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Airline pricing strategies versus consumer rights.

Abstract

As airlines price-discriminate, business travelers usually have to pay prices above average cost for flexible tickets. This allows the airlines to offer cheaper tickets to leisure travelers, albeit in the form of restrictive fares. Methods used by business travelers to circumvent strict rules of discounted fares are known as "cross-" and "hidden-city" ticketing. However, according to IATA Recommended Practice 1724, Article 3.3.1, airlines reserve the right to cancel all remaining legs of a booking if flight coupons are not used in full and sequential order. We discuss this issue from both a legal and commercial perspective. After providing an overview of various legal opinions, we predict the impact on airline marketing and economics if the described forms of fare rule circumvention are allowed.

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Airline pricing is a crucial dimension of airline marketing and a complex issue. Air transport services tend to be identical for everyone sitting in the same service class on a given flight. However, individual fares paid by the passengers can differ enormously, as airline revenue management tools include price-discriminating measures to absorb different degrees of willingness to pay. Hereby, the rule of "full and sequential use of flight coupons" adapted from Recommended Practice 1724, Article 3.3.1, of the International Air Transport Association (IATA) (or IATA RP 1724--see appendix) acts as a rate fence to insure that most (business) travelers with a relatively high willingness to pay cannot benefit from discounted fares intended for leisure travelers.

From the passengers' perspective, some of the fare rules employed by legacy carriers might be regarded as consumer-unfriendly and sometimes even absurd: Why do travelers have to pay more for one-way trips than for combinations of the same outbound and additional return flights? Why can a transfer flight from A to B via hub H be much less expensive than a direct flight from H to B, although the latter journey is shorter and thus causes significantly lower production costs? As a consequence, passengers reportedly follow three different ways to circumvent strict fare rules: (1) nonuse of the in- or outbound leg; (2) cross-ticketing; and (3) hidden-city ticketing (see section 3). These practices are regarded as fare rule abuses by the carriers; not showing up for a flight segment usually leads to the remaining segments of a booking being canceled, which has resulted in a number of case laws.

In this article, this issue is discussed from both a legal and a commercial perspective. After a short introduction into the need for price discrimination in the aviation sector and into the typical price-discriminating methods employed by carriers (section 2) the main ways of circumvention are presented in section 3. After that, a summary of related court decisions and other legal opinions is provided, before the potential implications of legal intervention on airline marketing are assessed in section 5.

So far, this specific subject has hardly been discussed in the literature. An exception is a report on this issue conducted by the US General Accounting Office (GAO) in 2001, which looks at the intra-US market only and concludes that the rule of "full and sequential use of flight coupons" is necessary to maintain current airline networks and here especially linkages to small and remote communities.

Price Discrimination in the Aviation Sector

Air-travel demand is characterized by fluctuations over time (see, e.g., Chiang, Chen, and Xu 2007; Vasigh, Fleming, and Tacker 2008). Decreasing air-travel volumes during the worldwide recession in 2008-9 indicates the strong cyclicality of air-travel demand. Seasonality and peaking, in contrast, describe relatively short-term, periodic demand variations. Seasonal demand variations mainly occur on leisure routes, or during statutory holidays when leisure traffic usually peaks, while demand from business travelers shrinks. Intra-weekly and -daily demand variations mainly result from the specific needs of business and leisure travelers. The first group usually prefers midweek trips and flights in the mornings and evenings to ensure spending the weekends and nights at home. Leisure travelers, in contrast, often intend to travel over the weekend to minimize the number of days off work. In addition, leisure and business travelers also differ from each other with respect to their willingness to pay. Table 1 displays the main differences between business (long-term), emergency business (short notice), visiting friends and relatives (VFR) and holiday travelers with respect to criteria such as price elasticity or cabin product requirements.

Despite strict cost management in most firms, business travelers are still less price sensitive than leisure travelers. Their price elasticity of demand is usually low, as several meta-studies indicate (see table 2). This especially applies to "emergency business trips," which have to take place at very short notice.

