Analysis and Comparison of Harbour Air and Helijet Pricing Policies

Econ 205 Industry Project Analysis and Comparison of Harbour Air and Helijet Pricing Policies Vancouver-Victoria Route

Michael Wilson Jennifer Sallows Christie Tustin Ryan Erikson Diane Bousadda Both Harbour Air and Helijet use forms of price discrimination to capture revenue, which is lost with uniform pricing. We will discuss the effectiveness of these policies and any improvements that could be made.

Comparing Harbour Air and Helijet Segmentation and Consumer Response

Harbour Air:

Air Bucks & Quick Tickets: see chart 2 Air Bucks vouchers allow you to put credit on your account, and the more you purchase, the more you save. With Quick Tickets booklets, the tickets purchased are for a specific route in order to save money (depending on how many passes you purchase). Quick tickets can be resold in a gray market and as a result could cannibalize regular paying customers. Air Bucks is resistant to cannibalization because credit from purchase is only accessible through a password protected account.

Consumer Response: Both Quick Tickets and Air Bucks are ideal for frequent flyers as they will benefit from the savings. However, Air Bucks are more flexible for individual users but they are not easily transferable. In contrast, Quick Tickets are limited to a single route, but they are easily transferable between customers. A business that has a number of employees traveling from Victoria to Vancouver would favor the Quick Tickets. A single businessman frequenting a variety of routes would choose the Air Bucks.

Market Divisions: see chart 1 Harbour Air divides the market by age. Adult fare is most expensive but has no limitations on when they fly. Senior fare and child fare are cheaper but more restrictive. Children must travel with an adult passenger, and seniors are restricted to flying in off-peak hours. This form of direct segmentation based on age prevents excess demand on peak flights and excess supply on off- peak flights by diverting senior guests to less popular flights Harbour Air also offers cheaper stand by rates for seniors and students. This prevents students and seniors from filling peak flights at a lower rate. Moreover, by not offering a cheaper adult stand by rate, Harbour Air prevents adults from choosing to fly stand-by in order to save (cannibalization). Senior and student consumers respond by waiting for stand-by and adult consumers continue to book ahead of time at the full rate (Exhibit 2).

Helijet:

Helijet divides the market into peak/off-peak rates, unlike BC Ferries’ inefficient pricing method. This ensures that only consumers with highest demand for peak flights will get on them. There is a senior and child’s rate limited to off-peak flights which prevents seniors/children with a lower demand from using up the peak seats. They also implement a general off-peak rate, which encourages less urgent consumers from using up the peak seats.

Stand-By: Student stand-by is also available. Helijet is able to capture the students’ consumer surplus by providing a great rate based on strict limitations. Therefore, student demand does not cut in to the adult demand as students are only given seats once it is seen that there is no demand at the full rate.

These pricing policies help direct consumers to the option that will provide them with the most benefit. Those willing to pay more for convenience will pay peak prices and those willing to be flexible will save by avoiding peak flights. Helijet does not offer benefits like Harbour Air (increased savings the more you buy). They prefer to market themselves as an “experience.” The company claims that flying Helijet is not just a convenient way to travel; it is an experience unlike any other. Helijet prices are more expensive than Harbour Air, despite flying a similar route from Victoria to Vancouver. They use this to convince consumers that the higher price is worthwhile.

Increased Revenue Policies vs. Uniform Pricing

While uniform pricing sets one price, and captures revenue based on the quantity demanded at that price, inframarginal buyers do not pay as much as their willingness to pay. Also, economically inefficient amounts are sold (Lehman & Png, 2007). Therefore, the closer to complete price discrimination one can get through different segmentations the higher the revenue (figure 1). By directly discriminating between people of different age groups as well as their demand, both Harbour Air and Helijet create new segments thereby maximizing revenue and profits.

The increased segmentation is certainly captured through Helijet’s peak pricing policy. While Harbour Air’s pricing is directly split, Helijet allows for greater segmentation through large differences in peak and off-peak pricing. The peak pricing allows only those with high willingness to pay to use Helijet during peak times, increasing total revenue. Those who purchase during the peak hours will most likely be tourists or business people, with a high implicit cost of time.

Marginal Cost per seat is very small, as the seats are a sunk cost. Having off-peak pricing ensures that those who have a low willingness to pay can be captured by segmentation as well (the extra ticket and unused seat is a sunk cost and a missed opportunity, similar to that of the Hyde Park Hotel Case Study). However, Harbour Air’s pricing is less segmented and, therefore, less flexible to changes in demand due to shortages and surpluses (Riley, 2006). (Figure 2).

