easyJet Airlines: small, lean, and with prices that increase over time

Marketing

Centre for Marketing Working Paper

2004

easyJet® Airlines, which has emerged as one of Europe’s most successful low-cost, short-haul airlines, has a simple pricing structure. For a given flight, all prices are quoted one-way, a single price prevails at any point, and in general, prices are low early on and increase as the departure date approaches. In this paper, we examine the optimality of this pricing scheme and analyze the factors that determine how the price should change over time by building a model of dynamic pricing that incorporates demand uncertainty. We find that while a pricing strategy such as easyJet’s is indeed profit-maximizing, the magnitude of the increase in price from the first date of seat sales to the departure time is dependent upon the capacity of available seats between the given city pair, and varies inversely with it. We examine the issue of last-minute deals by assuming that while consumers have uncertainty with respect to the firm’s capacity and therefore the availability of last minute deals, the firm might not know a-priori if it offers such deals or else randomize its decision to offer such deals. We find that when the firm does not know a-priori if it will offer a last-minute deal, then it discounts both Period 1 and Period 2 prices below the non-constraint optimal price. When the firm knows it will offer a last-minute deal, then Period 1 price is above the non-constraint optimal price, and Period 3 price is below the non-constraint optimal price. However, the higher Period 1 price may act as a signal to consumers, who then wait for the last-minute deal. Thus in both cases, as compared with the two-period game, employing last-minute deals is not optimal for the firm. We empirically analyze the data for several easyJet flights and find empirical support for our main model assumption and the result of an inverse relationship between the magnitude of the price increase over time and the available seat capacity. An important strategic implication of our analysis for easyJet is that while its current pricing strategy is optimal given its size, it would not be optimal for the airline to offer such low initial prices were it to add substantial capacity to any given route. This would be a challenge for a firm that has built up expectations among customers as an airline with a great value proposition for those willing to buy early.

Centre for Marketing

CM 04-904

Centre for Marketing Working Paper

No