The supply of air services is characterized by temporal synchronization of production and consumption. Consequently, air services are not storable and thus perishable (Chiang, then, and Xu 2007). After the schedules are fixed, air-transport capacities and thus a large part of an airline's total costs are also fixed and thus hardly adjustable. In contrast, variable costs that are directly attributable to a passenger (airport charges, security fees, catering, distribution, and marginal fuel costs) are relatively low. This is why airlines are tempted to sell seats at marginal cost prices, risking not generating enough revenue to cover average costs.

Price Discrimination in the Air-Transport Market

Fixed-capacity allocation and fluctuating demand lead to unstable capacity utilization over time. To smooth demand variations, different methods of price discrimination are executed by the carriers' revenue-management systems, making pricing a key marketing variable in the airline industry. In general, "price discrimination" refers to the sale of identical goods or services by the same provider to customers of different market segments at different prices according to the respective degrees of willingness to pay. In a competitive market, price discrimination requires a system in which arbitrage through resale is not possible. Such a system contains boundaries (rate fences) set up by the producer to keep market segments separate (see, e.g., Gillen and Hazledine 2007; Hanlon 2007). The traditional elements of price discrimination in the airline industry are reviewed below.

Advance Booking Restrictions

Most leisure travelers are prepared to book well in advance, while business travelers often have to fly on short notice. For this reason, virtually all carriers reward early bookers with steep discounts and charge higher fares for late bookers (for up-to-date empirical evidence see Bilotkach, Gorodnichenko, and Talavera 2010). This kind of price discrimination is enforced by either absolute advance booking restrictions (tickets can no longer be purchased at a discounted fare once the specific booking deadline for the respective fare class has elapsed), or by implementing dynamic price curves (where prices rise the more seats have been sold for a specific flight), or by combinations of both. Even low-cost carriers sell tickets subject to absolute advance booking restrictions. For instance, all 5-36.99 GBP promotional fares offered by Ryanair on Wednesday, May 26, 2010, were subject to a 14-day advance purchase limit.

Discounts for Return Nights and Minimum Stay Rules

Unlike leisure travelers, business travelers usually prefer pre-weekend return flights, or they might even require one-way or multicity itineraries. To make sure that business travelers do not book the cheapest leisure fares, traditional airlines usually offer discounts to consumers who reserve an outbound and a post-weekend return flight in one booking. This "Saturday night stay rule" for discounted fares is perhaps the most prominent rate fence and was introduced some 30 years ago (Tretheway 2004), At the same time, higher fares are usually charged for midweek excursions, and for one-way trips to prevent passengers from circumventing minimum stay rules in booking two one-way segments. Hence, a one-way trip can even be as or even much more expensive than a return trip containing the same outbound flight. Tables 3 and 4 display fare classes, and the respective fare restrictions, offered by Lufthansa on flights from Munich to Berlin. It shows that the cheapest one-way fare (EFLYOW in table 4) costs the same as the cheapest return flight (E99F in table 3).

Rebooking Restrictions and Mileage Accrual

The cheapest fares offered by network carriers are usually subject to stricter rebooking and cancellation restrictions, and to lower frequent-flier program mileage accrual than higher-priced tickets. Table 5 shows different prices for a Finnair return flight from Helsinki to London from May 6 to 13, 2009, if booked on February 5, 2009. Table 6 shows the mileage accrual by Lufthansa for different fare classes.

Pricing for Transfer Flights/Geographical Price Discrimination

Most network carriers consolidate their flight operations at hubs where passengers from various origins are redistributed on outgoing flights. This way, the number of origin and destination (O&D) connections can be maximized across a network. For the following reasons, fares for hub-originating trips are often more expensive than those for trips going via the same hub:

* Time-sensitive passengers might be willing to pay price premiums for nonstop options. The airlines' rationality in setting higher fares for nonstop services than for transfer itineraries is based on the observation that shorter trip times have a higher utility for the passenger (Hess 2008). Moreover, the time-sensitivity of passengers traveling for business purposes is found to be higher than for leisure travelers (Hess, Adler, and Polak 2007). This ultimately results in a higher willingness to pay for business travelers for air services with a shorter trip time. Generally, it can be found in the literature that business passengers have a higher value of time than leisure travelers (Dresner 2006).

