Summary of Key Points
China Eastern Airlines has extended the free cancellation and refund period to 14 days, which represents a concession to passengers within the existing regulatory framework. However, this does not address the fundamental issue: the pricing system still revolves around the "time of cancellation" rather than the "type of product." The article argues that the high fixed costs in the aviation industry (such as purchasing and maintaining aircraft, as well as developing flight routes) and the low marginal costs (adding one more passenger hardly incurs any additional expense) necessitate a pricing approach based on "product differentiation" (different cabin classes offering varying cancellation and refund benefits). This strategy allows airlines to accurately match passengers' needs and cover their costs, while also providing passengers with clear choices, which is crucial for the industry to overcome long-term losses.
Detailed Analysis
1. The Unique Cost Structure of the Aviation Industry: Why Differential Pricing?
The cost structure of the aviation industry is unique:
- High fixed costs: Buying an aircraft can cost hundreds of millions, and maintenance and route approval require significant investments.
- Low marginal costs: Once a flight is scheduled, carrying one more passenger hardly incurs additional costs (at most, the need for an extra meal and slightly more fuel).
In this context, it is rational for airlines to treat passengers differently:
- Those who value flexibility in cancellations and refunds (e.g., business travelers with changing schedules) should pay for more expensive, refundable tickets.
- Those who are only concerned about price and have fixed travel plans should buy cheaper, non-refundable tickets.
Cancellation and refund fees are not penalties but tools for airlines to cover their fixed costs. By offering different levels of flexibility and charging accordingly, airlines can generate sufficient revenue to remain operational.
2. Policy Comparison between China and the United States: Time-Based Pricing vs. Product-Based Pricing
- Chinese Model (implemented after 2018): Fees are based on the distance from the flight departure time, with earlier cancellations being cheaper. The intention was to address the issue of high cancellation fees relative to ticket prices. However, this uniform rule has limited product differentiation, as the premium for full-price tickets has been eliminated, and low-price tickets cannot be priced even lower (out of fear of higher refund costs).
- American Model (now prevalent, especially after the pandemic): Basic economy class tickets (cheaper) offer limited flexibility, while standard economy class and above tickets (more expensive) allow free cancellations and refunds. Passengers know their rights before purchasing, allowing for a better match between their needs and the flight options available. For example, Delta Air Lines' basic economy class offers lower prices in exchange for no refund or limited seat selection, attracting price-sensitive travelers while charging a premium from those who require more flexibility.
The American model is more precise. Although the Chinese model may seem fairer, it sacrifices industry efficiency and airline profitability.
3. The Hidden Costs of Time-Based Pricing
- For Airlines: Profit margins are compressed, leading to long-term losses, especially for the major airlines. For example, the flexible benefits associated with full-price tickets are restricted by time, discouraging business travelers from paying extra. Low-price tickets, while refundable, cannot be priced too low due to concerns about high refund costs, which reduces the competitiveness against budget airlines.
- For Passengers: Their needs are not accurately met. Business travelers who are willing to pay for flexibility are now restricted by time, and low-price passengers may not be able to find cheaper tickets because airlines need to cover cancellation costs.
Contrary Example: Spring Airlines has been profitable because it adopts a "low-price ticket + additional service fee" model (seating and baggage fees are charged separately), clearly distinguishing between different services and allowing passengers to choose according to their preferences. This aligns with the American approach of basic economy class pricing.
4. A Way Forward: Clearly Differentiating Products for Passengers
The article suggests promoting a "brand-based fare" model, where ticket prices include various benefits such as cancellation and refund rights, baggage allowances, and seat selection options in different packages:
- Basic Economy Package: Low price, no free cancellations or baggage.
- Economy Comfort Package: Slightly more expensive, includes free cancellations and one piece of baggage.
- Business Package: More expensive, allows for flexible cancellations and priority seat selection, as well as access to VIP lounges.
By making these options transparent before booking, passengers can make informed decisions. This not only protects consumers' rights but also enables airlines to charge appropriately to cover their costs, leading to a win-win situation.
Conclusion: For China's civil aviation industry to overcome losses, it must return to economic logic: acknowledge the high fixed costs, allow for product differentiation, and implement transparent pricing that allows the market and consumers to make informed choices. While China Eastern Airlines' 14-day free cancellation policy is a step forward, a true transformation requires shifting from a time-based pricing system to one based on product features.