Episode #0086 - Will subsidies boost demand for domestic tourism?

Pricing College Podcast

In this episode of Pricing College - we discuss the new Aussie Federal Government plan to boost domestic tourism by subsidising flights by 50%.

We discuss is price the major driver of tourism nowadays in a post Covid world - or is it the rationale expectation that your vacation will be ruined by State Governments locking down cities and closing borders willy nilly.

We're recording this podcast a day after the Australian Federal Government announced a 50% subsidy for holiday flights to certain destinations throughout Australia. From a pricing perspective, we want to look at that and ask, what should you be looking for? And will it actually boost travellers?

I'm also looking at it from their pricing team's perspective. What prices are they going to set for their retail prices? Are they going to go higher than usual? Or are they going to because they know there's going to be a 50% discount, or are they going to keep within range? And, what is their range when they normally do things like dynamic pricing? So there are a lot of questions to be asked.

I'd be honest, that was one of my first thoughts. If you're a pricing person at Qantas, Jetstar, or Virgin, You know that customers have you charge $100 and then customers will get a 50% discount. I don't know exactly how it works, but you will get a 50% discount from the government. Would you be tempted to slightly increase your prices? Move from $100 up to $120. So, that's something we'll see. Yeah, I don't know the answer to that. Maybe they will. Maybe they won't.

I think this all comes back down to price positioning. If you think about how you set prices, just because you can set prices higher. Does that mean you should? How does that affect the brand? How does it affect the reputation of a business? These are all very serious considerations, as is the amount of attention that will be given to the newly released prices by regulators and consumers. Everybody's watching. Everybody is very interested. Obviously, going away now, especially at Easter time, is on people's minds. People are weighing up whether they should or not. In fact, I imagine Qantas and Virgin would be very interested in getting that kind of feedback. What is market feedback intel about what customers are going to do? Are they not just going to be willing to pay more or less? Are they actually willing to go on holiday at all? With the knowledge that borders could close, announcements could be made about COVID. Lockdowns can happen instantly, and people will be stranded. So this is on everybody's mind. Now, how does this affect pricing?

I think, looking back to that first question, how do you even set prices? We've discussed on this show numerous times how the travel industry was probably leading the way with revenue management tools and computer programs. But let's be honest, the history of a year ago isn't really relevant anymore. Has anyone who flew during the Easter holidays in 2019 changed their mind about flying this year? The answer is probably not. So, how would you even start setting prices? Let's be honest, all airlines at the moment have excess capacity. It's not as if there aren't flights available internally if you want to take them. So that's not the problem affecting the airlines. So, how would you set those prices? I’ll be honest, I don't really know. What is the methodology they're using on the airline? It’d be interesting to hear from some of those people. Is it based on historical metrics? Or is it just based on more of a value-based approach based on today?

Well, we are certainly living in unprecedented times. There are no benchmarks. The past data, as Aidan was saying, is not very relevant today. So, what were they doing before? They were using algorithmic pricing to set their prices. They were using advanced AI and pricing software. Are they using that now? Not at all. Looking at a very recent example from United Airlines in America, they actually had to shut down the pricing software. Due to the crisis, the algorithm was massively reducing the rates of the fares to almost rock bottom prices based on market conditions, availability, supply and demand. It just didn't make sense. So what they had to do was to step in very quickly and shut it down. Now, their pricing team is stepping up to the floor and leading the price-setting process yet again. The same is undoubtedly happening all over the world because the pricing algorithms set in the systems just don't make sense for now. Yes, they were logical for a market that was stable and set up for a particular scenario or market conditions. But now things have radically changed, and you can't just tweak the system. It takes a long time to reset the algorithms. So they just shut them down. So even here today, I would imagine the pricing teams of the leading airlines are very, very busy. They're thinking, "Okay, and they're setting new hypotheses about customers." Because customers and their willingness to pay for what they're thinking about travelling for lead this discussion. I imagine the data on this would be anecdotal. It'd be based on a lot of assumptions. So I would say, to a certain degree, their pricing will be the same. But that doesn't mean that it can't be scientific and done scientifically using hypotheses, testing, learning and trials. At the same time, it's very important, as I said, to bear in mind all those other things, like a business strategy. What do you intend to do in 3-6-9 months from now? But also, what does the airline want to be in three to five years from now? Because you've still got to maintain that as your point of reference to understand what you're going to do now. Because you don't want your tactics to drive your strategy because you could ruin your future business strategy.

I think the airlines, talking about the future, obviously, they've got their eyes on the future. But this is seen, I suppose, as being promoted by the government as a way to safeguard those jobs and safeguard those industries so they will have a future. I have serious questions as to whether this is an efficient use of taxpayer money and whether it really will boost people travelling or wanting to travel. I personally think there's a lot of pent-up demand for holidays and travel. I think what's holding people back is not necessarily paying $50 versus $100, or whatever it is. I think the elasticity of demand It's almost, to some extent, a bit inelastic at the moment. You could increase prices and people would still travel. I think what's holding people back is more is not a pricing-related aspect. It's a risk. It's whether you get to Queensland or Perth, wherever it is, whether halfway or 10 minutes before landing, you're told you’ll spend two weeks in a quarantine facility. Let's be honest, that's a bit of a downer on the holiday mood. So I think that's what holds people back. I think there is also a fear that governments will just shut down willy nilly. Personally, at this point, I don't think many Australians are fearful of COVID to that extent. I think they're afraid of wasting their money during their two-week holiday. The horrific implications of being on holiday in a hotel room, not being allowed out into fresh air for two weeks. That puts people off. Whether saving $50 at the fair will compensate for that and make them confident is another question. I suppose just the one thing I'd add to that one is maybe when the government is spending this money. It can be seen as the federal government, to some extent, vouching for or pressurising state governments not to lockdown again. Not to shut down borders. Obviously, if they did, it would just be seen as literally flushing taxpayer money down the toilet. So, I think people may get more confidence that if taxpayer money has been used to finance that stuff, maybe there are some brains behind it.