* Due to economical or social conditions, people have a lower average willingness to pay in some markets than in others, resulting in geographical price discrimination. For instance, premium-class trips from Greece via Western Europe to North America or Asia are usually much less expensive than flights starting in other Western European countries (see table 7). For this reason, airlines have to offer lower fares to passengers starting their trips in those markets. In addition, special legal constraints can hinder airlines from charging prices above certain limits. Many restrictive bilateral air-services agreements contain clauses that fares need to be approved by the contracting parties. Also in domestic markets, price caps have been applied by a number of countries. Until June 2010, first-class air fares for domestic services in China were capped at 1.5 times the economy-class fares, while business-class fares were set at 1.3 times the economy-class fare (Hui 2010).

* Airline brands are usually strongest in their respective home countries. To attract passengers from foreign markets, discounts are sometimes offered for transfer services. Based on about 3,000 observations, a recent paper shows the existence of "country premiums" flag carriers can charge for services out of their home countries, while connecting services starting abroad tend to be cheaper (Frohlich 2010).

* Due to intense network competition, prices for transfer itineraries are usually more competitive than nonstop routes.

To sum up, today's airline pricing can in most cases be regarded as more competition- than cost-based.

Circumvention of Fare Rules

Nonuse of the In- or Outbound Leg

When one-way fares are more expensive than return fares, one-way passengers might purchase return tickets but actually only show up on either the out- or inbound leg (for a real-data example, see figs. 1a-b). If the return flight is not used, the consumer's intention to breach the contract is not obvious initially, and airlines usually have no technical possibility to sanction the passenger. If the first leg of a return flight remains unused, however, airlines usually deny boarding for the return segment, unless the passenger agrees to pay the fare difference between the already paid return fare and the higher one-way fare. They refer to the respective conditions of carriage based on IATA RP 1724.

[FIGURE 1A OMITTED]

[FIGURE 1B OMITTED]

Cross-Ticketing

The combination of two discounted round-trip bookings in opposite directions, of which only the respective outbound legs are actually used, can be a cheap way to circumvent minimum-stay rules (see real-data example in fig. 2). This strategy is often applied by business travelers when the combined price of two discounted tickets with a minimum stay over the weekend is lower than a single midweek return ticket. Again, airlines use their conditions of carriage to forbid cross-ticketing. They claim that air-transport contracts comprise all segments shown on the ticket. If a passenger uses only a portion of the segments initially booked, the airline will reprice the flight(s) at the applicable fare of the segments actually flown. However, the consumers' intention to breach the contract is not obvious initially from the airline's perspective if the unused flight portions are the return legs.

Hidden-City Ticketing

Hidden-city ticketing is a constellation in which a traveler does not intend to start/end the trip at the ticketed origin/destination but at an intermediate hub H. A ticket from A via H to B is purchased, but only the portion A to H (or H to B) is actually used (see fig. 3). This strategy is applied by passengers to benefit from lower prices in some geographical markets, or to circumvent the nonstop premium charged to hub-originating passengers with a high time-sensitivity. Again, airlines refer to IATA RP 1724 and regularly deny boarding to passengers who have not shown up for the first segment but want to board at the hub. They argue that, due to intense competition, they sometimes have to charge a passenger who is traveling beyond a connecting point less than travelers who start]end their trip at this point. Only in cases where passengers without checked baggage actually end their journey without using the last segment of their trip do airlines usually have no technical possibility to sanction.

