The impact of income on airfare pricing

Abstract

The purpose of this article is to show possible changes in airline ticket pricing with the passengers' income distribution. Our study focuses on the issue of competition for traditional carriers (TCs) and low-cost carriers (LCCs). We assume the competition between these two competitors to be in the form of a Bertrand two-stage game. In the first stage, both competitors decide on the level of their airfares simultaneously, whereas in the second stage, consumers choose between high or low quality based on their consumer surplus. This surplus includes the individual's utility of 'trip purpose' and characteristics, the airlines' service quality and the airfare. The results indicate that the LCCs' market share would shrink and the TCs' market share would expand as the average income increases. To prevent loss of passengers and to increase profit, the LCC would have to lower its airfare so that broadens the price difference between TC and LCC. This can be achieved by taking advantage of smaller landing fees and higher aircraft utilisation rates.

EasyJet pricing strategy: determinants and developments

“…Gil-Alana, Pestana Barros, and Assaf (2013) found structural brakes in the airline revenue time series as a consequence of strong industry dynamics. Even if LCCs differentiate their products from traditional carriers in order to relax service competition (Jou, Lin, and Wu 2013), most studies have shown that traditional airlines react to competition by lowering fares (Alderighi et al 2004). Goolsbee and Syverson (2008) showed that full-service carriers in the US market pre-emptively reduced fares in reaction to the increased threat of an entry by Southwest, the major US LCC.…”