Understanding airlines’ price discrimination

Author: Ana Burduli

I have flown economy class several times and will most probably fly this way in the future, but recently experienced the type of reality when I had the opportunity to fly business class on an airBaltic flight. That was good time to relax and think more like an economist.

• Why your seatmate’s airfare cost more than yours?
• Why is economy class in airlines so humble?
• Why are round-trip airfares from Delhi to Chicago IL lower than round-trip airfares from Chicago IL to Delhi?

If you never asked these questions to yourself before here is a guide to rational decisions.

It’s reasonable to say that most of us choose economy class. But it’s not that bad, right? Unless you are stuck on an old aircraft with no leg room.

Understanding airline ticket prices requires some basic knowledge from economics. I hope you all have heard about price discrimination, a practice for charging a different price for the same good or service.

Airline industries has practiced price discrimination for many years. As graph 1 shows, International passenger numbers have a positive trend in recent years for both economy and business travel classes. But economy class travel has experienced slightly stronger growth so far.

Graph 1

Why and how airline companies price discriminate? Do they really benefit from it? Yes, I am sure they do. Most of the costs related to flying are fixed costs. Marginal cost of an extra passenger should be relatively low. The fewer passengers the aircraft has, the more all these fixed costs the company should pay for the flight. Therefore, the airline company will try and sell all tickets to maximize profit. In fact, airlines have one goal in mind: to maximize their profit on every route, on every plane, on every seat. The ways how they achieve this goal thought price discrimination (PD), more precisely thought multimarket PD, are the following:

• Charging a higher price to customers how are willing to pay more than the uniform price.
• Servicing some people who are not willing to pay as much as the uniform price.

In short, companies charge different groups of customers different prices.

Chart 1 provides statistics about traffic growth by route. It depicts that economy and business travel experienced the higher growth within Europe, accounting for 11.4% and 6.7% growth rate respectively.

 Chart 1

It seems like price discrimination that the airline companies are using currently is not sufficient to gain as much consumer surplus as possible. Hence, there’s a new class of service coming to an aircraft so called “economy minus” or “last class” with pay less, for less logic. Sounds quite fair 😊