Case Analysis: “No Frills” Air Fares
Business Economics Case Analysis: “No Frills” Air Fares Distinguish between the demand curves for National Airlines, Eastern Airlines and the Airlines industry. The above analysis requires an understanding of: (i) Why is the demand curve downward sloping? (ii) Can price have the same effect on the demand between the firms and at industry level? (iii) What would be the effect of changes in income and other prices on the demand curve of a firm? iv) Calculate the price elasticity of demand for National and Eastern Airlines. (v) Which elasticity measurement (Point vs. Arc) is appropriate for National and Eastern Airline? Explain “No Frills” Air Fares As the 1974-1975 recession made inroads into passenger traffic loads of the major airlines, National Airlines persuaded the Civil Aeronautics Board (CAB) to let it try an experiment with a discount of as much as 35 % from normal coach fares on certain of its regularly scheduled routes.
National, in an effort to build up its load factor, tied its discount fare proposal to the offering of “no frills” service during the flight, including doing away with complimentary meals, snacks, soft drinks, and coffee so as to reduce costs and partially offset the lower-priced fares. However, passengers using the “no frills” plan could selectively purchase these items in-flight if they wished. The no frills fares were offered only Mondays through Thursdays. The CAB gave the go-ahead to National to experiment with the no frills fare, with the proviso that National study the plan and report back at a later date.
Eastern Airlines and Delta Airlines, both competitors of National on some of the routes where National proposed to implement no frills fares, were also permitted to use the discount fares for a trial period. In its report to the CAB on the results of the no frills approach, National maintained that 56 % of the 133,000 passengers who used its no frills fare from mid- April through June 30, 1975, were enticed to travel by air because of the discount fare plan. According to National, the new passenger traffic generated by discount fares increased its revenues by $4 million during that period.
National said that its figures were based upon an on-board survey of 13,500 passengers and presented one of the most exhaustive studies ever conducted for a CAB investigation. J. Dan Brock, vice president for marketing for National Airlines, was quoted at a news conference as saying that the fare had been an “unqualified success,” had created a new air-travel market, and had generated more than twice the volume of new passengers required to offset revenue dilution caused by regular passengers switching to the lower fare.
He said the stimulus of the fare gave National a net traffic gain of 74,000 passengers during the initial 21/2 – month trail. But he also cautioned that the success claims he was making for the no frills fare did not mean that low fares were the answer to the airline industry’s excess capacity problems. Yet Brock did go so far as to state that “what no frills has proved… is that a properly conceived discount fare, offered at the right time in the right markets with the right controls, can help airlines hurdle traditionally soft traffic period. Eastern Airlines reported a much different experience. Eastern said its studies showed that only 14 % of the 55,200 of its passengers who used a no frills fare between mid-April and May 31 represented newly generated traffic, with the remaining 86 % representing passengers diverted from higher fares who would have flown anyway. It said that the effect of the fare in the six major markets it studied was a net loss in revenue to Eastern of $ 543,000 during the initial 11/2 months.
At the same time Eastern attacked the credibility of the National Airlines’ survey, noting that its own data were based upon an exhaustive and scientific blind telephone survey among persons who did not know the purpose and sponsor of the survey. Eastern claimed that this type of study was more apt to produce unbiased results that National’s on-board surveys.
Other airlines joined Eastern in challenging National’s survey results in the CAB’s hearing to decide whether the no frills fares should continue to be allowed. Delta Airlines, for example, claimed that the no frills fare did not even come close to offsetting the dilution its experienced in revenues. Other airline officials observed that while National Airlines might have succeeded through its heavy promotion of the no frills fares in diverting some business from ther carriers, they felt that National‘s claims of generating many passengers who otherwise would not have flown were “preposterous. ” Those airlines in direct competition with National on the routes where the discount fares were tried were vehemently opposed to continuing the discounts. In their view the no frills approach constituted “economic nonsense. ” They announced a policy of matching National’s discount fare only where forced to for competitive reasons.