The Impact of Loss Aversion and Diminishing Sensitivity on Airline Revenue: Price Sensitivity in Cabin Classes

Abstract

While most businesses actively adopt a data-driven approach for revenue management decisions, understanding how air travelers perceive and behave differently to pricing strategies is essential for yielding optimal financial outcomes. This study analyzes the loss aversion and diminishing sensitivity mechanisms of prospect theory in economy and business cabin classes. With rich longitudinal airfares, regression models and revenue data (15,868 observations from the top-10 aviation routes in the world) from 2014 to 2019, this study finds that lower-(higher-)than-expected airfares have a positive (negative) impact on revenue. When the effect of loss-coded and gain-coded tickets were compared, the extent to which passengers avoided losses (vs. welcomed gains) had a greater impact on revenue, supporting that loss aversion applies to the airline revenue, especially for business passengers. This study contributes to the further refinement of prospect theory by showing that the loss aversion and diminishing sensitivity mechanisms manifest differently in each cabin class.