Understanding the Economics of Air Travel: Airline Tickets Elasticity Analysis
Air travel has become an important part of our lives, both for personal and business reasons. As airfare is the main cost associated with air travel, airlines and passengers are affected by the fluctuation of air ticket prices. To understand how these fluctuations impact the airline industry and consumers alike, we need to analyze the concept of elasticity.
What is Elasticity?
In economics, “elasticity” is defined as the degree to which the quantity demanded or supplied of a good or service responds to a price change. In simple words, we can say that something is elastic if a small change in price causes a significant change in demand, and it is inelastic if a small change in price causes little or no change in demand.
What makes Airline Tickets Elastic or Inelastic?
The elasticity of airline tickets depends on several factors, such as the availability of substitute modes of transportation, level of competition in the market, and the income level of consumers. Inelastic demand for air travel is observed when there are no close substitutes for air travel, such as intercontinental travel, and passengers are willing to pay for the high ticket prices.
On the other hand, elastic demand for air travel exists when there are close substitutes like bus, train, or car available, which have lower costs than air travel. In such situations, customers are more likely to choose the cheaper alternatives if the price of air travel increases.
What factors affect demand for Air Travel?
Several factors can impact the demand for air travel. One of the significant factors is the price of the airline ticket. Any increase in airfare can lead to a decline in demand for air travel. Other factors that can influence demand for air travel are the availability of time, reliability of service, comfort level, and accessibility to destinations.
How do Airlines Manage Airfare Elasticity?
Airlines make use of revenue management techniques to manage ticket prices and maximize profits. Revenue management is the process of analyzing sales data to calculate the elasticity of demand and adjust prices accordingly. It involves offering discounts to increase demand during low demand periods and raising prices when demand is high to maximize profits.
Airlines also use competitive pricing strategies to compete with each other and attract customers. They offer promotional fares, loyalty programs, and discounts for advance booking to entice consumers to choose their airline. These strategies can improve the demand for airline travel and manage airfare elasticity.
Conclusion
Understanding the elasticity of airline tickets is vital to comprehend the impact of fluctuating ticket prices on airline revenue and consumer behavior. The elasticity of air travel is influenced by several factors, including the availability of substitutes, competition in the market, and income levels. Airlines use revenue management and pricing strategies to manage ticket prices, compete with each other, and maximize their profits. By analyzing the concepts of elasticity, airlines can make informed decisions and improve their performance in the highly competitive air travel industry.
