Airline pricing & demand
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Price is the most important factor influencing demand for airline seats and cargo space since deregulation. Economists have emphasized the role of price in determining demand levels. Pricing in the airline industry is complex due to the industry's transition from regulation to deregulation. Demand is defined as the quantity consumers are willing and able to purchase at various prices over time. There is an inverse relationship between price and quantity demanded known as the law of demand. While price is key, non-price factors like passenger preferences, the number of passengers in a market, passenger income levels, competitor prices, and expected future prices also influence airline demand.
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1 The Commercial Airline Industry October 17t.docx
1
The Commercial Airline Industry
October 17th, 2014
Ben Cohen
Z23106977
Global Strategy and Policy
Man 4720
Professor Harry Schwartz
Finance Major
2
In this paper, a Porter’s analysis will be conducted on the commercial airline
industry. The Porter analysis is a means of measuring the intensity of the competitive
forces associated with an industry. The competitive forces consist of threat of new
entrants, rivalry among existing firms, threat of substitute products or services,
bargaining power of buyers, bargaining power of suppliers, and relative power of other
stakeholders. Each of these 6 competitive forces will be analyzed and rated high, medium
or low in strength based on their intensity.
Threat of New Entrants: Low
Companies that are considering or attempting to enter the airline industry will
have extreme difficulty, as a result of the many entry barriers they will encounter. These
entry barriers are why the threat of new entrants in the commercial airline industry is
considered low. Airline companies operating in today’s industry have a large inventory of
aircrafts and offer many flight availabilities. They are able to use economies of scale to
effectively provide flexibility to travelers. The existing airline companies will capitalize
on their economies of scale as a competitive advantage and entice travelers with their
low-cost fares for the same service. This is why in the airline industry many companies
seek to gain strategic alliances with other companies. Forming strategic alliances allows
companies to add new routes and increase sales revenue, without substantially increasing
their capital investment. An example of this is the joint venture agreement between Delta
Air lines and Virgin Atlantic Airways Ltd. This agreement allowed them to form a “fully
integrated joint venture that will operate on a “metal neutral” basis with both airlines
sharing the costs and revenues, from all joint venture flights” (Delta Air Lines, 2012).
This agreement will allow these two airlines to provide a seamless network between
North America and the U.K. for their customers. These alliances have changed the
dynamic of the industry.
Another barrier to entry into this industry is the extremely high capital
requirements. It takes a large amount of initial capital to buy inventory of large
commercial aircrafts. However, it is not just the initial capital that is crucial; it is also the
steady capital needed to maintain these aircrafts. “Domestic carriers spent $11.6 billion
3
last year on capital improvements. Over the past five years U.S. airlines have retired
nearly 1,300 planes” (Mayerowitz, 2014). This is substantial evidence of the financial
intensity associated with entry into this industry.
Another barrier to entry is government policy. Government policy in the past
played a much larger role, how ...
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NOTE This Industry overview is only a starting point for your an.docx
NOTE: This Industry overview is only a starting point for your analysis. Environment and industry issues can change rapidly and some of the information here may therefore be out-of-date.
You MUST supplement this information with additional research.
The Airline Industry
4940- Summer, 2014
Few inventions have changed how people live and experience the world as much as the invention of the airplane. During both World Wars, government subsidies and demands for new airplanes vastly improved techniques for their design and construction. Following World War II, the first commercial airplane routes were set up in Europe. Over time, air travel has become so commonplace that it would be hard to imagine life without it. The airline industry certainly has progressed. It has also altered the way in which people live and conduct business by shortening travel time and altering our concept of distance, making it possible for us to visit and conduct business in places once considered remote.
The airline industry exists in an intensely competitive market. In recent years, there has been an industry-wide shakedown, which will have far-reaching effects on the industry's trend towards expanding domestic and international services. In the past, the airline industry was at least partly government owned. This is still true in many countries, but in the U.S., all major airlines have come to be privately held. The U.S. airline industry has been in a chaotic state for a number of years. According to the Air Transport Association, the airline industry’s trade association, the loss from 1990 through 1994 was about $13 billion, while from 1995 through 2000, the airlines earned about $23 billion and then lost about $35 billion from 2001 through 2005. Against this backdrop of poor financial performance, dramatic changes in industry structure have occurred. Growth in air passenger traffic has outstripped growth in the overall economy and the U.S. airline industry remains in the midst of an historic restructuring. Over the last five years, U.S. network airlines have reduced their annualized mainline costs excluding fuel by more than 25%, or nearly $20 billion.
While some of the cost savings realized in the industry were the product of identifying greater operational efficiencies, most of the savings were generated by renegotiation of existing contractual arrangements with creditors, aircraft lessors, suppliers and airline employees and achieved either through the bankruptcy process itself or under threat of bankruptcy. A portion of industry capacity still operates in bankruptcy. But, it is down from a high of 46 percent in 2005. As a result, several carriers that were near liquidation now have lower cost structures that should allow them to show improved performance.
