Does EasyJet price children with Black Scholes?

The “pricing engines” behind products (financial or otherwise) have always been of interest to me (being a closet mathematician). There are some incredibly complex pricing engines within the financial markets and many dollars thrown at being able to produce a better / faster engine (and supporting models).

One pricing engine which mystifies me is the pricing engine behind Easyjet airline tickets – especially as Easyjet positions themselves as a “budget” airline. (living in France, EasyJet is my lifeline back to the UK and I commuted 2 times a week for 3.5 years).

As an aside, I should state I am a massive fan of Easyjet when physically on their planes and respect what they have done to the industry in terms of pricing transparency, but their customer service is really poor when responding to problems (e.g. getting refunds etc. is like getting blood out of a stone) – anyway, back to pricing….

Some observations (based on real facts – the tickets I have purchased and those of my “EasyJet commuter club” colleagues):

– in 2003 I would agree that EasyJet was a “budget” airline as my weekly commute would cost me 70 Euros a week (when averaged across 52 weeks)

– in 2004, price averaged 75 Euros

– in 2005, price averaged 90 Euros

– in 2006, price averaged 125 Euros (which is still not massively expensive)

– in 2005 when changing a booking online the price (excluding the “change booking” fee), was more than the normal fare. So I guess that Easyjet hoped customers would not notice the “difference” (I did and complained but got zero response)

– I just noticed (21st May 2007) that children fares cost more than adult fares (at least between Nice to Luton in August). Try pricing a flight for a single adult, then price the same fare for zero adults and one child, then one adult and one child. Three different fares for the same seat when the underlying price has not moved!

Now, my theory is that EasyJet pricing is nothing more sophisticated than a few blokes / girls sitting around thinking up ways to push up “floor prices” and a computer just taking a “floor” price and generating final pricing as a function of “time to flight” and “availability” (reminding me of the recent Nationwide adverts on TV) – e.g.:

– The Nice/London flights generally transport wealthy people, so lets see how far we can push the prices each year (I am sure they do the same on other routes)

– Is there an event on? (e.g. Cannes film festival, MIPIN conference and Monaco Grand Prix), then let’s set the “floor” price higher

– Let’s cut routes that appear not to be profitable (without consulting customers)

– Let’s try and hide price rises where customers may not notice (e.g. when changing a booking or traveling with children)

Now….

– In 2007 I think EasyJet has finally received a negative reaction to the “lets see how far we can get” price hikes between 2003-2006 as Easyjet share price was hit by lower than expected “occupancy” and EasyJet have been having lots of sales in 2007 to boost “occupancy” (the factors in EasyJet’s “official” explanation would contribute some, but I believe the factors I mention above are a major contributor)

– Also interesting to note Ryan Air has decided to “kick-em when they are down” with aggressive pricing

– Rising energy prices between 2003 and 2006 will have pushed up prices but not to the level of nearly 100% fare price increases on some routes (EasyJet’s treasurer should have hedged out energy price risk anyway so that they could have been safe setting “floor” prices)

– If EasyJet really did want to engage their customers in dialog, they might have turned non profitable routes into profitable ones rather than irritate customers

In conclusion……

Perhaps if EasyJet invested in better pricing engine technology they might be able to price in real time taking into account all factors across all routes: fuel hedged price; availability; fixed cost base; seasonality; landing slot pricing; estimated time on the ground (which costs money); customers in-flight buying habits; seat availability; and net operating profit target for EasyJet; therefore….

The customer would gain a more “consistent” and less “dis-honorable” price to and possibly might up the EasyJet share price to invest in other areas….

Potentially invest a little more on Customer Service (I would pay 1 GBP more per ticket for better customer service; how about this as an idea – “customer services credits” based on total spend with EasyJet and “credits purchased” – I am sure other would as well; just like some people are prepared to pay for speedy boarding perhaps?)

But then – you do get what you pay for and Gordon Ramsey doesn’t work at Burger King…

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~ by Nigel on May 22, 2007.

5 Responses to “Does EasyJet price children with Black Scholes?”

  1. I’d be surprised if EasyJet didn’t have at least what they think is a sophisticated algorithmic pricing engine/model. I mean isn’t that really the key element of running an airline (the planes and destinations are undifferentiated – well putting aside monopolies and oligopolies artificially created by bureaucrats and their rent-seeking supplicants. The science and art of maximizing revenues per passenger/mile is after all just a (fiendishly difficult) optimization problem. Indeed this is at the heart of the business case behind Ed Iocabucci’s DayJet concept and company.

  2. Perhaps I am being a little too harsh on EasyJet’s pricing capabilities, but it is a little obvious where they have “tweeked” the model to up prices with the hope that people “do not notice”.

    I totally agree routes and destinations being un-differentiated (except perhaps some of the obscure places you end up with with Ryan air 🙂 ), and it is perhaps time for one of the budget airlines to start upping the ground based customer service “capabilities” – why?……

    Just part of a cycle of an industry being re-invented through price transparency (hence lower cost) and innovation through technology (hence lower cost).

    Next stage, differentiate via ground-based service?

    Not sure in-flight service is the right place to differentiate on short haul – personally I like the no frills in-flight service as you have clear expectation as to what you are getting. I have also found the EasyJet cabin staff and flight crew great fun and more “relaxed” than traditional airlines.

    Thankfully EasyJet and others did not have BA’s endemic public servant mentality to start with…

  3. http://pressposts.com/Technology/Does-EasyJet-price-children-with-Black-Scholes/

    Submited post on PressPosts.com – “Does EasyJet price children with Black Scholes?”

  4. […] be green and eliminate the hassle for your customers. At the rate the competition is growing for bargain fare airlines, I bet the next green wannabe EasyJet will find a way to do […]

  5. I think it’s a combination of two factors; energy hedges that they would have done expiring and newer hedges costing a lot more – effetively passing on a fuel surcharge to the consumer. Secondly the regional airlines have cut their fares to a point where it is often cheaper to fly KLM to Amsterdam, BA to Nice and Dublin so they are becoming dependent that the average consumer will just assume that they are the cheapest and pay the price on the screen. It’s the eBay effect in motion again.

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