How charter holiday pricing works — Part 1

If you’re an Irish consumer currently thinking of getting away for a week or two in the sun at the moment, chances are that you’re experiencing one or both of the following problems:

1. There is very little availability left to many destinations

2. All the prices are very expensive

And to add further insult to your injury, you’ve probably already found that the prices that airlines such as Aer Lingus and Ryanair are charging are simply outrageous. I’ve heard of prices as high as €700 for a round-trip airfare to Majorca. Of course, it doesn’t have to end up like this every other year if only consumers took time out to understand how the holiday industry works and how simple economic principles such as ‘supply and demand affect pricing. In order to get your head around this, you first need to understand the fundamental differences that exist between charter pricing and scheduled flight pricing.

If you scan the pricing for any package holiday that is based on a charter flight service you will notice that the prices plot a bell curve as you go through the season from beginning to end. The typical summer season in the Irish market runs from May until October and the pricing in both of these months (with the exception of the October bank holiday weekend) tends to be at its lowest, rising steadily from the beginning of June and peaking at the first two weeks in August. This is because pricing needs to be low in the shoulder months as an incentive to attract punters as demand is weak whereas the peak season dates will also fill up as that is when most people like to/have to take their holidays. The pricing of the peak season dates therefore effectively cross-subsidises the pricing for the low season dates. This all assumes of course that tour operators correctly predict what the likely demand for holidays is going to be at the beginning of the season when they sign their contracts with the airlines and the hotels/apartments. If they correctly predict the latent demand then everything gets sold more or less for what we call ‘brochure’ price. If they get it wrong or if the market suffers from some unexpected development that negatively impacts on the expected demand, then tour operators will start discounting the prices of their packages as they are a ‘perishable’ product and must be sold at whatever price before the plane takes off. The steepness of the discounts on offer depends on a multiplicity of factors such as the amount of over-capacity or under-demand in the marketplace; the relative proximity of the date to be discounted and the extent to which the tour operator is prepared to hold his/her nerve as the day of reckoning approaches. This year, the trade has gotten its sums largely right with the result that the capacity of seats/availability in the marketplace is roughly equivalent to the level of demand that is out there right now so packages and airline seats are holding their own. In the case of scheduled airline fares, these are actually rising as the pricing model with scheduled services is the opposite to that of charter flights, the mechanics of which are explained in our next blog.

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