BUSINESS ECONOMICS

Business Economics

Business economics

Cost of British Airways return flight from Aberdeen has become increasingly complicated over the years and is now largely determined by computerized yield management systems.Because of the complications in scheduling flights and maintaining profitability, airlines have many loopholes that can be used by the knowledgeable traveler. Many of these airfare secrets are becoming more and more known to the general public, so airlines are forced to make constant adjustments.

British Airways use differentiated pricing, a form of price discrimination, in order to sell air services at varying prices simultaneously to different segments. Factors influencing the price include the days remaining until departure, the booked load factor, the forecast of total demand by price point, competitive pricing in force, and variations by day of week of departure and by time of day. Carriers often accomplish this by dividing each cabin of the aircraft (first, business and economy) into a number of travel classes for pricing purposes.

A complicating factor is that of origin-destination control ("O&D control"). Someone purchasing a return flight from Aberdeen to London (as an example) British Airways lost £485 million for the six months that ended in September. The airline's CEO Willie Walsh told the BBC that this has been the "most difficult year in the history of British Airways". BA is planning to cut 3,000 more workers in an attempt to return to profitability, but the firm's outlook for an improvement in passenger traffic is bleak.

The BA news should not be seen in isolation. After a brief period in which analysts and traders hoped for a full-scale turnaround in the global airlines industry, those sentiments have faded. The dismay is reflected in the stock prices of US-based airlines. Shares of American (AMR) are down about 25 percent in the last month, and most stocks in the sector are off more than 10 percent.

The theory that airline earnings would get better was based on three premises, which have turned out to be largely untrue. The first is that fuel costs would continue to fall, or at least stabilize. The price of crude has risen to £80 and there are concerns that a step-up in the world's economic growth will take oil even higher, bringing jet fuel costs with it.

The advent of advanced computerized reservations systems in the late 1970s, most notably Sabre, allowed airlines to easily perform cost-benefit analyses on different pricing structures, leading to almost perfect price ...