How much airline customers are willing to pay: An analysis of price sensitivity in online distribution channels

INTRODUCTION AND MOTIVATION

The competitive market structure of the airline industry requires airlines to rapidly evolve and adapt to new technologies. For example, as more individuals search for and make travel arrangements online, airlines need to understand how these individuals' searching and purchasing behaviour is influenced by increased fare transparency, increased availability of travel packages that include air, hotel, and car rental in a single bundle, increased flight information such as seat assignment, airplane type and on-time performance, etc. Moreover, the intense competition among airlines limits the amount of data shared in the industry. These factors, combined with inherent difficulties in linking purchase¹ and pricing data, has led to a lack of published studies on airline passengers' behaviour and their willingness to pay to travel by air or for service amenities. However, from the perspective of an airline manufacturer, it is important to understand passenger demand and customers' willingness to pay in order to evaluate the benefit of the introduction of new aircraft designs and amenities. As such, over the last several years, Boeing Commercial Airplanes, the commercial products arm of the Boeing Company, has been engaged in a research effort to advance its models of passenger behaviour, which are a central part of the tools used by its marketing department to help potential airline customers estimate how much market share and revenue can be gained via the introduction of new service and equipment in a market.

This study builds on prior work associated with Boeing's passenger modelling efforts and research on understanding the value of speed (or equivalently time, as it is more commonly measured in the transportation literature). For example, in 2001 Hensher summarised value of time studies for intercity travel reported in the literature. His review, which synthesised results from more than 60 studies and nine countries, found that value of travel time savings estimates are highly context dependent (eg, depend on mode, trip length, trip purpose, etc) and that the 'vast majority of available analysis in the literature are for contexts other than air travel, and the availability of value of travel time savings figures for air travel is limited' (Hensher, 2001). Further, among the limited intercity studies that exist, Hensher found that not all the evidence was 'reinforcing' and...