[FIGURE 2 OMITTED]

[FIGURE 3 OMITTED]

The Legal Perspective

Inclusion of IATA RP 1724 in Air-Transport Contracts

IATA's RP 1724, General Conditions of Carriage (Passenger and Baggage), Article 3.3.1, is the legal instrument aimed at preventing circumvention of fare rules. In general, these rules are only a suggested framework to harmonize industry practices in the air-transport sector. While IATA is not a governmental organization and has therefore no competence for legislation, their Recommended Practices are internationally recognized references and generally have a nonbinding character. As a template, some airlines have adopted these general conditions as minimum requirements in their Conditions of Carriage or have modified them to their own commercial practices. Thus, plenty of slightly different terms and conditions exist in the aviation sector. Through the unilateral usage of conditions of carriage by the carrier, the requirements of IATA RP 1724 and in particular the "full and sequential use of flight coupons" rule are, in many cases, the basis for air-transport contracts. When passengers purchase tickets, they enter into a legally binding contract with the carrier to receive transportation between two points. Following national contract laws, these standard terms become part of every contract with every passenger and are therefore applicable. While each national contract law sets the framework for conclusions of contracts, these specific standard terms also have to comply with national laws. Thus, the nonbinding IATA rules as international standards are not prioritized in favor of national law, but, on the contrary, have to comply with the national law.

Compliance of Airline Terms with Consumer Protection legislation

Standard terms in contracts with customers have to recognize effective consumer rights to ensure the protection of the weaker contractual party. Within the European Union (EU), consumer-friendly national contract law is enacted on the basis of Directive 93/13/EEC (Council of the European Communities 1993). This directive states that consumers are not bound by standard contract terms used by a seller or supplier if these terms are unfair. However, article 8 of the directive provides an opportunity for national legislations to establish stricter provisions. Thus, EU member states have the option to afford an even higher level of protection for consumers through national provisions. This is the reason for tensions between internationally recognized recommendations and different national laws: On the one hand, a variety of standard terms used by IATA member airlines apply to air-transport contracts, and on the other hand a nonuniform consumer protection law exists within the EU. As a result, a standard clause on the basis of IATA recommendations may be considered illegal in one country while legal in another.

Although IATA's recommendations have been widely approved by governments over the years and have assumed the status of accepted legal practice, some terms and conditions have been deemed to be in breach of Directive 93/13/EEC (Council of the European Communities 1993). In 2000, intervention from the Office of Fair Trading (2003) as the UK's consumer protection and competition authority and other government authorities led to more consumer-friendly conditions of contracts. As a result, the wording of IATA's model for Conditions of Carriage was clarified, and airlines amended their terms and conditions, making them more favorable to passengers. The principle of "full and sequential use of flight coupons," however, was not challenged. In 200l the Consumer Ombudsmen of Denmark, Sweden, and Norway reviewed the terms in relation to Nordic consumer contract legislation (see, e.g., Danish Consumer Ombudsman 2002). These provisions are generally intended to provide rules along the same lines as Council Directive 93/13/EEC on unfair contract terms. During these negotiations, no solution was found on the "full and sequential use of flight coupons" issue.

Complaints filed by the Federation of German Consumer Organizations

In the recent past, Verbraucherzentrale Bundesverband (VZBV), the Federation of German Consumer Organizations, admonished British Airways' and Lufthansa's standard terms for transparency and inappropriate disadvantage of passengers and filed exemplary legal complaints against the "full and sequential use of flight coupons" term. VZBV argued that the "full and sequential use of flight coupons" term, despite its importance to the passenger, would only be presented insufficiently within the small print of the standard terms, which could be considered a lack of transparency. Various carriers have since provided an explicit notice on this contract term within the booking procedure. Furthermore, VZBV argues that the term would discriminate passengers losing their rights of carriage.

In spring 2010 the Federal Court of Justice (2010) ruled that airlines have no legitimate interest to deny boarding in general. The term imbalances the position of the contracting partners contrary to the principle of good faith; once an airline has received payment for a trip, it must be irrelevant to the company whether the seat is actually empty for parts of the journey. However, carriers can ensure their tariff structure by drafting softer terms, giving them the right to recalculate the price based on the actual flight routing.

The court decision seems to have not only a domestic dimension, but, due to the Common Market in the EU, also a European dimension. If the rule of full and sequential use of flight coupons is declared invalid in Germany, for instance, any customer in the EU might buy a ticket in Germany and insist that the consumer rights of the country of purchase should be applied for this contract. The situation would even be further complicated should a court in the EU outside Germany approve the rule of full and sequential flight coupon use, creating a direct contradiction. Overall, and in favor of a level playing field for all stakeholders in air transport, a regulation on this matter on the European level could be appropriate.

