7-32 Airline pricing, considerations other than cost in pricing. Northern Arways

Question

7-32 Airline pricing, considerations other than cost in pricing. Northern Arways is about to introduce a daily round-trip flight from New York to Los Angeles and is determining how to price its round-trip tickets. The market research group at Northern Airways segments the market into business and pleasure travelers. It provides the following information on the effects of two different prices on the number of seats expected to be sold and the variable cost per ticket, including the commission paid to travel agents: Number of Seats Expected to Be Sold Price Charged S 800 1,800 Variable Cost per Ticket S 85 195 Business 300 285 Pleasure 150 30 Pleasure travelers start their travel during one week, spend at least one weekend at their destination, and return the following week or thereafter. Business travelers usually start and complete their travel within the same work week. They do not stay over weekends. Assume that round-trip fuel costs are fixed costs of $24,700 and that fixed costs allocated to the round-trip flight for airplane-lease costs,ground services, and flight-crew salaries total $183,000. 1. If you could charge different prices to business travelers and pleasure travelers, would you? Show yourR computations 2. Explain the key factor (or factors) for your answer in requirement 1 3. How might Northern Airways implement price discrimination? That is, what plan could the airline formulate so that business travelers and pleasure travelers each pay the price the airline desires?

Explanation / Answer

As can be seen that the sale of number of tickets is greatly reduced for the pleasure travels if the prices of tickets are increased to $1800 thus, if allowed then different prices would have been charged for business and pleasure travellers as the overall contribution would have been higher under such situation. The key factor is the huge drop in pleasure travels subsequent to the increase in the ticket prices. Thus, the ticket prices of pleasure would not have been increased as much the ticket prices of business travellers. The airline should charge the business travellers higher as they generally require the tickets within a week whereas the business travellers require to travel at emergency basis due to shortage of time. Hence, the business travellers should be showed the reason of making them available tickets at short notice whereas the pleasure travellers do not have any hurry.

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