WRITTEN BY ON April 29, 2021.
By Stefan Oberender
Pricing a good or service used to be simple. If you were into manufacturing, say chairs, you would add up all the costs you occurred producing it. Wood, glue, cushion, … You would attribute a cost to the time spent producing it. Add a margin on that production cost to pay for the rent of your workshop, and not least to have some profit. After all, you’re not producing chairs for the pure fun of it.
You were so confident in the price that you would produce chairs before they were sold. Put them on a display with a price tag, and no matter who entered your shop could buy that chair for that price. Regardless of whether the person desperately needed that chair because of guests coming over, or just as a backup.
This wonderful principle worked for ages. Not only for physical goods but also for services where the main cost is the time invested.
And then airlines came around. They have kind of a funny product. Their product is a seat going from A to B at a certain time. But they can only produce the product in batches of say 300 at a time (120 if they have smaller planes). Which is not dramatic per se, but their product does not have a shelf-life. It needs to be sold before it is produced. Every unit the airline fails to sell is going to waste.
It’s like a carpenter who manages to pre-sell 220 chairs. He buys the materials and produces 300. And once he’s finished he burns the remaining 80 chairs in his backyard.
As this is not very efficient, the airlines (in 1985) invented Yield Management.
Basically as a reaction to human nature where the same item has a different value attributed by a different person. Or even by the same person under different circumstances. Like private vs business, depending on urgency, subject to comparison with others, …
This attribution of value follows a curve and the high art of yield management is to predict this curve as precisely as possible and use it to generate the highest sales possible for the batch of seats that is about to be produced. Remember: As soon as the schedule is out, most of the costs are fixed (except for user fees at the airport, some catering, and a negligible increase in fuel cost).
Books have been written about this, computer software has been developed, thousands of specialists at airlines and institutes do nothing else than to further fine-tune and optimize the approach of the airlines.
Luckily, the practice is restricted to airlines.
Imagine the next time you go buy a chair. The carpenter sees on his screen that you’ve looked at the chair in the shop window already four times (!) this week indicating a high interest. He will also notice that it is Saturday 18:27 (maybe you have guests over?) and instead of coming with your bike, you parked outside with your big station wagon – ideal to transport a chair or two. Is your decision already made? Judging by the car, it also indicates that you have some money to spend.
You enter the shop and ask the carpenter why there’s no price label on the beautiful chair in the window. The carpenter will whip up some small talk to get additional data points, confirm the existing assumptions, and then present you with a price that is 3x your expectation. But you have no choice, your guests will come in 1h and have no place to sit (and of course, you promised to get the chairs already on Monday…).
You spend a nice evening with your guests, reasonably annoyed about the fortune you have just spent, only to learn from one of your guests that they bought the same chair recently for a quarter of what you paid. Stinks.
So what does all this have to do with Business Aviation?
Well in one important aspect, pricing in Business Aviation is simpler than in the airline business: You only fly what you’ve sold, and you don’t really care how many passengers are on board, because you sell the entire plane anyways.
In any other area, Pricing in Business Aviation is a lot more complex than in commercial aviation.
The flexibility of demand is orders of magnitude higher than in airlines. The market size for each flight you sell is ~1. Technically creating a Monopsony.
You don’t have the large numbers of airlines to derive meaningful statistics.
And contrary to airlines you have empty legs. You need to bring the plane to where the passengers are, and often back home afterward.
At FL3XX we see many attempts to figure out the holy grail of charter pricing, and we support them all as well as we can. Spoiler: we do not have the holy grail either, but we have the best software to remove several variables from the equation and automate large parts of your price calculation.
We provide different approaches like Rate-Based pricing and Cost-Based pricing. To complete the picture we are now adding the last missing piece in the mix: Rule-Based pricing.
With our partner Stellar Labs we are working hard to make the best-of-all-worlds pricing available to all our customers. While pricing strategies differ from operator to operator, one thing is clear: The future of charter pricing will be fully automatic, and FL3XX is building the autopilot for it.
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