Air Pricing Demand and Output Determination
A review of chapter 12 of the book indicates how the current air prices have been determined over time. The chapter augments various factors that affect air prices and formulates a relationship between the factors and the prices. In this chapter, airline management uses prices to increase their current air traffic. In addition, the prices are used to counter competition in the industry and generate enough revenue to offset any operating expenses.
Chapter 12 first discusses the trend in air prices over the last century. It differentiates the changes in two segments, that is, the pre-jet era and the jet era (Wensveen, 2018). Over two years, air prices decline only twice during this period. The first instance was during the great recession that saw prices plummet. The second instance was due to the September 11 attacks that heightened the fear that people had in using airplanes. The industry suffered significant losses during these two periods. It is, however, prudent to note that the major cause of an increase in air prices is the rising cost of fuel.
Before the prices of the air industry were regulated, the government played a major role in determining the air prices so as to ensure that the air carriers realized a profit while cushioning the clients from being overcharged. This, however, is no longer the case as the market has now been deregulated and the forces of demand now determine the air prices (Wensveen, 2018). In this context, the author specifies that the demand and price have an inverse relationship. That is, as the air carriers reduce fares for passengers, the demand to use air travel increase. This can be depicted using Graph 1.
Graph 1:Air travel based on fares set by carriers
Price is not the only factor that affectsthe demand for air travel. The passengers’ preferences also affect the demand for air travel. If passengers prefer a particular airline due to increased advertising, then the demand for that airline automatically increases. Other factors include the number of passengers, financial status and income level of passengers, prices of competitors and related travel expenses, and passengers’ expectation with respect to future prices (Wensveen, 2018).
Chapter 12 of the book highlights that a change in price might have the desired effect on the demand due to the elasticity of the demand. If the demand of air travel is elastic, then a change in price will have a significant effect on the quantity demand. The reverse is also true. The various factors that determine elasticity include; competition, distance, business versus pleasure, and time (Wensveen, 2018).
In a low-cost pricing strategy, airlines strip all the costs associated with providing additional services to the clients. Airlines do this by foregoing the provision of added services like catering and preferred seat allocation. Low-cost pricing trades comfort for a lower price. The lower price is aimed at increasing demand for air services. However, a research conducted on three companies indicated that introducing the low-cost carriers had different results. One company concluded that low-cost pricing increased its revenues since it attracted new people to use air travel and thus increased its demand. The other two interjected and revealed that the strategy only diverted the individuals who would have otherwise traveled regardless of the price to use the low-cost carriers. This reduced the revenue generated by the airlines and resulted in losses.
Wensveen, J. (2018). Air Transportation: A Management Perspective. Milton: Taylor and Francis.