Last month Tom Bacon recommended three tools to help airlines flying new routes approach forecasting in a more strategic way. Now he turns to the challenge of pricing

As airlines launch a record number of new routes in 2015, airline pricing needs to take a central role in ensuring success. Those who set prices cannot rely on route planning alone to screen markets, to establish a strong competitive position in a new market in order to develop proper forecasts. Satisfactory results will rely on both strategic and tactical pricing.

In the highly competitive airline industry, a ‘me-too’ carrier in an established market has little chance of success. Questions that might arise include: what is the launch airline bringing to the market that the market doesn’t already have? Low fares?

Of course, one can normally expect an aggressive response from an incumbent; he is likely to match – or potentially even undercut – an introductory low fare. Even though a new entrant can obtain presence in many third-party distribution systems, the incumbent will have a huge advantage in knowing the habits and having experience of frequent travellers. 

In new markets, pricing has two potential strategies:

• Helping to leverage the advantages the new carrier is bringing to the market (it’s reason for entering), or
• Offering an important differentiating factor on its own (less common but a strategy some carriers are pursuing today)

Pricing to leverage other factors

In the Middle East and Europe, Emirates is among the fastest growing carriers. Emirates has established itself by offering a better product than many competitors; a fantastic business class experience, is one example. In this case, in order to achieve target revenue, pricing needs to identify the various product, schedule, marketing strengths, as well as weaknesses, and then establish price premiums and discounts accordingly.

To match on price, while offering a better product or a more convenient schedule, or stronger ties to a particular point of sale, squanders the inherent competitive advantage

To match on price, while offering a better product or a more convenient schedule, or stronger ties to a particular point of sale, squanders the inherent competitive advantage, which was the reason for launching the route.

Pricing as a differentiator

In the US, Spirit Airlines is among the fastest growing airlines yet, from a schedule and product standpoint, it brings little to the new markets it serves. In fact, it often operates a few frequencies in markets that already have many; it promises less legroom and fewer amenities than most incumbent carriers.

What Spirit Airlines does, is rely heavily on its maverick pricing to add value to a market. Its pricing strategy is not simply to undercut incumbent airlines but to offer a radically different pricing structure. Lower base fares, yes. But to some travellers, a dizzying number of ancillary charges, including carry-on bag fees and boarding pass printing. The incumbent carriers, generally, do not match the low base fares since they don’t also assess all of the ancillary charges that add up to Spirit’s total revenue.

In summary then, as airlines launch a record number of new routes in 2015, pricing plays a strategic role – either through leveraging the launch airline’s various existing competitive strengths or by making pricing a differentiating factor of its own.

In the highly competitive airline industry, ‘me too’ is never enough, in pricing or other commercial functions.

Tom Bacon is a regular EyeforTravel.com columnist and 25-year airline veteran and industry consultant in revenue optimisation. His views are his own. Questions? Contact Tom at tom.bacon@yahoo.com or visit his website