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Journal of Revenue and Pricing Management

, Volume 16, Issue 3, pp 308–324 | Cite as

Airline switching revenue with price-guarantees

  • Fouad H. Mirzaei
  • Fredrik Ødegaard
  • Xinghao Yan
Research Article

Abstract

Many airlines permit ticket holders to change the time of their flight by paying a switching fee. For an airline, selecting a switching fee is an important strategic decision for two reasons. First, it is a supplementary but considerable revenue item for firms with a narrow profit margin. Second, the fee impacts their demand and consequently their capacity planning. Knowing that a low or high fee could cause operational challenges, such as unsold capacity or lost sales, the question that arises is what fee should be set for switching. We model a single firm which delivers two sequential homogeneous services that are priced differently; a high-priced service followed by a low-priced one. The price difference triggers a demand leakage across the two services. Switching customers pay a switching fee but get reimbursed the price difference. This reimbursement is an extension of airlines’ current switching practice and money-back guarantees that are common in retail industries (such as consumer electronics). We analyze the firm’s revenue function and derive the optimal switching fee. We show that the variability in switching behavior of customers drives the firm’s ideal switching policy. When this uncertainty increases, the firm should impose a higher switching fee. Furthermore, the optimal switching fee is rising in the resources’ prices. Finally, through numerical analysis, we investigate the joint decisions of the service price and the switching fee. This analysis shows that the optimal fee is increasing in the size of the low-price service.

Keywords

ancillary revenue airline industry change fee revenue management marketing price guarantees 

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Copyright information

© Macmillan Publishers Ltd 2016

Authors and Affiliations

  • Fouad H. Mirzaei
    • 1
  • Fredrik Ødegaard
    • 2
  • Xinghao Yan
    • 3
  1. 1.Leavey School of Business, Santa Clara UniversitySanta ClaraUSA
  2. 2.Ivey Business School, Western UniversityLondonCanada
  3. 3.College of Business and InnovationUniversity of ToledoToledoUSA

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