2. As the recession made inroads into the passenger trafficloads
of the major airlines, Airline A attempted an experimentwith a
discount of 35 percent from normal coach fares oncertain of its
regularly scheduled routes. In an effort to buildup its load
factor, Airline A tied its discount fare proposal tothe offering of
no-frills service during the flight, includingdoing away with
complimentary meals, snacks, soft drinks,and coffee, so as to
reduce costs and partially offset thelower-priced fares.However,
passengers using the no-frills plan couldselectively purchase these
items in flight if they wished. Theno-frills fares were offered
only Mondays through Thursdays. 3. Airlines B and C, both
competitors of Airline A on some ofthe routes on which Airline A
proposed to implement no-frillsfares, went along with the discount
fares. Airline Aclaimed that 56 percent of the 133,000 passengers
whoused its no-frills fare from mid April through June 30
wereenticed to travel by air because of the discount plan.According
to Airline A, the new passenger trafficgenerated by discount fares
increased its revenues by $4million during that period. Airline A
said that its figureswere based on an on-board survey of 13,500
passengersand represented one of the most exhaustive studies it
hadever conducted. 4. J. Smith, vice-president for marketing for
Airline A, was quoted ata news conference as saying that the fare
had been anunqualified success, had created a new air travel
market, andhad generated more than twice the volume of new
passengersrequired to offset revenue dilution caused by regular
passengersswitching to the lower fare. He said that the stimulus of
the faregave Airline A a net traffic gain of 74,000 passengers
during theinitial two-and-one-half-month trial.He also cautioned
that the success claims he was making for theno-frills fare did not
mean that low fares were the answer to theairline industrys excess
capacity problems. Yet Smith did go sofar as to state that what no
frills has proved is that a properlyconceived discount fare,
offered at the right time in the rightmarkets with the right
controls, can help airlines hurdletraditionally so traffic periods.
5. Airline B reported a different experience. Its studies showed
thatonly 14 percent of the 55,200 passengers who used its
no-frillsfare between mid-April and May 31 represented newly
generatedtraffic, with the remaining 86 percent representing
passengersdiverted from higher fares who would have flown anyway.
It saidthat the effect of the fare in the six major markets it
studied was anet loss in revenue of $543,000 during the initial one
and one-halfmonths.At the same time, Airline B attacked the
credibility of Airline Assurvey, noting that its own data were
based on an exhaustive andscientific blind telephone survey among
persons who did not knowthe purpose and sponsor of the survey.
Airline B claimed that thistype of study was more apt to produce
unbiased results thanAirline As on-board survey. 6. Other airlines
joined Airline B in challenging Airline As surveyresults. Airline
C, for example, claimed that the no-frills fare didnot even come
close to offsetting the dilution it experienced inrevenues. Other
airline officials observed that although Airline Amight have
succeeded through its heavy promotion of the no-frillsfares in
diverting some business from other carriers, they felt thatAirline
As claims of generating many passengers who otherwisewould not have
flown were preposterous.Those airlines in direct competition with
Airline A on the routes onwhich the discount fares were tried were
vehemently opposed tocontinuing the discounts. In their view, the
no-frills approachconstituted economic nonsense.They announced a
policy of matching Airline As discount fareonly where forced to for
competitive reasons. 7. Does Airline As experiment suggest that the
demand for airlineservice at discount prices is elastic or
inelastic?Do Airline Bs results indicate that demand is elastic
orinelastic?Which of the two studies, Airline As on-board survey or
AirlineBs telephone survey, do you think would yield the most
reliableestimate as to the true elasticity of demand?Is it possible
or likely that the elasticity of demand for Airline Ais different
from the elasticity of demand for Airline B? Why?How would you
account for the differences in the experiencesof Airline A and
Airline B with discount fares?
