Another question I cant seem to figure out.

[millertime24 8]

I was sitting here reflecting on airline tickets and their cost to the average consumer. When you buy a ticket online first class generally cost over $1000 while an economy ticket averages in the $4-500 range. My question is, why is it that if you buy an economy ticket then upgrade to first at the check in it only cost an extra $100? Why do they charge over $1000 when you get them online if they dont actually cost that much to put people in them?

Muff #5048

[Amazon 7]

They are filling a seat at the last minute that would go unused otherwise its a win win for the airline.

[nanook 1]

big assumption here:

They actually cost "$1000" but instead of having a loss of "$1000" for not filling the seat, they have a loss of "$900" for a $100 upgrade from another seat.

_____________________________

"The trouble with quotes on the internet is that you can never know if they are genuine" - Abraham Lincoln

[nanook 1]

Quote

big assumption here:

They actually cost "$1000" but instead of having a loss of "$1000" for not filling the seat, they have a loss of "$900" for a $100 upgrade from another seat.

coincides with what Amazon said. . .

_____________________________

"The trouble with quotes on the internet is that you can never know if they are genuine" - Abraham Lincoln

[Amazon 7]

Quote

Quote

big assumption here:

They actually cost "$1000" but instead of having a loss of "$1000" for not filling the seat, they have a loss of "$900" for a $100 upgrade from another seat.

coincides with what Amazon said. . .

Plus they get to shoehorn in another passenger in the coach seat vacated...forgot to add that before.

[nanook 1]

Win win for the customer, airline and the airline lady at the booth getting yelled at by an irate passenger.

_____________________________

"The trouble with quotes on the internet is that you can never know if they are genuine" - Abraham Lincoln

[millertime24 8]

Thats kind of what I figured, but why do they charge SO much less for the upgrade? Why not charge an extra $250 or so?

Muff #5048

[Remster 30]

Full economy is not that much less than Business (what you call 1st class... There aint no 1st class in North America). What most people buy when getting an economy seat is a discounted rate with more restrictions than full economy.

Remster

[DrewEckhardt 0]

Quote

I was sitting here reflecting on airline tickets and their cost to the average consumer. When you buy a ticket online first class generally cost over $1000 while an economy ticket averages in the $4-500 range. My question is, why is it that if you buy an economy ticket then upgrade to first at the check in it only cost an extra $100? Why do they charge over $1000 when you get them online if they dont actually cost that much to put people in them?

The short answer is because they can. Who'd turn down profits?


The long answer would be Price Discrimination (that would be the term of art).

Basic economic theory shows a demand curve which declines with increasing price. Companies maximize their profit by setting a price where units sold multiplied by (price per unit - costs per unit) is maximized.

One way you do better is by producing different products (first class and coach) where the enhanced product price X unit sold gains exceed the increased cost of goods sold by enough margin. You get big volume times less profit plus small volume times big profit. My favorite example here is German cars where $50K in price separates the cost from a few hundred in electronics, a few hundred in leather, and a pair of KKK turbo chargers which I can get for $750 each on the internet. Stereo speakers with $10K in price for a few hundred in COGS are fun too.

Another is by figuring out how to sell the same product to some people who are willing to pay more and others for less so you can keep the units sold and average price per unit high. That's price discrimination.

The airlines getting up to $500 more for a first class seat at the time of sale compared to one at the gate (when they may have run out) is a classic example.

Presumably an additional $400-$500 to guarantee a first class seat and drinks before takeoff makes the most total profit among people who can and will splurge for the experience but aren't frequent travellers.

That's the other business concern - opportunity cost. First class advance sale prices are inflated so airlines can retain their base of business people who travel too much (often on short notice, with full-price tickets which are high margin) who have brand loyalty because they can get upgrades to make the experience tolerable through their mileage upgrades.

Once the airline has sold as many seats as it can under that model and retained profitable business with frequent flier upgrades there's still room for more revenue.

As the plane is boarding they're not going to sell many full-price first class seats; but they might eek another $100 out of a few customers less the difference spent on a bad meal versus a bag of peanuts and half a coke.

The other interesting thing is that the airlines have a lot of fixed costs. Interest on the plane, costs per hour of airframe/engine time, and gate rental don't change whether 1 or 300 passengers fly. Fuel doesn't change much with each added passenger. I watched a fun Discovery Channel documentary whilst stuck in temporary housing and they showed a low-four figure (maybe $3k?) profit on a mostly full New York to LA flight so significant profit increases come at 17% profit from one full-price first class ticket sale (that flight doesn't have the same small difference in prices due to business demand) and 3% (plus drinks which are almost pure profit) times a few from paid upgrades.

[millertime24 8]

Thread over. That pretty much explains it (in detail I might add).

Muff #5048