Journal of Air Transport Management 15 (2009) 195–203
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Journal of Air Transport Management
journal homepage: www.elsevier.com/locate/jairtraman
Pricing strategies of low-cost airlines: The Ryanair case study Paolo Malighetti a, *, Stefano Paleari a, Renato Redondi b
Department of Economics and Technology Management, University of Bergamo– Universoft, Viale Marconi 5, Dalmine 24044, Italy Department of Mechanical Engineering, University of Brescia – Universoft, Via Branze, 38 – 25123 Brescia, Italy
a b s t r a c t
Keywords: Dynamic pricing Low-cost Ryanair Fares
We analyse the pricing policy adopted by Ryanair, the main low-cost carrier in Europe. Based on a year’s fare data for all of Ryanair’s European ﬂights, using a family of hyperbolic price functions, the optimal pricing curve for each route is estimated. The analysis shows a positive correlation between the average fare for each route and its length, the frequency of ﬂights operating on that route, and the percentage of fully booked ﬂights. As the share of seats offered by the carrier at the departure and destination airports increases, fares tend to decrease. The correlation of dynamic pricing to route length and the frequency of ﬂights is negative. Conversely, as competition increases discounts on advance fares rise. Ó 2008 Elsevier Ltd. All rights reserved.
1. Introduction In recent years, the entry of low-cost carriers has totally revolutionised the air passenger transport industry. The low-cost business model was introduced by Southwest in the US at the beginning of the 1970s. However, it was only in the 1990s that the phenomenon spread worldwide. Ryanair was one of the ﬁrst airlines in Europe to adopt the low-cost model in 1992. Easyjet, Ryanair’s main low-cost competitor, was founded in 1995. Although the phenomenon is relatively recent, the stunning results obtained by low-cost carriers urge academics to study the reasons for their success. The reduction of costs lies at the core of the low-cost business model, which aims to offer lower fares, eliminating some comfort and services that were traditionally guaranteed (hence the deﬁnition of ‘‘no frills’’, often employed to refer to low-cost ﬂights). The use of an on-line booking system, the suppression of free in-ﬂight catering, the use of secondary airports connected through a pointto-point network, and the use of homogeneous ﬂeets are only a part of the innovative choices made by low-cost airlines. Many studies have analysed low-cost businesses, highlighting the keys to lower costs (Alamdari and Fagan, 2005; Doganis, 2006; Franke, 2004), and the role played by entreprership (Cassia et al., 2006). The containment of costs is only one of the reasons for the success of a low-cost carrier. Alertness to ‘‘latent demand,’’ characterised by the passenger’s willingness to pay elastic prices, which is not the attitude of the so-called ‘‘traditional’’ passenger, is among the key factors.
In the airline business, the maximisation of the proﬁts obtained from each ﬂight is strictly related to the maximisation of revenues, because many of the costs incurred are essentially ﬁxed, at least in the short term. Pricing has always represented an important factor in the carriers’ choices, driving the adoption of different strategies by low-cost and full-cost carriers. Full-cost carriers choose price discrimination techniques based on different fare classes, complex systems of discounts with limited access, customer loyalty schemes, and overbooking techniques. Low-cost carriers instead use ‘‘dynamic pricing’’. Because of dynamic pricing, it is now common for people to buy air tickets to European destinations for less than V10.00 (airport taxes excluded). This paper deals with the pricing policies of low-cost carriers, offering a detailed analysis of Ryanair, the main developer of the low-cost model in Europe. Generally speaking, fares tend to increase until the...
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Fig. 12. Distribution of the optimal purchasing periods of time for 391 routes.
6. Conclusions and future developments This work has provided an in-depth analysis of the pricing strategies of low-cost carriers. We focus on the features of the demand curve, hypothesising Ryanair’s ability to maximise its proﬁts. The price equation is obtained from an exponential demand function subject to Ryanair’s proﬁt maximisation, and shows that, as the date of ﬂight approaches, the price trend tends to resemble a hyperbola. The empirical analysis is based on an original database of Ryanair’s fares, made available on Ryanair’s website, for each individual route operated during the year starting the 1st July, 2005. We estimate the price trends for each individual route over the 3 months prior departure, in terms of the average fares and the dynamic pricing intensity. In general dynamic pricing intensity is strong in almost all the ﬂights. However the phenomena is complex in terms of determinants. We ﬁnd positive correlation between fares and route length, route frequency and the percentage of fully booked ﬂights. Length and route frequency are also signiﬁcant variables with negative correlation to the dynamic pricing intensity. Ryanair grants fewer discounts on long haul and high-frequency routes, despite advance purchase. We ﬁnd a negative correlation between the Ryanair’s importance in the departure and arrival airports and offered fares. The offer of the discounted fares appears as an incentive to use secondary airports. However, if Ryanair plays a dominant role in the departure airport, not only average prices are lower, but also signiﬁcant discounts are more likely on tickets purchased in advance. This indicates the importance for the carrier to fulﬁl its capacity. Surprisingly, the presence of competitors does not seem to heavily impact the average price. However, the variable representing the number of competitors operating on the same route is
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