Friday, 9 June 2023

Jetstar profits from selling flights, but doesn't only profit from selling flights

Jetstar has been in the news this week for its birthday celebrations. As the New Zealand Herald reported:

Jetstar is marking its 14th year of flying New Zealand domestic routes with fares as low as $29.

The airline is also offering fares from Wellington to the Gold Coast starting at $155.

The low-cost airline launched services within New Zealand on June 10, 2009...

Jetstar’s head of New Zealand, Shelley Musk, said the airline remains committed to New Zealand.

“For the past 14 years we’ve been offering Kiwi customers great-value fares and choice so they can decide how they want to fly."

Aren't Jetstar great? Out of an abundance of kindness towards New Zealand travellers, they're offering really low fares. Or maybe not. As I noted in this post from 2017, airlines are known for taking advantage of having locked-in consumers in order to increase profits. Here's what I said then:

In the usual discussion of customer lock-in, customers become locked into buying from a particular seller if they find it difficult (costly) to change to an alternative seller once they have started purchasing a particular good or service. Switching costs (like contract termination fees) typically generate customer lock-in, because a high cost of switching can prevent customers from changing to substitute products.
In this case, once the airline customer has purchased a ticket from an airline, they are locked into travelling with that airline (and often, they are locked into a particular flight, if they have selected a ticket type that is non-transferable). The airline knows that the customer won't switch to another airline (or flight) if they charged additional fees for complementary services... such as for checked bags, in-flight meals, selecting their own seat, and so on.

This is a highly profitable proposition for the airlines... and this is because customer demand for those extra services is relatively inelastic. Once you have purchased a plane ticket for a given flight, there are few (if any) substitutes that allow you to get your checked baggage to the same destination as you are going. So your demand for checking a bag onto your own flight (if you have a bag that needs checking in) is probably very inelastic. Similarly, if you are not prepared for your flight and buy some snacks to take onto the plane with you (and/or you don't have a meal before boarding and are unwilling to wait until you land to eat), there are no substitutes to buying a meal while in the air. When there are few substitutes for a good or service, demand will be relatively more inelastic, and the optimal mark-up over marginal cost is high. As many of you will have observed, the mark-up on in-flight snacks and meals is very high. It is these high mark-ups that leads these extra charges to be highly profitable for the airlines.

While the extra charges have been increasing, ticket prices have been declining

Is that what Jetstar is doing? You be the judge. From the New Zealand Herald article:

“By keeping our starter fares low, customers can choose to add a meal, select a seat or bundle their bags — it’s all about choice.’'...

The airline’s business model is to operate with low costs and maximum ancillary revenue. Before the pandemic, revenue from add-ons such as seat selection, paid baggage and food and drinks grew 38 per cent.

The airline aims for similar growth rates over the next five years as it adds more optional extras and technology to enable buying them easier. It is also getting bigger and more efficient A321 aircraft into its fleet.

Seems to me like it's working well for them. Especially when they can get good press for their 'low fares', while maintaining their profitability through the 'ancillary revenue'. As I note in my ECONS101 class, there are many ways for firms to increase profits, and they need not sell every good and service at its individual profit-maximising price.

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