Additionally, another increase in revenue is shown through the idea of Helijet as an experience, rather than just a mode of transport. Helijet has identified its service as “transforming everyday air travel into a scenic excursion above the natural beauty of Greater Vancouver and Vancouver Island” (Helijet), and “around 50% of the users are tourists (lower elasticity, see Figure 3) who are willing to pay more during peak seasons” (Helijet Management, November 8, 2011). This follows a differentiated oligopolistic model (Lehman & Pgn, 2007), as Helijet is a differentiated substitute for Harbour Air. Helijet and Harbour Air would also differentiate themselves on distance based on where their airports are located (Hotelling Oligopolistic model). However, during off-peak times, Helijet becomes more of a form of transportation than a tourist attraction and is more homogenously priced in order to remain competitive with Harbour Air (Bertrand model).

One way in which Harbour Air has greater variance and segmentation than Helijet is with its confirmed seat pricing through geographic segmentation (differentiated input costs) (Exhibit 2&3). Harbour Air prices each route differently, which allows them to change prices based on elasticity and the cost of travel. For example, they can raise the price to travel directly to downtown Vancouver compared to Richmond by the cost of transportation to the downtown core from YVR. On the other hand, Helijet offers a fixed cost for their three locations. Helijet only offers three locations, but are well-established in other markets. Thus, it makes more sense for them to travel to the hubs, rather than to out of the way areas. By offering the same cost for the three locations, Helijet opens itself up to overuse of one location and underuse of another, affecting revenue.

Finally, Helijet is established in many markets (Horizontal Integration). Helijet’s “main revenue source is travel planes, taking up about a half of the fleet, but some (~30%) are dedicated for Medical and some for charter.” (Helijet Management, November 8, 2011). By entering different markets, Helijet keeps its revenue stable by not “putting all of its eggs in one basket.”

Improvement to Policies

Outside of peak times, Helijet would benefit from marketing itself more as a tourist attraction. Flying in a helicopter is an experience, allowing customers to view the scenic landscape of Metro-Vancouver and Vancouver Island. When compared to flying in Harbour Air’s small planes, Helijet would appeal to a larger market. This would allow Helijet access to a niche market, where they would be able to better utilize their later flight times to attract different segments of customers. If advertised as a tourist attraction, Helijet could expand, offering short and lower priced flights for tourist routes. If Helijet exercises further direct and indirect price segmentation on this niche, it is likely to successfully expand into a niche market, where it would have no direct competitors and fill demand for sightseeing from a helicopter. Another issue for Helijet is that it only services three routes and charges the same rate on each. If Helijet found that one of the routes were more popular, it would be economically efficient to raise the price for that route to capture more revenue. By differentiating prices on routes, Helijet prevents cannibalization by consumers who would pay more for a specific route and ensures maximum revenue through geographic price discrimination. Harbour Air also has the opportunity to fill a niche market, being one of few carbon neutral seaplanes. Harbour Air should advertise this feature and attract green consumers, creating a niche market like Helijet’s market for tourism. In addition, another problem with Harbour Air is cannibalization through quick tickets (despite regulations already set). Further prevention of cannibalization is possible through better regulation of Harbour Air’s Quick Tickets. These Quick tickets can be re-sold on a “gray market” which could cause cannibalization as consumers have the moral hazard to cheat and re-sell on the gray market. This could cut into Harbour Air’s revenues. Therefore, the company should create policies that do not allow for resale of the tickets to third parties (for example, by making the tickets non-transferable or charging a transfer fee for tickets sold to third parties thereby making the gray market less appealing).

In Conclusion

Although it is clear there are some improvements that could be made to both companies, it is evident that both Harbour Air and Helijet effectively use pricing policies and segmentation to capture revenue that would be lost with uniform pricing.

