Question

Airlines give away millions of tickets each year through their frequent flyer programs, with the typical airline awarding a free ticket for each 25,000 miles flown on the airline. The average airline ticket costs $500 for a 2,500-mile round trip. Given this information, answer the following question applying concepts learned about the theory of consumer behavior:

Couldn't airlines generate the same effect on demand by simply lowering the average ticket price by 10 percent? Why do they choose to institute frequent flyer programs instead?

Answer 1

Total money spent on round trip on airline = 500 * 10 = $5,000

If they offer 10% on ticket, its price will reduce to $500 * 0.9 = $450

Trip of 25,000 would cost $450 * 10 = $4,500

Airline generates same revenue by offering a free ticket or they give 10% discount in ticket price but there is benefit in offering discount:

• Discount offered to consumers induces them to fly more which will make their habbit of flying more than usual even if they do not offer free ticket in long run.
• It Attracts flyers to book ticket from them. As a consumer, everyone likes some free gift or discount which wins customer heart.