Welcome �

Our corporate offices are located near an area known as the Research Triangle, due to the number of universities and high-technology industries dedicated to research in the area. It's a great base to focus on travel in the southeastern, eastern, and midwestern areas of the United States.

 

 

 

Pricing

find ways to improve the profitability of a regional airline business.

study the current pricing strategy of the market that is the least profitable and, therefore, needs the most attention: flights on the Durham to Chicago route.

After you analyze the current pricing strategy, consider a broader plan. He wants you to determine whether the company can use price discrimination effectively and, if so, to recommend a plan to implement price discrimination. Before you begin, read the e-mail from Brian Usher that explains this project in more detail.

 

Rationale

In this task, you will explore pricing strategies in situations where a firm has some market power. In addition, you will examine the potential for price-discrimination strategies to increase profits.

Your Deliverable

Write a 700- to 1,000-word report to Brian Usher analyzing current and proposed pricing strategies and their profitability.

���������������

�         Include an assessment of whether the current fare maximizes profits. If not, identify the fare that should be charged. Give evidence that it is the best by showing that profits are highest if this fare is charged.

�         Complete the Customer Demand Data spreadsheet for Clear Blue Sky by calculating all appropriate revenues, costs, and profits. This spreadsheet can be downloaded from the Project Materials.

�         Discuss whether fuel costs should be used as a basis for pricing.

�         Comment on the suggestion that the company could use price-discrimination strategies to improve profitability.

�         Discuss the requirements for effective price discrimination, and describe how Clear Blue Sky satisfies these requirements.

�         Identify and describe each group of travelers according to their price sensitivity. Analyze the price elasticity of demand for each group.

�         Recommend a pricing plan that effectively separates each group of consumers. Providing actual prices is not necessary, but your plan should clearly indicate the level of pricing for each group.

Definitions

 

 

 

 

 

 

 

 

Data Provided by Marketing

 

 

 

Quantity

Number of passengers

 

 

 

 

 

 

Price

Dollars per passenger; the demand curve, a linear function of quantity.

 

 

 

 

 

 

 

Price = 1250 - 8 * Quantity

 

 

 

 

 

Data Provided by Operations

 

 

 

Marginal Cost

 

 

 

 

 

 

 

Fixed Costs

 

 

 

 

 

 

Formulas for Calculating Additional Data

 

 

 

Exact Marginal Revenue

Additional revenue gained by selling another seat.

 

 

 

Because the demand curve is a linear function of quantity, the exact marginal revenue can be calculated as follows:

 

 

 

 

 

 

 

Marginal Revenue = 1250 - 16 * Quantity

 

 

 

(see Pricing with Market Power Learning Resource for an explanation of this calculation)

 

 

 

 

 

 

Revenue

Price * Quantity

 

 

 

 

 

 

Total Variable Costs

Quantity * Marginal Cost

 

 

 

 

 

 

Profits

Revenue - Fixed Costs - Total Variable Costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketing Department's Customer Demand, Costs, and Current Pricing

 

 

Here is the information route, is a distance of 680 miles.

The maximum capacity of our planes flying this route is 125 passengers.

Based on data from customer purchases and marketing surveys, we estimate demand for passenger tickets on this route as follows. Note that demand is a linear relationship between price and quantity:

Price = 1,250 (8 � Quantity)

Our fixed costs include salaries of pilots and flight attendants and fuel. For a one-way flight, current total fixed costs amount to $25,000.

Our variable is $50 per passenger. �I multiplied this 50 times the quantity of passengers. This figure is constant whether the person is the first or 125th passenger aboard the flight. Variable costs include the expense of additional fuel requirements for bearing another passenger and associated luggage, and the costs of food and beverage service, ticket processing, and baggage handling.

Fuel costs are a primary component of our flight expenses. In Clear Blue Sky's current fare structure, we establish a price that is a multiple of the average market price for the kerosene-based jet aviation fuel used in our fleet. For example, given current fuel prices, the one-way fare charged in the Raleigh-Durham to Chicago market is $850.

Fuel costs are expected to rise. Therefore, I propose a fare increase from $850 to $890 �for the one way route. I did not use this difference. �This recommendation is based on our proprietary fuel-to-fare factor.

Basing ticket prices on the fuel prices allows us to minimize the risk of changing fuel prices. By passing on the increase in fuel prices to our customers, I believe we will be able to maintain the level of profitability on this route.

 

 

Price Elasticity Estimates

 

 

 

 

 

 

 

 

Based on our research, we believe our market contains four identifiable customer market segments: business, government, student, and leisure travelers.

Our estimates of price sensitivity are below.

Business travelers = �1.1

Government travelers = �1.3

Student travelers = �2.6

Leisure travelers = �3.2

There has also been some discussion about whether other academic/university travelers (e.g., professors and staff) form a distinct group. However, we have not been able to distinguish this group from our data, because of the difficulty in identifying these travelers. �I used 1.9 as the elasticity. ? Our best estimate is that this group would fall somewhere between government and student travelers in terms of price sensitivity.

 

 

Fare Restrictions

 

 

fare restrictions:

  • Advance purchase requirement: Travelers must purchase their ticket 14 days or 21 days in advance of their departure date.
  • Nonchangeable ticket: Travelers may not change their travel itineraries once purchased.
  • Nonrefundable ticket: Travelers may not receive refunds on tickets.
  • Saturday night stay: Travelers' itineraries must include a Saturday night stayover.
  • Proof of identification or age: To qualify for certain fares, photo identification may be required (e.g., university, government, or military ID or driver's license).

Please consider these fare restrictions in designing an appropriate price discrimination