Differentiated pricing for airline ancillary services considering passenger choice behavior heterogeneity and willingness to pay

Abstract

Under the differentiated service reform of Chinese airlines in 2021, it is an inevitable trend to design and develop differentiated ancillary products, which is the optimization scheme of the supply-side for airlines starting from user demands. The trend of domestic air passengers paying for seat selection is becoming increasingly prevalent. By taking the seat selection fee as an example, this study examines the formulation of ancillary service fees based on passengers' willingness to pay. Using a stated preference (SP) experiment method, this study investigates passengers' seat selection behavior and uses the latent class conditional logit model (LCL) to classify passengers based on seat selection preference. Then, considering the passengers' socioeconomic characteristics, travel characteristics, flight characteristics, seat categories, and passenger categories, this study constructs a model of willingness to pay for seat selection through logit regression. Finally, this study further explores the influencing factors that affect passengers' willingness to pay by using the model and conducting a confirmatory analysis between the model results and the investigation data. The research results show that: (1) passengers' cabin seat selection preferences are heterogeneous, and passengers are divided into three categories; (2) the passenger's personal characteristics (gender, age, etc.) have no significant influence on the willingness to pay for the three categories of passengers; however, the flight purpose for business and leisure travel, day flight, flight duration, the number of luggage, person accompanied, person unaccompanied, and preferred seat have a significant impact on it; (3) the model of willingness to pay has strong correctness and practicability, so in practice, with this method, airlines can predict the willingness to pay for seat selection according to passenger categories and then provide differentiated services and charge fees. It provides theory and decision support for airlines to conduct seat management and design differentiated ancillary service products.