Passengers' Complaints Against Cancellations Because of "Simple Throw-Away Coupons"

Complaints are filed quite frequently by passengers who were unable to use one or more segments of a trip for well-founded reasons (such as illness or force majeure), resulting in the cancellation of the remaining legs or in rebookings at much higher fares. German lower courts rescinded the "full and sequential use of flight coupons" term for several different reasons:

* Breaching the principle of transparency, confusing arrangements, and unclear wording in fare conditions result in an illegal usage of standard terms. While some decisions mention these insufficiently composed standard terms and poor transparency, it has to be mentioned that these inadequacies can be resolved by reformulating the conditions.

* The usage of the "full and sequential use of flight coupons" term imbalances the positions of the contracting partners. The consumer's possibility to recall contractual duties or only even parts of it, here especially the transportation of the first leg, is excluded. While losing the right of subsequent transportation in accordance with the above-mentioned terms, the curtailing of the right of termination is a disproportionate disadvantage for the consumer.

* The usage of terms that are not expected from the consumer's point of view is surprising and therefore unfair and illegal for the airline. The courts argue that only through the application of the term is a right to deny a consumer's air transportation given. Without the term airlines could not justify their right to deny boarding. The passenger could not be obligated to use all flights out of a bundle.

In almost all cases, lower German courts have ordered airlines to pay damages to consumers because of passengers' above-mentioned extra payments resulting from the illegal cancellation of the return leg on the basis of illegal terms and conditions. Courts haven even ruled in favor of those passengers who were fully aware that they had circumvented the agreed terms and conditions.

The Legal Role of Hidden-City Ticketing

From a legal point of view, hidden-city ticketing may be seen in a different way than the nonuse of the in- or outbound leg or cross-ticketing. The exact travel itinerary via hub H as a technical transfer point could be considered as not being part of the contract for air transportation from A to B. In this case, the transfer hub H may be regarded as a stopover point only at which passengers would not have the right to start or end their journeys.

The conditions of carriage by Scandinavian Airlines (SAS 2008) consider these thoughts: Article 3.3.1.1 of the standard terms of SAS grants exemptions from a "full and sequential use of flight coupons" term in the case that all the flight coupons for the outbound travel are completely unused. This way, hidden-city ticketing is not allowed, while the other forms of circumvention are. As SAS operates a one-way-based pricing system on intra-European routes, return trips are never cheaper than one-ways, rendering cross-ticketing obsolete anyway.

Impact of Legal Intervention on Airline Marketing and Fare Rules Practices

In this section, the impact of legalizing the circumvention of fare rules on airline marketing and consumers is assessed. In this context, we also refer to the results of the GAO report. The following two scenarios are discussed: (a) legalization of the practice not to use the outbound or return flight, legitimating the nonusage of the out- or inbound flight coupon and cross-ticketing; and (b) legalization of the practice to "throw away" any segment of a booking, also making hidden-city ticketing possible.

In scenario a, all passengers could purchase cheap return flights and use only a one-way portion. This would make it virtually impossible for airlines to charge high one-way fares and to absorb a higher degree of willingness to pay of business travelers for one-way services, as these passengers would also switch to cheaper return options. Moreover, the legalization of cross-ticketing would practically render obsolete the minimum-stay rule so far used as rate fence between leisure and business travelers. Based on this, the GAO concludes that a legalization of throw-away coupons would result in a price increase of discounted air fares and--in some markets--in declining demand and--ultimately--in the discontinuation of some services to smaller communities (see US General Accounting Office 200l, pp. 8 and 42-44).

