Economics: Case lets in Pricing

Kochi: There is good news for air travellers — both regular and otherwise. Many of the existing airlines that operate
from Kochi are planning to compromise on the ticket prices.

Indian Airlines, the national domestic airliner, has announced several packages that are quite attractive. Jet Airways, the other
major operator, has also pitched in with similar offers, which appear irresistible to passengers. Today with so many offers being
floated by almost every airliner, the air travel sector in the country is not what it used to be earlier. "With ticket prices
coming down drastically, we are getting too many reservations," says a leading travel operator based in Kochi.

Though the newly announced prices are promotional, in a way this is definitely going to pep up the air travel sector in a major
way. More and more people are turning towards air travel over other modes of transport. The fares are cheaper by 20 to 40 per
cent depending on the sector chosen by the passenger. For instance, Indian Airlines now charges Rs 1500 for a ticket in
the Kochi-Chennai sector when a ticket is reserved a full 30 days in advance. If the booking is made 15 days
before the date of journey one has to pay Rs 2,920 though the normal rate is Rs 5,235.

Similar offers are also offered by Jet Airways. They offer passengers two schemes — Apex Fare and Super Apex Fare. Apex Fare
requires 15 days of advance booking and Super Apex Fare is offered to those who reserve tickets 30 days in advance. As per
the Super Saver Scheme of the Indian Airlines, which is a limited edition ticket series, one can travel on any four
domestic sectors in the economy class within 90 days by paying just Rs 25,000. For the executive class the price
is Rs 35,000.

Many other international operators have also introduced attractive prices. Lufthansa, Emirates and Silk Air are just some of
those that offer different packages. Currently seven international airlines are operating from Kochi International Airport alone,
the latest in line being Sri Lankan Airlines, which has three services per week between Kochi and Colombo.

(Extracted from an article titled ’IA, Jet Airways offer attractive packages to woo more travellers’, authored by Jays Jacob and
appeared in www.domain-b.com; 25 June 2003)

What's more, Anita Goyal reports to the COO, but is a capable and strong-willed woman with a big say in all revenue decisions
like planning new routes and pricing. When Steve Forte joined the Jet airways in February 2000, he had tried to
change the way things were run with a yield management software. These are the tools that help airlines manage
revenue per passenger by predicting various situations and possible solutions. But Forte's proposal was shot down as
Goyal thought the manual systems were adequate.

Forte had also suggested introducing a fragmented fare structure. The idea was to try and expand the market by making fares
affordable for fresher market segments - particularly those that travelled by train. This time it was Anita Goyal who shot the
proposal down. She did not see the need to tinker with Jet's pricing strategy, which had worked very well till then. So Jet was
taken completely unawares when Sahara started the price war last year and IA followed suit. After initial resistance, Goyal was

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Economics: Case lets in Pricing

forced to give in a month later and started the Apex fare scheme. But Goyal refused to have it advertised at railway stations as
he thought it will dilute the brand.

The Apex scheme was run on the thumb rule that about 10% of the tickets on a flight were to be given out under
it when the market required fares to be managed dynamically. But Forte's proposal to install the yield management
system that would have enabled Jet to do so had been shot down. Says an ex-employee: "Airlines don't have much time to be
ultra-competitive. You need to react very fast to a bad situation and this is why airlines are very heavily technology dependent."
In the end, the price war took a heavy toll on Jet. Sources say yields fell by $5 a passenger last year. The good
news is that this effort did increase the market by about 4,000 passengers a day among the three airlines. All
three airlines claim that a majority of these passengers are first-time flyers.

The market storm in 2002 undoubtedly shook Jet, but the airline is now slowly coming back on track in 2003, still the leader of
the bunch. The market has been growing at a steady 10% since January and July 2003 has been the best month in terms of
traffic and Jet is targeting a $60 million profit in the next two years. Yet, the pressure on Jet remains. Sahara has just announced
yet another 30 % increase in capacity

(Extracted from an article titled ‘On a Wing and a Prayer authored by Radhika Dhawan and appeared in Business World;
September 22nd, 2003)

What do airlines mean when they say they want you to become a member
of Frequent Flyer Programmes (FFP)?