Economic profile of the Air line industry: The airline industry has always exhibited cyclicality because travelers' demand is sensitive to the performance of the macro economy yet airl.
Civil Aviation Industry In India
Civil Aviation industry in India is growing at an accelerating rate and the country is getting the benefits of its improved connectivity. India has become the world’s third largest domestic aviation market in term of the number of tickets sold. The Civil Aviation Industry has come in new era of expansion, driven by factor such as low cost carriers, modern airports, Foreign Direct Investment in domestic airlines, and growing emphasis on regional connectivity.
The Ministry of Civil Aviation is responsible for the administration of the aviation industry in India. It plays a significant role in formulation of national policies and programmes for development and regulation of aviation industry. The following are the principal regulatory authorities functioning under the authority of the Ministry of Civil Aviation:-
• Directorate General of Civil Aviation
• Airport Authority of India
• Airport Economic Regulatory Authority
4
This document discusses airlines' pricing strategies and origin-destination (O-D) markets. It begins with an introduction to the growth of the airline industry and importance of pricing. It then reviews various theoretical pricing strategies used by airlines, including demand-based pricing, cost-based pricing, and service-based pricing. It also discusses the specific pricing strategies used by full-service carriers (FSCs) and low-cost carriers (LCCs). FSCs offer multiple fare classes and use techniques like dynamic pricing and restrictions to discriminate between passenger types. LCCs primarily offer single fares that increase closer to departure and focus on removing ancillary services to keep base fares low. The document aims to evaluate how air
Airlines 2020 substitution and commoditization
Two developments the global airline industry can no longer afford to ignore.
The 2000s were a rough decade for airlines. Battered by unprecedented global turmoil, airlines that survived learned powerful lessons about cost containment, efficiency and the importance of financial strength. Airlines that thrive in the next decade, however, will have to do more to stay ahead of the competition. In particular, they will need to think strategically about two issues that have received little attention of late: substitution and commoditization. The IBM Institute for Business Value Airline 2020 Study focuses on these two key challenges and provides a roadmap for how they will likely play out in the next ten years, as well as recommendations for action.
150115 What is AirMarkets
AirMarkets is a computational microsimulation platform that models global air transportation demand and supply. It reproduces the decision-making behavior of individual air passengers to forecast demand, load factors, and revenue for any flight or set of flights. AirMarkets accounts for consumer behaviors, preferences, and the availability of air transportation options to estimate how many passengers will travel between any city pair and how much they will pay. It is an agent-based model that represents individual passengers, available flight networks, and business models to enable "what if" analysis of new aircraft, services, and strategies.
Title of assignment student nameclass name and
This document appears to be a student paper about the aerospace industry. It discusses the goods and services provided by major airlines, including passenger transportation and additional services. It also examines economic concepts related to the industry like supply and demand. A key trend discussed is the overall decline in business travel seen over the past decade as technology has provided alternatives to travel.
Eco ppt
The document provides an introduction to airline industry economics. It discusses how air travel has grown globally and facilitated other industries. It describes the airline industry structure as an oligopoly with few dominant firms and high barriers to entry. It outlines the oligopolistic characteristics airlines exhibit and discusses factors like market share, mergers, mutual dependence, and non-price competition. The document also covers the airlines' economic characteristics such as high costs of labor, fuel, and technology changes. It analyzes how airlines are sensitive to economic fluctuations.
The Future of Airline Retail - Fast Future Report 19 07 11
This document summarizes key discussions from an airline retail conference. Six main challenges were identified: 1) continued economic uncertainty, 2) deepening customer insight, 3) driving innovation to increase customer relationships and revenue, 4) leveraging new technologies, 5) rethinking traditional offerings, and 6) evaluating revenue sharing between airlines, airports, and suppliers. New technologies like Wi-Fi, seatback displays, tablets, and smartphones were discussed as ways to engage customers, sell virtual products, and drive additional revenue. Traditional aspects like brochures, retail carts, and food were also discussed in terms of innovation.
Competition in the US Airline Industry FINAL
The document analyzes competition in the US airline industry using Porter's Five Forces model. It determines that the industry is an oligopoly, with four major carriers (Delta, Southwest, United, American) dominating the market. Airlines compete on pricing, using dynamic pricing strategies like yield management to adjust prices based on demand, time of booking, and other factors. This allows airlines to practice forms of price discrimination. While competition is present, barriers to entry are high for new airlines due to industry regulations, scale requirements, and brand dominance of the major carriers.
Ppf
The production possibility frontier (PPF) shows the maximum combinations of goods an economy can produce with limited resources. It is typically drawn as a curved line representing diminishing returns. Points inside the PPF indicate inefficient resource allocation, while points outside require new technologies or resources. Shifts in the PPF occur due to changes in productivity, resources, or technology. The opportunity cost of producing more of one good is giving up production of the other good.
