If several people are not paying the same price for approximately the same product or service, then the highest paying customers are sponsoring the cheapest ones, right? The Business traveller is paying proportionally more of the plane cost than the Economy fares, so in a way is paying a part of their tickets. So, the Business traveller is paying unfairly too much…?

Wrong.

As odd as it seems, the highest paying customers are paying LESS thanks to the cheap customers!

The reason is the following: it’s easy to move the cheap customers from one slot to another, because they are very price-sensitive. This allow to optimize the capacity usage of the plane, hotel, whatever.

Example: let be a plane of 200 seats, which costs $50,000 to fly, and is filled up by 50 Business travellers only on average. Than means those travellers have to pay $1,000 a seat for the airline to break even. Now, let’s say the airline sells 150 cheap seats at $200 each, then the 50 business travellers would only have to pay ($50,000 – $30,000) / 50 = $400 for break even!

This entry was posted on Tuesday, August 26th, 2008 at 4:10 pm and is filed under Economics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.