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Elasticity of demand IN AIRLINES
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Economic Profile of the Airline Industry Airlines use a formula of combining their yield and inventory costs to determine ticket prices. While it is imperative to focus on the idea of being profitable, the focus is to maximize the cost of the flight revenue. One huge factor that encourages an increase in the cost of tickets relates to a customer ordering a ticket close to the departing date, define this as a risk factor because they need to make up for all unsold seats. A high percentage of the revenue is dedicated to overhead costs such as fuel and labor. When a ticket price is higher with one airline than the other, the customer interprets this as being an excessive cost. The demand is greatly affected by the external market conditions that are in existences such as taxes; by law it is legal to add taxes to airline tickets since they are considered a luxury good (Button, 2005). The price elasticity of demand in the airlines industry depends on the number competitors that are in that route. For example in a very busy route like New York to LA the price elasticity of demand for the airlines is high, the passengers can switch over from one airline to another (Econ FAQs, 2007). They can substitute the lower cost airlines for the higher cost and so the price elasticity is high. On the other hand non-competitive routes have an inelastic demand. The article quoted below gives the example of the route between Charleston, WV and Atlanta that has a fare of $1,000 (Jerram, 1998). In general it is difficult to substitute air travel. The other modes of transport like roadways and railways take a relatively longer time to travel. So if a person has to travel he has to use airlines. However, if the there are a ... ... middle of paper ... ...con FAQs. (2007). Air Transport Association, Retrieved January 15, 2008, from http://www.airlines.org/economics/specialtopics/Econ+FAQs.htm FRBSF. (2002). Economic Letter. Retrieved January 21, 2008, from FRBSF: http://www.frbsf.org/publications/economics/letter/2002/el2002-01.pdf Jerram, R. (1998). The Airline Industry. Retrieved February 5, 2008, from London School of Economics and Political Science: http://www.mega.nu/ampp/PEGB/chap11.htm Riley, G. (2006), Externalities - Government Policy Options, Retrieved on February 12, 2008 from: http://tutor2u.net/economics/revision-notes/a2-micro-externalities-policy-options.html Recent Policy Initiatives to Raise Low Pay. (2004). Retrieved February 10, 2008, from ACORN.ORG: https://www.acorn.org/index.php?id=203 Zabin, C. (1999). Living Wages at the Port of Oakland. Retrieved February 14, 2008 from http://ww
of price versus service in the airline industry as a whole, as well as, the
As the nature of air travel is largely logistical, it is hard to talk about the industry without addressing geography. Airlines don't just have to market to customers in terms of geographics, the airline industry is geographic; getting a customer from where they are to where they want to be.
In 1978, deregulation removed government control over fares and domestic routes. A slew of new entrants entered the market, but within 10 years, all but one airline (America West), had failed and ceased to exist. With long-term growth estimates of 4 percent for air travel, it's attractive for new firms to service the demand. It was as simple as having enough capital to lease a plane and passengers willing to pay for a seat on the plane. In recent news, the story about an 18-yr British...
"Problems" in the airline industry have not risen due to too much competition within the industry. To the contrary, Washington regulators should turn the industry loose in any more ways that it can. Lowering restrictions to enter the market place, emphasizing private ownership of aviation matters, and encouraging open and free competition within the scope of anti-trust law should be the goals of the Clinton Administration. Instead of heading towards re-regulation, Washington should get out of the airline business for good.
According to the International Air Transport Association, 2001 was only the second year in the history of civil aviation in which international traffic declined. Overall, it is believed that the IATA membership of airlines collectively lost more than US$12 billion during this time (Dixon, 2002).
In lights of the PESTLE model, the political factors bring both opportunities and threats to Jetstar’s new proposal. Since this proposal focus on the Australia-India low price airline market, the analysis conducts involving Australia and India political environments. There are two potential opportunities in this political environment. Firstly, the Australian government has the incentive to boost the development of tourism between the two countries (Tourism Australia 2012). With the support of government, the start of the new route could be easier. For example, American government erects legislation to increase competition of the airport ‘by forcing these airports to increase the availability of scarce facilities’ (Williams 2015). Such legislations and regulations as well as financing investment or subsidies from government could directly help the airline company cut the cost. Similarly, Australian government could also have powerful intervention to influence aviation market. Thus, it is a big opportunity for Jetstar to the new route expansion if it acquires the
In order to measure the impact of United's price increase, we would need the price elasticity of the demand. The main problem is that there is no agreement as to whether, generally speaking, air transportation is or is not relatively price elastic. There is ample evidence that the introduction of deeply discounted fares by the low cost carriers can be very price elastic, although, each type of traveler has its own price characteristics.
The Five forces in the airline industry can be easily broken down, firstly the threat of new entrants. Over the last 10 years there has been a huge influx of new low cost companies in Europe such as “Easyjet”, or “Ryan Air” as the low cost niche slowly becomes more full we are seeing less and less entrants since the market has become saturated. The better an airlines brand image, such as British Airways being a recognised name and the use of frequent flier or airmiles schemes the less likely a new entrant with lower prices will be able to break into the market. Next we have Supplier and buyer power in the industry. In terms of the suppliers of aircraft the main two are Airbus and Boeing and so it may seem that this few suppliers would have a lot of power over the airlines, but intact it tends to just increase the competition between the suppliers as they fight for major contracts with the big airlines. The bargaining power of customers in the
by Donald M. Fisk Bureau of Labor Statistics This article was originally printed in the Fall 2001 issue of Compensation and Working Conditions.
333-355. Hocking and Waud 1992, Oligopoly and Market Concentration' in Microeconomics 2nd Edition, Harper Educational Publishers, NSW, pp. 315-342. Kathleen Hanser, The Secret Behind High Profits at Low-fare Airlines'. a href="http://www.boeing.com/commercial/news/feature/profit.html">http://www.boeing.com/commercial/news/feature/profit.html/a> [accessed 15 May 2003]
Airline and travel industry profitability has been strapped by a series of events starting with a recession in business travel after the dotcom bust, followed by 9/11, the SARS epidemic, the Iraq wars, rising aviation turbine fuel prices, and the challenge from low-cost carriers. (Narayan Pandit, 2005) The fallout from rising fuel prices has been so extreme that any efficiency gains that airlines attempted to make could not make up for structural problems where labor costs remained high and low cost competition had continued to drive down yields or average fares at leading hub airports. In the last decade, US airlines alone had a yearly average of net losses of $9.1 billion (Coombs, 2011).
Tom, Y. (2009). The perennial crisis of the airline industry: Deregulation and innovation. (Order No. 3351230, The Claremont Graduate University). ProQuest Dissertations and Theses, , 662-n/a. Retrieved from http://search.proquest.com/docview/304861508?accountid=8364. (304861508).
Shuk-Ching Poon, T. and Waring, P. 2010. The lowest of low-cost carriers: the case of AirAsia. The International Journal of Human Resource Management, 21 (2), pp. 197--213.
When an airline does not have a sustainable competitive advantage, it does not have any properties of differences from there competitor and turns to a dangerous price war. The sustainable ...
The airline industry is very susceptible to changes in the political environment as it has a great bearing on the travel habits of its customers. An unstable political environment causes uncertainty in the minds of the air travellers, regarding travelling to a particular country.