MENU
March 6, 2008

Deal or No Deal: Should Economy Airlines Offer Last-minute Bargains?

Offering last-minute deals is not always a sound pricing tactic for airlines, but under some circumstances, economy carriers may want to offer such bargains.

Topics: Marketing

Economy airlines often prosper in the airline industry because they buck traditional pricing and revenue-management strategies. Launched in 1995, easyJet is one of the most successful of the new economy carriers in Europe. Unlike many of its larger European counterparts, easyJet offers a single class of seat at one price but does not offer last-minute deals. Customers are assured that it’s in their best interest to buy a ticket now instead of later, and easyJet typically enjoys a steady stream of passengers, with no need to direct resources to expensive, complicated pricing and revenue-management systems.

Professor Oded Koenigsberg wanted to know if this single-price policy was the optimal pricing strategy for easyJet and similar economy carriers, and to identify how and if easyJet could build on its success by offering last-minute deals. To answer these questions, Koenigsberg and coresearchers Eitan Muller of New York University and Naufel Vilcassim of London Business School examined pricing and demand patterns for easyJet flights in six pairs of European cities.

The airline-pricing equation is complex. Customer demand can rise and fall quickly over weeks or days, but carriers’ ability to expand or scale back their service is very inflexible. If an airline misjudges growth, it can find itself with too few seats, unable to take advantage of increased demand and losing out on revenue. Alternately, if a carrier has overestimated how many seats it can fill on a regular basis, it may find itself strapped for cash. Carriers also can’t be sure of their competitors’ seating capacity, further complicating the pricing challenge.

Then there’s the question of offering last-minute bargains on unsold seats. In the 1970s, major carriers started to offer last-minute deals, releasing remaining seats on underbooked flights. U.S. carriers all but did away with last-minute deals in the 1990s, but most European airlines still offer them. But price-conscious customers with flexible travel dates will wait for last-minute deals in lieu of buying a more expensive ticket early in the selling cycle. “The caveat is that consumers may start to expect lower prices and delay their purchases,” Koenigsberg explains. “That puts more pressure on airlines to lower fares.” Economy carriers have resisted offering last-minute deals. “But many European carriers still use last-minute deals on the rationale that it’s better to fly a fuller plane than leave seats empty,” he says.

Koenigsberg and his coresearchers found that easyJet’s seating capacity rests between the extremes of high and low and that hitting a sweet spot of intermediate seating capacity means the single-price strategy is the optimal policy for the airline. However, the researchers found that easyJet could benefit by randomly offering last-minute deals under its single price strategy. By only occasionally lowering ticket prices to bump up revenue on some underbooked flights, easyJet could avoid creating the expectation that such bargains would be available on a predictable basis.   

Koenigsberg’s assessment of easyJet’s pricing strategy has prompted him to wonder if other airlines might rethink how — or even if — they should offer last-minute deals. By scrambling to fill all their seats on all flights for the sake of short-term revenue, carriers may be losing out in the long term. “Airlines should reconsider how they offer last-minute deals,” he says. “If customers know a firm is likely to reduce prices if demand isn’t strong, many of them will put off buying tickets, waiting for the price to go down. In many cases it is better for airlines to fly with empty seats than to reduce prices.”

Oded Koenigsberg is associate professor of marketing at Columbia Business School.

 

 

Have You Read Columbia Business?

Columbia Business School’s alumni magazine connects alumni with each other and the School; celebrates alumni milestones and accomplishments; and chronicles the impact of Columbia Business School alumni, faculty members, and students on the global business landscape.

Read Columbia Business>