Travel Reference
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seasonally because low season would not be profi table; see Anton et al . 2010). The implications
of elasticity issues for tourism pricing are: that any technique which makes pricing easier is
welcome; that pricing must be taken extremely seriously by any tourism business; and that
strategic approaches are essential to help to defend the business from demand fl uctuations and
consequent falls in revenue. A meta-analytic approach to studying price elasticities of demand for
air travel was carried out by Brons et al . (2002) but the data was insubstantial and airline pricing
has been relatively neglected by researchers; for examples, see below.
Variability, as suggested above, is an important issue for price setting. Determining what the
costs of a tourism business will be when planning what prices to set for a forthcoming season is
diffi cult when the business is exposed to foreign exchange rates, to fuel prices in a volatile
market, even to fl uctuations in food prices responding to changes in weather patterns, disease,
transport costs and labour costs.
The tourism industry is also vulnerable to perishability. If a seat on an aircraft remains unsold
when the aircraft takes off, or a hotel room is empty for a night, the revenue from these potential
sales cannot be recouped because the product (seat or bed-night) cannot be stored for future sale.
The fi xed costs of operating aircraft and hotels are generally high; often the fi nance for the
business will have to be serviced (aircraft are leased; buildings may be leased and must be
maintained, for instance) and the employees paid, whether or not the facility is operating at
maximum effi ciency and high levels of sales. We assume high fi xed costs, but many tourism
businesses are also running with high variable costs too, such as fuel consumption. Much of the
labour involved in tourism businesses such as hotels is organized as core permanent staff with a
pool of casual labour in order to transfer the costs from fi xed to variable in order to manage
seasonality and fl uctuations in demand, but this tends to reduce the quality of service available to
the consumer. A very useful study of the infl uence of price instability on the profi tability
of hotels in Taiwan has been carried out by Chen and Chang (2012) which also references
Qu et al . (2002) looking at short-term price changes in Hong Kong; these studies demonstrate
the issues of seasonality in hotel price-setting and how they can affect profi tability.
Estimating future fi xed costs in order to establish cost-based pricing may depend on
fl uctuations in bank rate, because of the dependence of the business on loans and the need to
service them. Scheduled airlines must anticipate possible fl uctuations in fuel costs, taxes and
landing fees and the exchange rates in the countries in which they operate. Referring to the
prices set by their competitors is similarly risky as a pricing strategy because their competitors'
costs may well be different; their means of fi nancing themselves, their exposure to foreign
exchange rates, their operational models and ability to cross subsidize, may all differ. Global hotel
chains can cross-subsidize loss-making operations in destinations which are experiencing
diffi culties, where local or regional chains cannot; small low cost carriers with tightly defi ned
regional or local markets may be very vulnerable to changes in their markets, such as the low cost
specialist business carriers in Europe which have failed during the economic downturn.
Figure 26.1 shows how it is possible to maximize revenue by manipulating prices.
The higher prices charged above the single market price are possible in tourism situations
when elasticity is low; the additional revenue when marginal cost is zero can be obtained when
all costs have been covered at the single market price but there is spare capacity which can be
sold for lower prices as the date of consumption approaches, such as empty hotel rooms or
aircraft seats.
The idea of yield management (treated more fully elsewhere) is sometimes confl ated with
price setting, because the purpose of the practice is to maximize the revenue obtainable from
sales. Of course, it is essential that the consumer base is aware of the possibility that different
prices may be charged for the same product, depending on the date of purchase (see Ovchinnikov
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