Frequent Flyer Schemes offered by airlines is like a giant game of monopoly where
those who frequently travel by air trade their flying mileage points for freebies and
bonuses. It gives you the thrill of earning free tickets for the number of mileage
points accrued and, what’s better still; it can also earn you free tickets for your
spouse, kids or parents. The game has its own rules and awards. Procedural points
may vary from airline to airline — but the core remains the same. So, accrue mileage
to get free tickets and upgrades. Remember, more flights, greater distance travelled
and travel by higher class improves your prospects for mileage accrual.

Which airlines offer Frequent Flyer Schemes?

Most airlines, both domestic and international, offer FFP. Both international and
domestic airlines, which are driven by the need to create brand loyalty amongst their
customers and are increasingly competitive, are finding the FFP an ideal reward for
their customer base. What’s more, you can improve your mileage record by using the
flights and other services offered by the partners of these airlines as well. The

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Economics: Case lets in Pricing

partners could be other airlines (domestic and international), hotels, car rental
companies, credit card companies and even mobile phone services. If global travel is
high on your agenda, you should be looking at one of the international combos of
Star Alliance or One World partners, which offer bigger networks and more
destinations than others, and this automatically puts you in a better position to
enhance your mileage. Star Alliance, for example, has 15 allied partners and offers
894 destinations to choose from.
Returns mileage of 20,000 (the threshold limit) in order to redeem that
And domestic airlines…?

If your itinerary entails a fair amount of domestic travel, plus a couple of trips abroad
a year, you might want to join the Flying Returns programme offered by the Indian
Airlines-Air India combo. As with the international option, the choice of free trips
improves with the number of flights and accrued mileage points.

So what happens to my miles?

Mileage awards are based on distance flown and bonuses added upon your class of
travel and level of membership. The idea is to heap up mile upon mile to get those
Award Tickets (free tickets), upgrades and other benefits. You can claim free tickets
for one-way international trips at a 20% surcharge upon fulfilling mileage point
requirements. Miles travelled are valid for 3-5 years depending on the airline
programme you’ve opted for. Flying Returns even allows you and your spouse to pool
your mileage. To accrue the Flying 1st free ticket for Delhi-Mumbai, you need five Y-
class return trips on this sector.

Are there any add-ons?

Becoming a Silver and Gold Card holder on the programme has many advantages.
Don’t forget you can be a Silver or Gold Card holder even if you only fly economy. It’ll
just take you that much longer. These are the pampered customers, particularly the
Gold Club members. It allows them access to over 500 lounges (Lufthansa) across the
globe as it does for any of the Star Alliance airlines. Being able to refresh between
flights, catch a hot shower, get a great breakfast, use business traveller facilities and
e-mail are major pluses. Some of the offers of international carriers are typified by
British Airways (BA) which gives you a generous mileage scheme, world-wide lounge
access for Silver and Gold Card holders, recorded seating, meal preferences and
priority on busy flights. With KLM’s Flying Dutchman scheme, members can check in
and issue their own boarding pass on all KLM handled flights. It even allows you to

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Economics: Case lets in Pricing

proceed directly to the self-service check-in kiosks at Schiphol and London Stansted
Airports. Jet Privilege members can also earn miles on their programme partners
Oberoi Hotels as can Flying Returns members from Air France and Welcomgroup
Hotels.

What’s the feedback from veteran travellers on the schemes?

Veteran users of the programmes, though happy with those free tickets, feel that
some of these mileage accruals are not easy to attain. Corporate travellers feel that
the discounts on hotels could be better as they themselves can get a much better
discount directly from hotels. A regular globe-hopping executive loves the lounge
access with its hot showers and e-mail services, but feels that the airlines could get
partner hotels to offer free drop-off or pick-ups, some discounts on bar use and,
better still, weekend packages with the family. Getting on-the-spot redemption of
points is something they would all just love.

(Extracted from an article titled FREQUENT FLYER PROGRAMMES, authored by Ranee

Sahaney and appeared in http://www.outlooktraveller.com)

Exercise:

Please identify the relevant economics concepts involved in each of the above mentioned case-lets.

(Hint: please recall your understanding of ‘Cost Analysis’ in Management Accounting and ‘Segmentation’ in
marketing and do focus upon the sentences that are underlined and in bold format.)’

Faculty of Business and Economics, The IIPM, New Delhi 4