Word Count: 1,490

Michael Wilson Jennifer Sallows Christie Tustin Ryan Erikson Diane Bousadda

Appendix

Chart 1: Direct Price Indirect Price Other Unique Policies/ Strategies Discrimination Discrimination Helijet - Age Classification: - Peak Rates (H, - Marketing the Experience of a Heli- Senior, Adult, Child B,Y classes based flight - Student Stand-by Rate on when the - Bundle rate with a Vancouver Hotel flights leaves) - Charter/Touring Flights - Off-Peak Rates - Air Medical Services - Helicopters have access to any location Harbor -Age Classification: - Quick Tickets - Charter/Touring Flights Air Senior, Adult, Child - Air Bucks - Smart Phone Application -Student Stand-by Rate - Peak Rates - Off Peak Rates

Chart2: Flexibility Rates Target Crowd Quick Tickets -Transferable to - 1 book – 10% off - Corporation who anyone without - 2-5 Books – 15% haves multiple authorization off employers - Limited to a single - 6-9 Books- 18% off frequently route ie. (Vic –Van) - 10+ Books- 22% off travelling a single route - Frequent pleasure guests Air Bucks - Restricted to an - $1,000 Purchase - A single account by -10% Bonus Credit businessman authorization code - $2,500- 16% Bonus travelling various - Can use on any Credit routes flight route - $5,000- 20% Bonus Credit - $10,000- 25% Bonus Credit - $25,000- 28% Bonus Credit - $50,000- 30% Bonus Credit - $75000- 31% Bonus Credit “Probably only 10-20% actually buy quick tickets and most of these are businessmen. We made them to get more business people using our planes and to increase our reputation by word of mouth.” “The Airbucks are great. They ensure we get business and provide incentives for others to use our services.” (Harbour Air Management, November 13, 2011). Exhibit 1: Harbour Air Direct Segment Pricing Place 1 Way Return Child Senior Book of 10* Cost/Flight* Vancouver- 151.73 303.46 75.87 128.97 1365.57 136.56 Victoria Vancouver- 82.53 165.06 41.27 70.15 742.77 74.28 Nanaimo Richmond- 114.58 229.16 57.29 97.39 1031.22 103.12 Victoria Sechelt- 197.93 395.86 98.97 168.24 n/a n/a Jervis Inlet Zone 2 *Quicktickets From this exhibit, it is evident Harbour Air segments age groups as well as geographic location. This becomes important as different age groups have different elasticities. Also, different geographic regions have different marginal costs (Cost of landing pad, gas, etc.) and different elasticities (eg. Vancouver= more elastic due to many ways to get home but a more obscure place (eg. Jervis Inlet zone is harder to get to and probably more inelastic).

Exhibit 2: Harbour Air Standby

Place Full off- Return Student Senior peak Vancouver- 151.73 303.46 75.87 75.87 Victoria One key question here is: standby is used to create a new demand segment of people with low implicit costs of time. Thus, why are the adults not cheaper for waiting standby? It seems that, as the planes might not be at capacity, allowing cheaper flights through standby may be a way for the adults to cannibalize demand for the goods. While students and seniors might be attracted by this deal, leading to greater numbers and higher revenues, the use of stand-by deals for adults might not attract more, but cause adults to switch to standby to get the cheaper price and more buyer surplus.

Exhibit 3: Helijet Pricing

Place Full off- Full fare Full Fare Senior Child Student peak peak Standby Vancouver- 151.73 303.46 75.87 128.97 1365.57 136.56 Victoria

Although Helijet only services three locations: Downtown Vancouver, Vancouver Airport, and Downtown Victoria, they all charge the same rate regardless of geography. This is an area of improvement, as if Helijet found that one of the areas was more popular, they could raise the price of the ticket for that area in order to raise revenue due to inelastic demand. Helijet probably only services three areas as they have breadth of entry in other markets.

References

Air Bucks. (2011) Retrieved November 8, 2011, from http://www.harbourair.com/airbucksorder.php

Harbour Air Management. (2011, November 13). Phone interview. Helijet Management. (2011, November 8). Phone interview.

Helijet. (n.d.). Helijet (scheduled services). Retrieved November 8, 2011, from http://www.helijet.com/scheduled-services.

Lehman, D. & Png, I. (2007). Managerial economics. (3 ed., pp. 225-255). Malden, MA: Blackwell Publishing.

Pandey, A. (2009). Strategy management. Retrieved November 8, 2011, from http://www.slideshare.net/amitjpp/strategymanagement-2013055

Quick Tickets (2011) Retrieved November 8, 2011, from http://www.harbourair.com/bulk_discount_order.php

Riley, G. (2006, September). Price discrimination . Retrieved November 6, 2011, from http://tutor2u.net/economics/revision-notes/a2-micro-price- discrimination.html