Fares offered by the Irish airline Ryanair on their website typically start moderately high and tend to decrease over time up to about 10 days before take-off; subsequently, the trend reverts abruptly with fare hikes of 50-75% in the last few days. That is the central finding of research by Professor Claudio Piga and colleagues, to be presented at the Royal Economic Society’s 2014 conference.
Their study reveals that contrary to popular belief, the airline does not set its prices simply on how distant the departure date is. In an in-depth investigation of the main factors determining the structure of prices that are posted on the Irish carrier’s website, they show that once account is taken of the impact of seat availability, it is possible to establish a very precise profile for the temporal evolution of fares. Among the findings:
· The sale of an extra seat is associated with a 3.1% increase in fares. For Winter flights, the increase is 2.7%, while for Summer flights, the increase is 3.2%. A similar pattern is observed for flights on routes with high and low competition: 2.9% versus 3.3%.
· For a flight that takes off with 49 available seats, its last fare is about £106 cheaper than a flight that flies full.
· Fares start moderately high and tend to decrease over time up to about 10 days before the take-off, at which point there are fares hikes of 50-75%.
The researchers explain that the last minute fare hikes are for two reasons:
· First, the airline practices price discrimination by charging higher fares to late bookers. These are generally business people who cannot substitute the flight with one departing another day.
· Second, the airline has to establish a reputation for charging late sharp increases to prevent ‘strategic behaviour’ from customers, who could otherwise choose to postpone purchase hoping for a last-minute discount.
This study challenges the conventional wisdom according to which the low-cost carriers generally apply a very simple pricing mechanism that depends exclusively on how distant the departure date is. While the authors also control for these temporal effects, they focus their attention mainly on how fares change as fewer seats remain available on a given flight. This is a very difficult topic to address, since the airlines do not provide data on a flight’s occupancy at the time a fare is posted online.
By exploiting a feature of the Ryanair’s website, the authors can retrieve such information: the data reveal that for the average flight, the sale of an extra seat is associated with a 3.1% increase in fares. For Winter and Summer flights, the increase is, respectively, lower (2.7%) and higher (3.2%).
A similar pattern is observed for flights in routes with high and low competition (2.9% vs. 3.3%). Take a flight that takes off with 49 available seats: its last fare is about £106 cheaper than a flight that flies full.
Unveiling this pattern carries important implications for the other driver of fare change – that is, how fares change as the time of departure nears. The simple observation of an increasing profile of fares over time is indeed not sufficient to reach the conclusion that the airline practices price discrimination aimed at charging higher fares to certain groups of individuals (for example, business people who tend to book late). Because seats are sold sequentially over time, the increasing temporal profile may be simply due to the fact that fewer seats remain available on a flight as the departure date nears.
The study thus can establish a very precise profile for the temporal evolution of fares, once the impact of seat availability is controlled for. The evidence reveals a U-shaped temporal profile over the weeks before departure: fares start moderately high and tend to decrease over time up to about 10 days before the take-off; subsequently, the trend reverts abruptly, with fares hikes of 50-75% in the last days.
These hikes can be ascribed to two main reasons: one, the airline price discriminates by charging the late bookers (generally business people who cannot substitute the flight with one departing another day) higher fares.
Two, the airline has to establish a reputation for charging late sharp increases to prevent ‘strategic behaviour’ from customers, who could otherwise choose to postpone purchase hoping that a ‘last-minute’ discount is offered.
The study discusses extensively how these findings describe the airline’s routine activity aimed at fare setting, also known as ‘yield management’ or ‘revenue management’. The evidence clarifies how important aspects of such an activity are carried out in practice and in normal circumstances, that is, when the airline’s forecast on how a flight will sell turn out to be quite accurate, so that an yield manager can stick to a predetermined course of action.
The study provides the necessary foundations for future research aimed at understanding the impact and the factors that induce a yield manager to deviate from a predetermined plan and choose an alternative distribution of fares across seats and over time. It also offers insights on how yield management can be studied in other relevant sectors, such as sea ferries, hotels, car rentals and cruise ships.
For further information, contact:
Professor Claudio Piga, email@example.com, 07765 180936
Romesh Vaitilingam: firstname.lastname@example.org, +44 7768 661095