The global airline industry is experiencing cold season since the terrorist attack in 2001. Though china’s airline suffered less from the 9-11 effect, price hike of fuel has also plagued the industry. Moreover, in response to the entry of the WTO, Chinese government has phased out regulations upon airline industry and encouraged competition by introducing budget airline. To maintain competitive advantage and considerable profit margin as a domestic leading airline company, China Southern Airlines Co. Ltd. (CSA) needs to design a pricing strategy in accordance with the natures of the distinct markets. The principle of price elasticity of demand will help elaborating how different pricing tactics are applied to different market segments.
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Since more alternatives become available for substituting short-haul flight than long-haul flight, passengers are more likely to switch to substitutes including automobiles, trains and boats if the price of an airline ticket increases. This is more commonly found in leisure passengers, while it is unnecessarily true in applying to business customers who are solely looking for the fastest method of transportation, making the business sector price inelastic. For example, in flying to Beijing from Shanghai to close a multi-million dollar deal and sign the contact, the high air fare is low when factored into the overall value of the trip.
According to the general principle, for price inelastic market segments, the carrier can maintain airfare at a high and constant level where profit margin is maximized despite slightly fall of passenger turnout. On the other hand, however, for price elastic market segments the carrier should consider lowering the price in order to boost higher passenger turnout. Nevertheless, in the same flights of short-haul trips, for instance, there are price sensitive leisure passengers, and price inelastic business passengers. How are the measures designed to differentiate them and charge different prices to those two different groups of consumers?
Price Discrimination in Airline Market
Price discrimination is not alone for airline market. Most businesses charge different prices to different groups of consumers