricing (determining objectives, estimating demand, determining cost/profit relationships, select price level, set list price, and make adjustments).
- Discuss the various pricing models in class: demand-oriented, cost-oriented, profit-oriented, and competition-oriented.
- Show this video that explains the basic economics of airfare:
- https://youtu.be/BzB5xtGGsTc
- Draw the price structure on the board.
- Divide students into teams. Have each team work on a possible re-design of planes to address more market segments.
Source: Wendover Productions, YouTube