I recall. I think it was before Christmas. I think the airlines wanted people to get back to using the flights and go on holiday again. There was like a huge, massive sale for interstate border holidays to Queensland, etc., Perth. So many people obviously needed that holiday then, and they went for it, buying those tickets. Then, after that, there was a surge, a massive increase in prices. Because the demand was quite high, I think it exceeded the normal price range at that time. Even accounting for seasonality and it being Christmas time, People were complaining that going to Queensland for a holiday was extortionate. So, after the initial huge sale, there was a massive increase that exceeded the range. So that was interesting. I do wonder, even though that wasn't government-sponsored, whether that trend will happen again. Or what did the airline industry learn from that? As Aidan was saying because they learned that after they did that, there were lockdowns. Especially in Melbourne, people had to drive back in their cars over Christmas and stay on the highway. Some people have to stay out for days to get back in. Will the airlines now provide some risk mitigation here? Will there be extra flights just in case? Will there be some sort of logistics in place for people to get back home? Or will the flight schedule just be the same? Are they going to be running their flights pretty badly because they want to ensure that their costs are down and their running costs are down? Or are they going to be bumping up that supply just to be sure? And if they did that, then that would make any price increase quite justifiable. But it seems like it'd be interesting to know kind of what the plan is.

Personally, my view is over the last 12 months: is there a plan? Probably not. You could even look at a scenario. I don't think anyone would bet that borders will not close at the drop of a hat at any point in the next few weeks. What happens to the airlines if they've collected funds for flights that then have to be cancelled? Will that be covered by insurance? Will these airlines have a monetary refund for these customers? Let's be honest, there's a very high chance of that happening given the slow rollout of vaccines etc. The slowdown in Australia was even predicted. So generally, when people want a holiday, they want a vacation to relax, to unwind, to get away from things. Is that the product or service you will be purchasing when you buy the holiday? When you book that week in Port Douglas or wherever you want to go, I think it's a bit like the one we covered in the cruise ship stuff we covered in the previous episode. With that, we did say that maybe it's a bit of hope over experience. People are purchasing hope. If they're booking a holiday for the future, that gives them hope that this stuff is over. Now there is something to look forward to. So maybe that's part of it. Maybe it's a national positivity week, etc. I think that that gives people a really positive view of the future and something to look forward to, so I hope that's accurate. I know a lot of other people. You have to wear masks, etc. on flights and on airlines. Is that the holiday mood? Is that something people really want to do? To be honest, I would expect that would dampen the spirit also. At the end of the day, when you walk through a shopping centre, people can wear masks in Sydney if they want to. 99% of people choose not to. So clearly, people vote with their faith and people don't want to wear these things. So it's going to be a question, especially in the long flights of the current etc., or Perth. So it's all to be seen.

I suppose what they found in America recently is that the people that were going to go on holiday or use aeroplanes had a very specific reason for doing so, and they were going to fly regardless of the price. So offering discounts or heavy discounts didn't really matter. The rest of the population wasn't going to go anyway because of the COVID restrictions. So maybe that logic still applies now. Using some sort of mass discount subsidisation to drive people to drive demand looks unlikely to work. We're still coming out of a very serious crisis, and a lot of people are still very cautious and have safety and health in mind. But, if you notice, this comes down to segmentation. For whatever reason, there is a segmentation.'s going to be a segment that is going to fly anyway, and they're willing to pay the price to do so. Should they be paying an excessive markup on the traditional flight price for doing so? because that will impact your reputation and business strategy. Many people remember that sort of thing. Yes, they’ll be paid for that right now. But as soon as things get more stable, they'll be looking for alternatives and thinking about businesses that treated them well when things were tough.

I think a lot of people at the moment feel very sorry for the airlines. They feel for the people: the staff, the pilots, the cabin crew, the ground handlers; people feel for them. They feel for the people who hold the resorts and want to support them in this country. There's that attitude. But at the same time, there's still a big lack of trust with the state governments. There's a lack of trust that, you know, the holiday you book will be available. Is it worse not to have booked a holiday or to have a holiday snatched away from you at the last moment? I'm not sure. So it's all to be seen. I personally would love to have a holiday. I think 90% of the world's population could do without a break after what we've been through in the last 12 months. I personally think the demand for interstate travel is certainly interstate. I'm not so sure about international. But interstate, it's probably reasonably priced. I think a certain percentage of people will not travel currently given the fears of COVID. But another percentage of people couldn't care less and just want to get back to the old way. So I don't think dropping the price by 50 or 100 bucks is really going to influence that. But again, I've been wrong in the past. So let's see.

I tend to agree. There are a lot of reasons why it's not a particularly good idea from a pricing strategy perspective. But it seems they're using the age-old economics 101 theory. This is the government's way of driving demand. They're not thinking about pricing as pricing managers do by segmentation and picking value drivers. There is no such thing as a segment of one when considering it holistically. Hopefully, it'll work. Best of luck.

Just one final point. There is also a question of equity. Whereas the people who have lost out most from the COVID lockdown restrictions have been young people. People are probably less secure in employment. They're probably not in a position to really go off and enjoy themselves for a week's holiday somewhere interstate. To some extent, what we're doing is using government taxpayer money to basically subsidise potentially wealthy people who can already afford to book the trip. and would have booked the trip anyway. So like, Is it a bit of a pork-barrel thing to subsidise people who don't need that subsidy? I would argue yes. But I've got my own political views. To some extent, the government nearly always finds new ways to waste money, so I am not really surprised.