Archive for October 22nd, 2007

Airline Economics – Ticket Prices

We always see fantastic price offers from airlines. But it is never clear if they contain taxes or not? How much is it whith taxes? And what are these taxes anyway? The following article will explain it all to you.

Today I read it in the news, that British Airways will have to pay a penalty of about EUR 20 000 to the Hungarian Competition Committee, because some of their past commercials were misleading for customers. The Committee’s main problem with these commercials were that they did not say taxes were not included in the price. Earlier SkyEurope, Malev, SmartWings, WizzAir and KLM were penalized for the same purpose. Therefore – at least in Hungary – some airlines started to publish their gross prices. However gross prices can be different at the same airline for the same trip bought on the same day. How can it be?

Basic ticket prices

Pricing is a very sophisticated process at airlines. we can say that almost every airline ha s adifferent pricing model. In general we can say that prices can differ:

– by cabin class: economy class tickets are the cheapest, business class ticket prices are higher and first class ticket cost the most

– by the date of departure. The closer we are to the date of departure when buying the ticket, the higher the prices are. It is thought to be the model of low cost airlines, but it is not true. Thishas always been the model of flight ticket pricing.

– by the rules attached. The less flexibility we need, the cheaper the prices are. Cheapest tickets are not refundable, not modifiable, usually a saturday night has to be spent att he destination and the length of the trip may not exceed 2 weeks. If we need a ticket that can be modified later or refunded or has an open segment (for example we do not know the return date) cost more.

(We will explain the reason of this pricing model in a separate article about airline revenue management.)

The basic ticket prices are paid for the airline and in case of a common operated, so called code share flight the operating and the marketing carrier share the money when the ticket is sold by the marketing carrier.

Taxes

Originally taxes were paid only for the airport. The airports publish their handling and other prices in the same reservation systems the airlines use for booking. They publish these prices in their own currency, that is why these amounts differ from day to day, because the currency converting rates change even within days. This minor change is the reason why airlines do not wish to include taxes in the basic price.

It also belongs to the truth that in case of certain currencies this change my reach bigger amounts as airlines publish their prices for 333 days. We could also say – so what? They can change their prices every week if the want to. This is also a possibility, but publishing airline prices is a difficult and expensive procedure as these prices have to be present in all the reservation systems all around the world. Thus it is understandable airlines do not wish to publish gross prices in all markets. However within the EU it is not a risk.

There is a nice trick about taxes airlines happily use. They did not want to increase prices in the same volume as kerozene prices rose in the near past. Therefore they created a so called YQ tax that is basically the fuel surcharge. This way they could keep prices low and include the extra cost into the taxes that are not shown in the comemrcials. Fuel surcharges are not paid to the airports.
“Other fees”

The other fees section of a ticket contains the so called service fee. Service fee came into the picture when airlines stopped paying regular commission to travel agencies a few years ago. (althoguh they still pay super or marketing commission and similar extras to agencies that qualify for these by selling a huge volume of the airline’s tickets) Instead of paying commissions they launched service fees that they also collect and this way they give some space to agencies to collect the missing commission from the clients directly.

At the same time airlines also started to play with this service fee to direct traffic to their more cost efficient sales channels, such as website or call center. It can easily happen that you pay more for the same ticket, same day, same trip in the airline’s airport office than on their website. The most expensive sales channel for an airline is the travel agency (including online agencies), then comes the city or airport office of the airline, then the call center and naturally the cheapest channel is their own website.

So if you would like to get the cheapest price for a certain flight, you should try to book it for yourself on the airline’s own website. Still it is possible that you will find the cheapest price at another website, because when you first look for it on the airline’s website, only a higher class is open, but in the meantime somewhere somebody in the world cacnelled his ticket, a few minutes later a cheaper ticket will be available.

That is the so called revenue management, but we will take a closer look at it in a different post.

By Szafi
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