Correctly setting prices in any industry is challenging, but air travel can be an especially complex proposition. On the

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Correctly setting prices in any industry is challenging, but air
travel can be an especially complex proposition. On the same plane,
you’ll have customers that are primarily scheduled focused and
willing to pay a higher rate to get to a business meeting on time.
Sitting next to that traveler (probably in the middle seat) is a
leisure traveler who planned a trip months in advance and just
wants to get the lowest fare possible. And then there is the
perishability issue—when the wheels go up, any empty seats can no
longer produce revenue at any price. This is the environment that
United Airlines and other carriers face every day. United Airlines
is one of the leaders in an industry that has seen many companies
come and go since the beginning of commercial air travel in 1914.
Along with American Airlines and Delta, United is considered one of
the “big 3” in air travel. Formerly a part of airplane manufacturer
Boeing, the company was formed in 1931 and today claims to have the
world’s “most comprehensive global route network.” Recent counts
show 4,600 daily departures taking 148 million passengers per year
to 354 destinations in 48 countries. While clearly a survivor,
United has in recent years found themselves in competition with a
new class of airline known as ULCCs: ultra-low-cost carriers. You
may have flown on one of these economical (or “cut-rate”) carriers,
such as Spirit, Frontier, and Allegiant. Southwest Airlines also
offers low fares, but (along with Jet Blue and Virgin America) is
considered in the low-cost carrier category, as they offer some
standard services not available with the ULCCs. In this class of
airline, what distinguishes them is what they do not include as
part of the fare: reserved seats, snacks, drinks, ability to carry
on a bag, in-flight entertainment, seats that recline, legroom, and
often, on-time arrivals. These flights are not about service—they
are all about getting you from point A to B at the lowest price
possible. To compete with low-cost carriers, United first took a
run at creating an LCC of their own. Called Ted, the airline had
its own separate planes. Skeptics joked that the name stood for
“the end of United.” While United survived, Ted was discontinued
after five years. United’s latest initiative focused on competing
with the (now ultra) low-cost carriers is through the creation of
an additional fare class: Basic Economy. The prices are low like
those of the ULCCs, and so are the services: no seat selection, no
seat assigned until the day of departure (a.k.a. a middle seat!),
no ticket changes, no refunds, and one of the biggest: no
full-sized carry-ons. The fare savings are not huge—typically
between $25 and $40—but enough to attract customers who are very
price-sensitive, including many in the millennial generation. “Big
three” compatriots American and Delta have followed suit with their
own versions of the fare class. So far, Basic Economy seems to be a
huge success for Unit-ed and other airlines. In addition to keeping
some customers away from the ULCCs, United is able to sell a small
portion of their unused inventory as a kind of “loss leader,”
attracting travelers to their airline and then “upselling” some
customers to a better (and more profitable) class of service. The
company has been able to upsell up to 70 percent of bookings on its
own website and about 50 percent on third-party sites. They also
make significant revenues on fees when travelers decide they need
that overhead bin, after all, often paying more in total than they
would have by purchasing a standard economy ticket. Between fees
and upgrades, it’s projected that by 2020, United will earn an
additional $1 billion through the program. While United tries to be
very transparent about the differences between standard and economy
fares, an unintended consequence of the pricing has been the
creation of a sort of class system in the coach compartment of
their planes. Standard economy passengers, including some with
“elite” status based on miles flown, resent basic economy
“lowlifes” taking precious overhead bin space. On another airline,
one passenger spent the night in jail after a battle for the bin
with a fellow traveler, and in another case, the conflict turned
into a fistfight. So much for “Traveling the Friendly Skies!” The
airline industry will continue to evolve with new technology,
additional competitors, and changes in consumer preferences. To
continue to survive, United Airlines will have to carefully manage
its pricing process to meet the needs of all the classes of
passengers that they serve.
QUESTIONS:
1. What is the decision facing United Airlines? Does the
pandemic impact this decision?
2. What factors are important in understanding this
decision situation?
3. What are the alternatives
4. What decision do you recommend?
5. What are some ways to implement your
recommendation.
6. Consider the issue of price elasticity for the two
broad classes of United's customer base: leisure travelers and
business travelers. Are they generally elastic or
inelastic?
7. As seen above, competition is a big factor in
United's pricing decisions. What other factors in the external
environment should marketers consider?
8. Is the use of a "loss leader" pricing strategy
ethical? What steps could United take to make sure that its Basic
Economy pricing program is executed in an ethical
manner?