However, we cannot fully follow this argumentation of the GAO, as airlines would still be able to employ significant price-discriminating measures in their marketing mix. First, they are free to restrict the amount of capacity to be sold at the lowest fares, and to combine them with advance booking restrictions. This way, fares increase the closer the day of departure comes, helping to derive premium fares from late-booking business travelers. Gillen and Hazledine (2007) have identified such pricing behavior in the Canadian air-travel market. Second, the majority of cheap tickets could be sold for midday and weekend flights, which may not be suitable for most business passengers. The continuing success of the largest low-cost carriers indicates that one-way-based pricing without minimum-stay obligations for the passenger and profitability do not, per se, contradict each other. In this context, it is also worth mentioning that some legacy carriers (Lufthansa, British Airways, SAS and others) have in recent years introduced attractive one-way fares, but mainly routes where they compete against low-cost carriers that also offer one-way pricing.

A further step toward one-way pricing could also reduce the complexity of yield management and probably result in lower administrative costs. In addition, airlines would still be able to offer both restricted and more expensive, unrestricted "full-fare" tickets when it comes to cancellation and rebooking conditions. What is more, a clever interaction between pricing and product policy can increase an airline's up-sell potential for additional amenities like baggage allowances, priority check-in, mileage accrual, lounge access, or higher service classes (see also Hazledine 2009). Thus, contrary to the findings of the GAO, it shows that it would not in the least be impossible for airlines to price discriminate even if they were forced to switch to one-way pricing as a result of cross-ticketing and the usage of throwaway coupons becoming legal.

If hidden-city ticketing (scenario b) was legalized the consequences for network airlines would be more severe: Passengers would have the right to start and end their trip at any (intermediate) point included in their booking. Consequently, passengers could buy tickets for flights starting in low-fare markets (e.g., Greece or Egypt), but only board at the respective carrier's connection point (e.g., Frankfurt or London). This would make it impossible to charge higher prices for direct flights, although travelers usually have a higher willingness to pay for nonstop connections. As a result, we are in agreement here with the findings of the GAO report, which concluded that cross-subsidization of transfer passengers by local hub passengers would no longer be feasible, and that airlines would have to increase prices for connecting flights. This would then result in declining demand for transfer services and eventually in a discontinuation of certain services to smaller communities. Hence, parts of the hub-and-spoke concept would be endangered, without any alternatives being available on most thin long-haul markets. On short-haul markets, in contrast, the consequences for the consumer would be less severe, as low-cost carriers would most likely commence services on many routes major carriers have withdrawn from. However, frequencies and thus service quality would most likely be reduced on these routes, too. While the lower courts in Germany argued that their decisions were made with the intention of protecting consumers, the actual result could be massively detrimental to the consumers' interests: Carriers would have to increase their lowest fares for transfer flights in order to compensate for revenue decreases on nonstop services, resulting in a large number of price-sensitive consumers being priced out of long-haul air travel. Total social welfare could be reduced.

Conclusion

In this article, the tensions between airline pricing and corresponding consumer issues were discussed. In particular, it was analyzed whether there is a need for airlines to maintain the "full and sequential use of flight tickets" rule based on IATA RP 1724, Article 3.3.1. Fluctuating demand and different consumer groups with regard to their respective levels of willingness to pay on the demand side and fixed capacities on the supply side are the reason why airlines see price discrimination by advance booking restrictions, hub premiums, or minimum-stay rules as essential tools to maximize load factors and to earn money. However, passengers have found ways to circumvent strict fare rules.

[FIGURE 4 OMITTED]

While airlines refer to IATA RP 1724, Article 3.3.1, consumer advocates and a number of court decisions argue in favor of passengers, who claim the right to decide freely which segments of a purchased bundle of flights to use and which not. These different interests could create different case law within the member states of the European Union and could therefore affect the Common Market.

Section 5 discussed the economic impact on airlines and consumers if the three types of ticket abuse were legalized. In contrast to some of the findings of the GAO, we conclude that a legalization of the practice of cross-ticketing would not harm the network airlines, as they could adopt the one-way-based pricing schemes of the low-cost carriers that make (some of today's) strict fare rules obsolete. It is found that only a legalization of hidden-city ticketing would have severe consequences for the airlines, as the traditional hub-and-spoke operations--which rely on high revenues generated by hub-originating passengers, while transfer passengers pay fares close to marginal cost levels--could probably no longer be continued. Thus, it could be appropriate to establish a legal framework that prohibits hidden-city ticketing and, at the same time, approves the other two ways of circumvention: The transfer hub may be regarded as stopover point for technical/operational reasons only and therefore cannot be used as a place of origin or place of destination.