American airlines - Value Pricing 1992
American Airlines was facing declining profits in the early 1990s despite being the largest carrier in the US. Their costs per seat mile were rising while net income was falling. To address this, in 1992 American introduced a "Value Pricing" strategy that offered lower fares for tickets purchased further in advance, with penalties for changes. This targeted business travelers who accounted for 60% of revenue and were less price sensitive. While short-term losses were expected from advertising, analysis showed the approach would improve profits long-term by better utilizing existing capacity and increasing market share. The strategy also risked losing some leisure travelers, so expanding discount periods was recommended to retain them.
As we all know, cost is often only one of the factors we consider wh.pdf
As we all know, cost is often only one of the factors we consider when making a major purchase.
For example, service can also be an important factor in buying decisions. Briefly describe at least
three transportation-related service characteristics that are important to shippers and consumers
in a supply chain.
Solution
Ans:1)Transport Costs and Rates:
Transport systems face requirements to increase their capacity as well as speed and reduce the
cost off transportation.All tthe users whether it is individual,enterprise,government try to bargain
with the negotiate or bargain with the transfer of goods,information,people from one place to the
other.There are also costs involved in gathering information, negotiating, and enforcing contracts
and transactions, which are often referred as the cost of doing business. Trade involves
transactions costs that all agents attempt to reduce since transaction costs account for a growing
share of the resources consumed by the economy.The costs include fixed and variable
(operating) costs, depending on a variety of conditions related to geography, infrastructure,
administrative barriers, energy, and on how passengers and freight are carried. Three major
components, related to transactions, shipments and the friction of distance, impact on transport
costs.
Rates are the price paid by the consumer for the usage of transporation
services.They are the negotiated monetary cost of moving a passenger or a unit of freight
between a specific origin and destination. Rates are often visible to the consumers since transport
providers must provide this information to secure transactions. They may not necessarily express
the real transport costs.
2)Time
Time is the major factor which the people considered for the characteristics that are important to
shippers and consumers in a supply chain.
3)Capital costs:
Costs applying to the physical assets of transportation mainly infrastructures, terminals and
vehicles. They include the purchase or major enhancement of fixed assets, which can often be a
one-time event. Since physical assets tend to depreciate over time, capital investments are
required on a regular basis for maintenance..
Term Paper RequirementsThe paper must be written in accordance wit.docx
Term Paper Requirements
The paper must be written in accordance with APA standards using the current edition. The required length is 4-5 pages excluding the cover page, charts, tables, graphs, diagrams, photographs, the reference page, or the appendix. The format will be double-spaced, 1-inch margins, Times New Roman, and 12pt font.
Term Paper Topics
Topics for the term paper are required be directly related to aviation or aerospace legislation. You must have selected a topic from one of the Statutes or Cases
listed here.
The instructor may approve a topic from the Rhoades text which must be directly related to aviation or aerospace legislation.
The instructor may also approve an alternative topic suitable for your location in a jurisdiction outside the United States but only if it is directly concerned with aviation or aerospace legislation.
Plagiarism
Papers submitted to
Turnitin
may be compared against billions of Internet documents, archived Internet data that is no longer available on the live web, a local repository of previously submitted papers, and subscription repository of periodicals, journals, and publications. The comparison may be against any or all of these repositories as set on a specific assignment by the instructor of the class.
Paper half written as follows. No plaigarism. Need an advantage or disadvange two more pages in microsoft word double spaced.
Abstract
In the years leading up to 1978 there were five major airlines that dominated the market as well as the skies. These major airlines were regulated under the Civil Aeronautics Board (CAB), by 1978 there was a demand for lower airfares. There were several factors and courses of actions for the US Government to consider. Two of these courses of action will be presented here as well as advantages and disadvantages of each. In conclusion, the purpose of the Airline Deregulation Act of 1978 is presented.
Keywords:
CAB, aviation, revenue, deregulation
4.7- Case Analysis: Airline Deregulation Act of 1978
I.
Summary
The airlines of the United States had long been regulated by the government, the same year the CAA was established so to was the Civil Aeronautics Board or CAB. Where the CAA was tasked with regulation of safety, standardization, testing and upgrades to the national airspace, the CAB was tasked with forming dedicated routes for specific airlines as well as setting the price to fly those routes. “By the 1970s high inflation, low national economic growth, escalating fuel costs, and rising labor costs hit the airline industry hard.” (Gale Encyclopedia, 2000)
II. Problem
The government had regulated the major airlines for years, fixed routes, fixed prices. There were several low-cost carriers in operation, but due to the route regulations many could not operate the same city to city destinations as the larger airlines did. The rising costs of almost everything in the 1970’s led to a public outcry that changes be made, the public wanted .
