Gold Star for Jet Blue
March 20, 2008
Jet Blue is going to charge $10-$20 more for an extra 4″ of leg room in their seats. What a terrific idea. I’m a little tired of getting shoved into a seat with no leg room. Yes, it’s a great excuse for not working because I can’t get my computer out but on long flights it is a literal pain. I’d be more than willing to pay more for the leg room–how about you?
Jet Blue, like Southwest, continues to do a great job with their pricing. They have promotional fares that represent a 50% discount over regular fares. When they have a price difference it is based on something of value like distance, seat type and off-peak travel. A recent check of their web site shows flights from $94 to $284 each way–similar to what Southwest has been doing.
Contrast that to the legacy airlines, that use yield management techniques which extract every last penny from fliers based on their alleged price sensitivity. The net result is price differences that are as much as 1,000%. The result: alienated customers who start switching for better prices, eroding the base of loyal customers who used to pay the high prices. It’s no wonder that most of the airlines continue to lose money.
Here’s a question for you: for the same product or service, is the difference in prices charged to different customers big (over 100%) or is it small? Further, is it defensible? If it’s not, you are probably alienating your customers. That makes them appear more price sensitive when, in fact, they’re just mad. Think about it.
Entry Filed under: Current Events. Tags: Airlines, Jet Blue, pricing, Pricing Strategy, Yield Management..
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1.
Ron Baker | March 20, 2008 at 10:01 pm
Hi Reed,
Here’s my answer to your fairness question, specifically as it relates to yield management by the legacy airlines: Yes, the 100%+ difference is defensible. Why?
Because an airline seat purchased today is not the same seat as one purchased tomorrow, let alone close to departure. Sure, the actual flight is the same, but the value is in having a guaranteed seat on the flight you want.
Airlines have to reserve capacity for their best customers. As someone who makes their living flying, usually on incredibly short notice, I appreciate that they do this, and I’m willing to pay a premium for it, regardless of what the person next to me pays.
So it’s really not the “same product.” It’s an entirely different value proposition.
But your question is a good one about making customers mad. I just read “The Price is Wrong,” by Sarah Maxwell, where she talks about prices having to be “fair.” All well and good, except who decides what’s fair? Her book is more of a whine than an exploration of how a price system operates.
Here’s the real issue. A price system isn’t about fairness; it’s about allocating goods and services. The only other way to do this is by queueing or violence, which I think most people would believe is not fair at all.
I’ll concede people get upset with the airlines for perceived unfairness of yield management pricing. But I think it’s because most really don’t understand it, and that’s the airlines’ fault. But feelings of “unfairness” not grounded in economic reality are simply ignorance, not real victimization.
2.
dunk1 | March 24, 2008 at 3:11 pm
Hi Ron: First, like you, I loved Prof. Maxwell’s book–it will be reviewed in our next newsletter. Fairness is huge and she does a great job covering the subject.
From an economist’s perspective, a price system does indeed alocate goods and services. The problem is that attitudinal pricing effects such as fairness can impact search, variety seeking and loyalty.
A feeling of fairness limits search and variety seeking and enhances loyalty. A feeling of unfairness does just the opposite.
An interesting element of the airline pricing model is that since it measures short term price sensitivity, it appears that their loyal business travelers are price insensitive. Eventually, they recognize that they are being price discrinimated which causes them to decrease loyalty, increase search, and increase variety seeking. As they see the benefit of flying on other cariers, they will use the primary airline less.
The cool thing is that the long term impact of this is actually lower price airline seats since the yield management models that pus the prices of the loyal business travelers up react when demand drops not by lower the price of the seat but by opening more “tourist fare” seats at dramatically lower prices.
reed
3.
Ron Baker | March 29, 2008 at 7:58 pm
Hi Reed,
I agree that fairness is an incredibly important concept–prospect theory and behavioral economics is shedding tremendous light on this.
It has not been my experience that frequent flyers become less loyal, even though they are being discriminated against. I’m more loyal to my airline than ever. Yes, they charge me a premium, but they also shower me with perks (system-wide, regional, 500-mile upgrades, priority this and that, etc), which I value tremendously. They have 100% of my travel budget, and I’ve discussed this with many other flyers who feel the same way.
Also, I hardly “loved” Maxwell’s book. In fact, I found it to be quite an annoying screed, incessantly whining about the unfairness of capitalism, along with a total lack of understanding of the role prices pay in allocating resources. There’s a long review of it on my Blog at:
http://www.verasage.com/index.php/community/comments/book_review_confusing_a_fair_lunch_with_a_free_lunch/
As always, I love our conversations.
Ron
4.
Alex | June 24, 2008 at 12:58 pm
Reed,
I’m sorry, but your comments above, as well as your commentary regarding American Airlines in your newsletter this week show a lack of understanding of airline pricing and revenue management.
First of all, yield management as practiced by the overwhelming majority of airlines does not account for “price sensitivity”.
Second of all, what you refer to as $1,500 and $911 “change fees” from United and American are not change fees at all – they are the difference between the value of your current ticket and the value of the new routing that you selected(mostly – there may also be a “change fee” involved, but it’s not $900). Simply put, you changed your product choice, and the new product is more expensive / valuable. Would you complain so if I told you that the “change fee” for trading in my Kia for a Lotus was $100,000?
…and don’t even get me started on the whole “would I pay more for extra leg room” thing…
Regards,
Alex
5.
Holden Advisors | June 25, 2008 at 2:34 pm
Alex: lol on the legroom. I agree and disagree–go figure. First, I try not to get too technical on the blog and in our newsletter. While you are technically correct that the early models of price optimization in the airline industry did not explicitly calculate price sensitivity, they did seek to optimize prices based on how prices impact their load factors. As loads went above the anticipated load factors for a prescribed number of days prior to take-off, they would raise prices. If loads were below the prescribed level, rather than reducing prices, they would allow some seats to be sold at fairly low prices.
In today’s models, they do deal with price sensitivity specifically. It depends on whose software the airline is using as each one estimates the sensitivity beta differently. As such, they specificaly measure short term price sensitivity of both the high priced business traveler and the low priced tourist class passenger. For a review of that, I strongly suggest Bob Phillips’ excellent book called Pricing and Revenue Optimization.
In fact, the above is an over simplification–the airlines now make hundreds of price changes for each flight and hundreds of thousands of price changes per day for all of their flights.
The fee’s charged for last minute changes are in fact fences. They are there to bring the cheap seats closer to the level of the business traveler, especially for last minute changes. The problem is that you are now dealing with short term price sensitivity (the willingness to agree to the change) and long term price sensitivity (the alienation and ultimate decision to change behaviors in the long term) leave the airlines with fewer loyal customers.
This has been a fun topic–most recent newsletter takes it up another level: http://www.holdenadvisors.com/news/newsletter.htm
Thanks for the comments–would love to hear more.
reed