Airline pricing under different market conditions: Evidence from European Low-Cost Carriers

Abstract

Traditional theories of airline pricing maintain that fares monotonically increase as fewer seats remain available on a flight. This implies a monotonically increasing temporal profile of fares. In this paper, we exploit the presence of drops in offered fares over time as an indicator of an active yield management intervention by two main European Low-Cost Carriers, and measure its effectiveness. We find that reduction of the offered airfare by one standard deviation raises a flight's load factor on average by 2.7 percent, a measure unaffected by the intensity of competition in a route. Furthermore, yield management interventions are less effective the higher the share of leisure (holiday and visiting friends and relatives) traffic on the route. This result runs counter to the common perception of leisure passengers being more responsive to price changes.