The relevance of potential higher court decisions seems to have not only a domestic but, due to the Common Market in the EU also a European dimension. If the rule of "full and sequential use of flight coupons" is declared invalid in one member state, as recently in Germany, any customer in the EU might buy a ticket in this country and possibly insist that the consumer rights of the country of purchase should be applied for this contract. The situation would even be further complicated should a court in another member state approve the rule of flight coupon use, creating a direct contradiction. In favor of a level playing field for all stakeholders in air transport, a regulation on this matter on European level could be appropriate, after careful consideration of the balance between consumer rights and the economic needs of airlines.

Appendix

IATA Recommended Practice 1724 (revised)

(adopted by the IATA Passenger Services Conference September 2000)

General conditions of carriage (passengers & baggage)

[...]

Article 3--Tickets

[...]

3.3--Coupon sequence and use

3.3.1

The ticket you have purchased is valid only for the transportation as shown on the Ticket, from the place of departure via any Agreed Stopping Places to the final destination. The fare you have paid is based upon our Tariff and is for the transportation as shown on the Ticket. It forms an essential part of our contract with you. The Ticket will not be honored and will lose its validity if all the Coupons are not used in the sequence provided in the Ticket.

[...]

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Gregor Bischoff

German Aerospace Center (DLR)

Institute of Air Transport and Airport Research

Linder Hohe, 51147 Cologne, Germany

Tel.: +49 22 03 601-2596

E-mail: sven.maertens@dlr.de

Wolfgang Grimme

German Aerospace Center (DLR)

Institute of Air Transport and Airport Research

Sven Maertens

German Aerospace Center (DLR)

Institute of Air Transport and Airport Research
Table 1/Characteristics of Business and Leisure Travelers

Traveler      Business         Business     VFR          Inclusive
              traveler         traveler     traveler/    tour holiday
              (short notice/   (medium-to   Weekend      maker
              emergency        long-term    holiday      (booking well
              business)        bookings)    maker        in advance)

Examples      Last-minute      Conference   Shopping     Package
              meeting          delegate     trip,        summer
                                            flying       holiday
                                            home for     to Spain
                                            Christmas

Price         Very low         Low          Medium       High
elasticity

Comfort       Important        Important    Less         Less
                                            important    important

Frequency     Important        Important    Important    Less
                                                         important

Low total     Important        Important    Medium       Less
travel time                                              important

Typical       Few days         Few days     (Extended)   >= 1 week
duration

Source: Own compilation

Table 2/Price Elasticities of Demand for Air Travel

Study          Observed price elasticities              Comment

Brons et       Business travelers: -0.1 to -2.2         Meta-analysis
al. (2002)     All travelers: 0.21 to -3.2 (mean:       of 37 studies
               -1.146)                                  and 204
                                                        observations

Gillen/        Business travelers: Long haul: -0.265    For flights
Morrison/      (median);                                within/ex
Stewart        Short/medium haul: -0.730 (median)       Canada
(2003)         Leisure travelers: Long haul: -0.993
               (median);
               Short/medium haul: -1.520 (median)

Oum/Gillen/    Nontouristic routes: -1.15
Noble (1986)   Touristic routes: -1.52

Oum/Waters/    Business travelers: -0.62 to -1.15
Yong (1992)    Leisure travelers: -0.40 to -4.60
               (majority between -0.8 and -2.0)

Table 3/Fare Classes of Lufthansa on Munich-Berlin Route
(Return Trips)

MUC Munich Metro/Munich Franz Josef Strauss DE = MUC [EDDM]
BER Berlin Metro DE = SXFTHF TXL
RT Nov-Oct

