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Pay-as-you-weigh pricing of an air ticket: Economics and major issues for discussions and investigations

Journal of Revenue and Pricing Management Aims and scope

Abstract

Pricing a good or service correctly in a market is possibly a powerful tool to achieve greater efficiency, fairness and environmental sustainability. This is also true in pricing an air ticket. This article discusses the pay-as-you-weigh model, which postulates passenger's weight as a major determinant (at least in part) of a fare. The article investigates an economic justification of the model, evaluates various arguments for and against the model, points out some potential options for implementation, and briefly discusses possible implications. The model rewards passengers who weigh less than average and/or when they reduce weight, providing financial savings and improved health benefits. The exploratory analysis in this article indicates that the model can be technically and economically feasible to implement and its proper implementation may provide significant benefits to airlines, passengers and society at large, not just economic transfers. However we emphasize that the fare policy that charges heavier passengers more but does not give any discount to lighter passengers can benefit only the airlines but harm the passengers and the society at large. As the nature of this pricing model is potentially contentious, the article identifies some important issues and areas that deserve further discussions and investigations.

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Notes

  1. For example, the attributes of the trips such as refundability, place of origin and destination, stay-over, date and time of purchase and so on that make the fares different under current dynamic pricing policy. We will come back to dynamic pricing in the airline industry in the section ‘Weight and space in transportation’.

  2. Assuming 20 kg and 8 kg as the maximum weight limits for the checked-in baggage and carry-on baggage, respectively.

  3. Southwest Airlines requires a passenger to purchase another seat regardless of his/her weight when s/he cannot lower the armrests on a single seat (Southwest, 2011). The airline will refund the fare of the second seat if the flight does not oversell. However, these rules are controversial.

  4. Oil prices increased to a new record of $147.27 per barrel on 11 July 2008.

  5. (i) In general, weight is a binding constraint in transporting goods or people but it may not be a binding constraint in each operation. (ii) A constraint is binding if changing it also changes the optimal solution of an optimization model. Tightening a binding constraint can only worsen the objective function value and loosening a binding constraint can only improve the objective function value.

  6. Krugman (2000) points out that dynamic pricing, also known as yield management or revenue management, is just a new version of the old practice of price discrimination. The difference is that dynamic pricing utilizes modern information communications technology, which makes price discrimination widely possible as well as commercially viable. At the same time, he states that dynamic pricing is undoubtedly unfair: some pay more just because of who they are.

  7. Shadow price is the change in optimal value of the objective function in a constrained optimization problem by relaxing the constraint by one unit.

  8. A plane is expected to reconfigure the seating arrangement in order to accommodate more passengers if it attracts more low weight and small size passengers and/or passenger who lost weight in response to this incentive.

  9. Because a typical passenger is expected to lose weight and/or a plane can accommodate more passengers or an airline can attract more low weight passengers resulting in a decrease in average fare.

  10. See the footnote 8 above.

  11. It is more difficult and expensive for health service organizations to carry heavier passengers particularly in emergencies necessitating redesigning of ambulances (cf., e.g., Robb, 2011). Obesity also creates other problems related to treating them in hospitals, accommodating them in buses and so on. Besides, probability of sickness is very high for obese passengers during flight and at the airport.

  12. At one extreme, most people with excess weight do not want to get a disabled certificate from their doctor. At another extreme or the worst case, all heavier people would produce a disabled certificate alleging that the weight gain is not a personal choice but due to some medical reason that cannot be avoided.

  13. This estimate is based on the present size of airlines seat (17 inches wide mostly). We have also assumed that the current seats are appropriate for an average passenger and one-third of seats do not require any resizing.

  14. Specifically, passengers will tend not to carry overweight baggage if airlines charge for overweight baggage. The main reason of heavily charging extra heavy baggage is to discourage passengers to carry such heavy baggage in addition to earning revenues for the airlines. Besides, extra heavy baggage is also difficult to handle. The additional fee on extra baggage has to do with the fact that airlines would be in trouble if everyone carried too much baggage; this provides a way to accommodate those who need to bring more baggage than the plane can handle from everyone. Moreover, we should note that unlike passengers baggage needs to be handled by airline personnel.

  15. Or any proportion agreed among stakeholders but higher proportions will lead to high transaction costs, thus making it difficult and costly to implement the PAYW model. At the same time, lower proportion may reduce the probability of catching a cheater.

  16. This section utilizes ideas and/or arguments of various people contained in websites such as www.consumertravel.com, www.smartertravel.com, www.bloomberg.com, and personal blogs and so on.

  17. Refer to Figure 2. Here we have shown consumer and producer surpluses by assuming typical shapes of demand and supply curves. Consumer and producer surpluses in fact depend on shapes of actual demand and supply curves, which may be different from our assumptions here. However, a fare policy that charges heavier passengers higher fares but does not give any discount to lighter ones can benefit only the airlines but harm the passenger and the society at large because producers’ surplus may increase but consumers’ surplus will decrease and as a result total economic surplus will reduce under such charging policy.

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Acknowledgements

I am thankful to anonymous reviewers, Torbjørn Årethun, John Seriot, Rolf Dahl, Atanu K. Nath and those who posted their views on different websites. The views expressed in the article are solely mine. I am fully responsible for any errors and omissions.

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1who specializes in econometrics and choice modeling, is an economist working as an associate professor in Sogn og Fjordane University College in Norway. He holds a PhD in transport economics and an MSc in development and resource economics. He has published articles in Transport Policy, Journal of Air Transport Management and other journals. He also serves as a reviewer in various journals related to transport and economics.

Appendices

Appendix A

Consumer and producer surpluses under the two pricing regimesFootnote 17

Total economic surplus=consumers’ surplus (CS)+producers’ surplus (PS)

Under current pricing

CS=area of triangle DE1F1; PS=area of triangle F1E1S1

Total economic surplus=area of triangle DE1F1+area of triangle F1E1S1

=area of triangle DE1S1

Under PAYW pricing

CS=area of triangle DE2F2; PS=area of triangle F2E2S2

Total economic surplus=area of triangle DE2F2+area of triangle F2E2S21

=area of triangle DE2S2

Clearly, area of triangle DE2S2>area of triangle DE1S1 because triangle DE2S2=triangle DE1S1+trapezoid S1E1E2S2=>PAYW results in an increased economic surplus equal to the area of the trapezoid S1E1E2S2.

It is quite clear from Figure 1 that area of triangle DE2F2 >area of triangle DE1F1 => PAYW results in an increase in consumers’ surplus.

It is also quite clear from Figure 1 that area of triangle F2E2S2>area of triangle F1E1S1=> PAYW results in an increase in producers’ surplus. Thus both passengers and airlines will benefit from PAYW pricing of an air ticket.

Appendix B

Table B1

Table B1 Decomposition of costs of major US airlines, 2005

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Bhatta, B. Pay-as-you-weigh pricing of an air ticket: Economics and major issues for discussions and investigations. J Revenue Pricing Manag 12, 103–119 (2013). https://doi.org/10.1057/rpm.2012.47

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