Travel Reference
In-Depth Information
were not very popular but which the airline was obliged to include in its schedule in order to
ensure that the plane was in the right place (i.e. at the right airport) for a more popular fl ight.
This type of discounting represents the situation where marginal costs per seat are close to
zero - the cost of operating the fl ight is offset by the reductions in costs attained by maintaining
the smallest fl eet consonant with the safe operation of the routes chosen by the LCC. The fl ight
must take place, so any revenue obtainable is an extra benefi t. A new approach to pricing has
emerged very recently: some LCCs are offering the basic seat price, which includes hand baggage
only and no seat allocation, and an enhanced price which includes hold (checked) baggage and
seat allocation in addition to hand baggage, and even a top-range price which includes additional
benefi ts such as extra hold baggage, priority boarding, executive lounge, onboard food and
beverage service and so on. Thus the LCC is moving closer to the full service airline model in
which different prices are charged for different classes of seating and facilities per passenger
although the basic seat price remains the same throughout the booking period, sometimes being
discounted very shortly before take-off (see Granados
et al
. (2012) for a look at the issues, with
an interesting discussion on the 'decommoditization' of airline services).
The LCC model has been shown to bring new tourists to mature destinations (Anton
et al
.
2010) and to provide tourists who would have made their visit by other means with a new, more
convenient transport option. The role of convenience and speed in the decision to use LCCs
rather than full cost airlines, trains, coaches or other transport methods has not been fully
explored; this study also found, for instance, that travellers from the UK were happy to pay for
taxis to their fi nal destination rather than using shuttle buses, supporting the conclusion that
convenience rather than price was driving the decision to use the LCC in the fi rst place.
Pricing will continue to be used as a strategic tool for both low cost and full service carriers.
For an interesting discussion of some of the issues, see Koenigsberg
et al
. (2008), although the
dynamic nature of the industry in the face of recession may have overtaken some of its conclusions.
Hotels and hospitality
Hotels have been using yield management techniques to improve their revenues for some years.
Useful terms to be aware of in the pricing context are REVPAR, which is the short form for
'revenue per available room', and 'rack rate', the advertised price of a room charged to walk-in
customers exclusive of any available discounts. The REVPAR is calculated for a given period by
identifying the total revenue (without deducting taxes etc.) and dividing it by the actual number
of available room-nights during the period. It is a relatively easy calculation to make and can
be used to make comparisons with competing hotels or with other hotels in the same chain.
Because it takes into account the proportion of rooms that are occupied as well as the prices
(which may vary according to the season and size and class of available room) it is a useful base
for comparing results from season to season. An alternative measure is GOPPAR, or gross
operating profi t per available room, which takes into account the additional revenues made from,
for instance, food and beverage services. However, although it is a more sophisticated calculation
it makes meaningful comparisons with other hotels more diffi cult because of differences in the
facilities available. It is also less widely disclosed than REVPAR which is a long-standing practice
in the industry and can often be available (anonymized) from local agencies.
When considering pricing issues, the question of 'rack rates' is often discussed. If the rack rate
is seldom used, why does it exist? It is very useful for hotels which have a clientele which varies
widely from season to season. For instance, a hotel which serves a racecourse may experience
very high levels of occupancy when there is a race meeting and be able to use the rack rate as its
normal rate during that period; outside the period of high demand it may use discounts of