                               Cur
Carrier   From   To     Fare         Expiry   Min   Max   Fare Basis

LH        MUC    BER      56   USD            1     6M    E99F
LH        MUC    BER      59   USD            1     1M    EKOMBIF
LH        MUC    BER      60   USD            1     6M    TKOMBI1
LH        MUC    BER     135   USD                  6M    LKOMBI1
LH        MUC    BER     202   USD            Sun   14    OBASIC
LH        MUC    BER     236   USD            Sun   14    HBASIC
LH        MUC    BER     323   USD                  6M    KKOMBI1
LH        MUC    BER     389   USD                  6M    GKOM811
LH        MUC    BER     455   USD                  6M    PKOMBI1
LH        MUC    BER     558   USD                  6M    BKOMBI1
LH        MUC    BER     609   USD                        YRTFLEX
LH        MUC    BER     735   USD                        CRT1
LH        MUC    BER     874   USD                        YRTFLEX

Source: Sabre Reservation System, 2009

Table 4/Fare Classes of Lufthansa on Munich-Berlin Route
(One-way Trips)

MUC Munich Metro/Munich Franz Josef Strauss DE = MUC [EDDM]
BER Berlin Metro DE = SXFTHFTXL
OW Nov-Oct

Carrier   From   To    Fare  Cur   Expiry   Min   Max   Fare Basis

LH        MUC    BER    56   USD                        EFLYOW
LH        MUC    BER    75   USD                        TFLYOW
LH        MUC    BER    95   USD                        LFLYOW
LH        MUC    BER   193   USD                        KFLYOW
LH        MUC    BER   233   USD                        GFLYOW
LH        MUC    BER   271   USD                        PFLYOW
LH        MUC    BER   366   USD                        YFLYOW
LH        MUC    BER   392   USD                        COW1

Source: Sabre Reservation System, 2009

Table 5/Fares and Rebooking/Cancellation
Restrictions Between Helsinki and London

Fare           Changes                    Refund

305.34 EUR     Not permitted              No refund

471.34 EUR     100 EUR per direction      No refund

771.34 EUR     100 EUR per direction      50% for cancellations made
                                          up to 1 day
before the
                                          flight, no refund
                                          afterwards

891.34 EUR     50 EUR per direction       No fee for cancellations
                                          made up to 1 day
                                          before the
                                          flight, no refund
                                          afterwards

1,071.34 EUR   Changeable (service fee)   Fully refundable (service
                                          fee)

1,321.34 EUR   Changeable (service fee)   Fully refundable (service
                                          fee)

Source: Author's compilation, prices taken from finnair.com website

Table 6/Mileage Accrual by Fare Class (Lufthansa Miles and More)

European            Class of   Booking class       Miles
destinations        service

Flights             Business   C D 1 Z              1,500
within Germany/     Economy    B Y P                1,000
domestic flights    Economy    G H K M Q S U V        500
                    Economy    W                      125
                               ELT

International       Business   C D 1 Z              2,000
European flights    Economy    BY                   1,250
                    Economy    G H K M P Q S U V      750
                    Economy    W                      750
                    Economy    E LT                   125

Destinations        Class of   Booking class       Miles       Or
worldwide           service                           at    distance
                                                   least     miles

Flights from/to/    First      A F                  1,500    x 3,0
between             Business   C D J Z              1,000    x 2,0
non-European        Economy    BY                     750    x 1,5
destinations        Economy    G H K M Q V            500    x 1,0
                    Economy    L 5 U W                500    x 0,5

Source: www.lufthansa.com

Table 7/Prices for Business Class Trips from Athens
and Zurich to Bangkok and Back, March 3-13, 2009
(as available on February 5, 2009)

Airline             Ex ATH      Ex ZRH      Difference

Air France          2,156 EUR   2,679 EUR   +24%

Austrian Airlines   1,984 EUR   2,658 EUR   +34%

Emirates            2,118 EUR   4,006 EUR   +89%

Turkish Airlines    1,433 EUR   2,240 EUR   +56%

Source: www.Kayak.com
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Author:Bischoff, Gregor; Maertens, Sven; Grimme, Wolfgang
Publication:Transportation Journal
Article Type:Abstract
Geographic Code:4EUGE
Date:Jun 22, 2011
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