Porter’s five forces
Porter's Five Forces analysis is used to analyze the airline industry. The key forces are:
1) Bargaining power of buyers is low as there are many buyers and low switching costs between airlines.
2) Bargaining power of suppliers is low since there are few airplane manufacturers and airlines cannot easily switch suppliers.
3) Threat of new entry is low given the large capital required and brand recognition of existing airlines.
4) Threat of substitutes is medium as other transportation is slower but cheaper for some routes.
5) Rivalry among existing players is high due to similar offerings and inability to leave the industry easily.
BA-Thesis_Klein_317146_PDF
This thesis examines intertemporal price dispersion for Ryanair and Lufthansa flights over 15 weeks on 30 routes. The author reviews literature on price dispersion in the airline industry and finds competition generally increases dispersion. The data consists of prices for matching Ryanair and Lufthansa flights over the same routes and dates. The author develops a model to test if price dispersion, measured as standard deviation of prices, differs between the airlines. It is hypothesized dispersion will not differ, as costs of varying prices over time are small. Regression analysis is used to examine the factors impacting dispersion and compare the airlines.
Easyjet Presentation
EasyJet aims to provide low fares and frequent flights between major European airports. It targets both business and leisure travelers. Its marketing mix focuses on keeping costs low to offer the lowest fares possible through features like punctual no-frills flights and an orange brand. EasyJet's website is its main distribution channel and advertisements can be seen all over Europe. Factors like heightened environmentalism, terrorism, and energy crises have increased airline costs, affecting pricing decisions. The competitive airline market and price-elastic demand influence EasyJet's decisions to position itself as a low-cost carrier pursuing good value pricing.
Price Elasticity of Demand
Price Elasticity of Demand measures how responsive demand is to changes in price. It is calculated by taking the percentage change in quantity demanded divided by the percentage change in price. Perfectly inelastic demand does not change with price changes. Inelastic demand changes less than proportionately to price changes. Unit elastic demand changes proportionately. Elastic demand changes more than proportionately. Factors like substitutes, necessity, income share, and time period impact price elasticity. Producers use elasticity estimates to predict revenue and tax impacts and for price discrimination.
Transportation and travel management
The document provides an overview of the history and development of Bangladesh Railway. It discusses how railway operations began in Bangladesh in 1862 under British rule. In 1947, the railway system fell under East Pakistan after the partition of India, and then became known as Pakistan Eastern Railway in 1961 when control was transferred to the government of East Pakistan. The total length of Bangladesh's railway network is discussed as well as its current mission to develop and maintain railway infrastructure and operations throughout the country.
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The Future of Airline Retail - Fast Future Report 19 07 11
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Airline pricing & demand
- 3. Of all the marketing variables that influence the potential sales of airline seats and cargo capacity, price has received the most attention since deregulation. Economists have emphasized the price variable in describing the level of demand. Pricing remains a very complex issue in many industries. In the case of air transportation, it is even more complex because of the transition in recent years from a highly regulated industry to a deregulated environment.
- 5. Demand is defined as the various amounts of a product or service that consumers are willing and able to purchase at various prices over a particular time period. A demand schedule is simply a representation of a series of possibilities that can be set down in tabular form. There is an inverse relationship between price and quantity demanded. Economists have labeled this inverse relationship the law of demand.
- 6. Air Carrier’s Demand for Air Transportation per Month Between Two Cities (hypothetical data) Ref John Wensveen – Air Transportation
- 8. Assumption --- Price is the key variable and all others factors are insignificant – however, non-price determinants exist. The major non-price determinants of demand in the air travel market are: (1) the preferences of passengers, (2) the number of passengers in a particular market, (3) the financial status and income levels of the passengers, (4) the prices of competitors and related travel expenses, and (5) passenger expectations with respect to future prices.
- 10. 1. Preferences of passengers. A change in passenger preferences favorable to an airline - possibly prompted by advertising will mean that more tickets will be demanded at each price over a particular time period, shifting the curve to the right. 2. Number of passengers. An increase in the number of passengers in a market brought about perhaps by improvements in connecting flights or by population growth 3. Financial status and income levels of passengers. This nonprice determinant relates to the state of the economy and the level of such things as personal income, disposable income, and profits (in the case of businesses). Air transportation is very sensitive to fluctuations in the economy 4. Prices of competitors and related travel expenses. An increase in a competitor’s price, all other things being equal, will normally prompt some passengers to switch to your airline. 5. Passengers’ expectations with respect to future prices. Passengers’ expectations of higher future prices may prompt them to buy now in order to beat the anticipated price rises.
- 11. Elasticity of Demand Coefficient of Elasticity Determinants of Elasticity Types of Passenger Fares Pricing Process Intro to Airline Costs Output Determination