This document discusses airline traffic and demand modeling. It begins by explaining that traffic volume multiplied by yield must exceed operating costs for an airline to be profitable. It then covers modeling airline demand through demand functions and curves. Key points include how demand curves show the relationship between price and quantity demanded and how various factors can cause demand curves to shift. The document also discusses supply curves and how they relate to costs and profits for airlines. It explains the concept of market equilibrium between supply and demand. Finally, it covers elasticities of demand and supply as well as drivers of airline traffic demand like price, income, and service attributes.

1. Strategic Airline Management 2:
Traffic
Dr Narudh Cheramakara
2/2017
Bangkok University

2. TRAFFIC: 1st Element of Operating
Performance
TRAFFIC x YIELD> < OUTPUT x UNIT COST
= OPERATING PERFORMANCE (PROFIT or LOSS)

3. 1. The Modelling of Demand
1.1 Demand Function (Simplest form)

4. 2.1 Demand Curve
• An individual’s demand curve for a commodity shows how much that
individual would like to consume of that commodity at each
possible price. It is therefore a graph which shows the relationship
between the price of a good and the quantity demanded (in a given
period of time).
• For example, looking at the demand for hotel rooms, at a price of
3000 baht per night
• There would be a demand of 100 rooms.
• At a price of 2000THB there would be a demand of 150 rooms
• At a price of 4000THB there would be a demand of 50 rooms

5. 1. The Modelling of Demand
1.1 Demand Function (Simplest form)

6. 1. The Modelling of Demand
1.2 Demand Schedule/Demand curve

7. 2.1 Demand Curve
• There are two effects of a price change. For example, if the price rises:
• The Income Effect – the rise in prices means people feel poorer –
their purchasing power has fallen. They buy less because of this fall in
purchasing power.
• The Substitution Effect – the rise in price of a commodity makes it
relatively more expensive compared to other commodities, and so
consumers switch from the first commodity to one which is now
relatively cheaper.
• What factors might affect demand? Demand will increase

8. 2.1 Demand Curve
• What factors might affect demand? Demand will increase
• Income goes up (unless the good is an inferior good, in which case
demand will fall)
• Expectations of future price changes go up
• The price of a complement good goes down
• The price of a substitute good goes up
• Tastes move in favour of this good.
• …and vice versa for a fall in demand.

9. 2.1 Demand Curve
• Since these factors will change demand at any given price, they lead
to a shift in the demand curve. If demand at each price increases, the
demand curve shifts to the right, and if demand at each price falls,
the demand curve shifts to the left.
• To differentiate between a movement along a demand curve and a
shift in the demand curve itself, we say that:
• A movement along the demand curve is a change in the quantity
demanded
• A shift in the demand curve itself is called a change in demand.

10. 1.1 Demand Schedule/Demand curve : Demand can shift!!
VISA
New Service
Diseases
Political Instability

11. 2.1 Demand Curve
• Since these factors will change demand at any given price, they lead
to a shift in the demand curve. If demand at each price increases, the
demand curve shifts to the right, and if demand at each price falls,
the demand curve shifts to the left.
• To differentiate between a movement along a demand curve and a
shift in the demand curve itself, we say that:
• A movement along the demand curve is a change in the quantity
demanded
• A shift in the demand curve itself is called a change in demand.

12. 2.1 Demand Curve
• Utility : measurement of "useful-ness" that a consumer obtains from
any good. Utility may measure how much one enjoys a movie, or the
sense of security one gets from buying a deadbolt. The utility of any
object or circumstance can be considered.
• Diminising Marginal Utility

13. 2.1 Demand Curve
• Inferior Goods
(LCCs High/Low time case)
How about the hospitality
Sector?

14. 2.2 Supply Curve
• The supply curve shows how much a firm is willing to supply at each
possible price. It is therefore a graph which shows the relationship
between the price of a good and the quantity supplied (in a given
period of time).
• Considering the case of rubber plants
• Myanmar Hotel Markets

15. 2.2 Supply Curve
• The supply curve slopes upwards. As the price goes up, more is supplied. Why?
• Costs of production – to increase production may involve increasingly higher
costs. For example, a firm may have to pay its workers overtime in order to
increase production, or a farmer may have to use less fertile land and therefore
spend more on fertilizer. A higher price is therefore needed to persuade
producers to supply the extra goods and justify the higher costs.
• Profits – if producers supply a range of products, as the price of one goes up, they
might switch production from another product to the one that is now more
profitable. For example, if a farmer can plant carrots or potatoes in his field, if the
price of potatoes goes up he might plant fewer carrots and more potatoes.
• Entry of new firms – as the price of a good goes up, more firms may start upand
supply that good (market supply curve effect).

16. 2.2 Supply Curve
• What factors might affect supply? Supply will increase if:
• Costs of production fall – this could be a fall in the price of inputs (for
example a fall in the wage rate) or technological improvement which
means the firm can produce more efficiently and require fewer inputs, or a
government subsidy.
• Price of alternative products falls – if the price of an alternative good that
the firm could produce falls, the supply of the original good will increase as
the firm switches production to this good which is now more profitable.
• Random events occur that have a good effect - .g. good weather for
agriculture.
• Future prices are expected to be high
• Government Policies

17. 2.2 Supply Curve
• Since these factors will change supply at any given price, they lead to
a shift in the supply curve. If supply at each price increases, the
supply curve shifts to the right, and if supply at each price falls, the
supply curve shifts to the left.
• To differentiate between a movement along a supply curve and a shift
in the supply curve itself, we say that:
• A movement along the supply curve is a change in the quantity
supplied
• A shift in the supply curve itself is called a change in supply

18. 2.2 Supply Curve
• Since these factors will change supply at any given price, they lead to
a shift in the supply curve. If supply at each price increases, the
supply curve shifts to the right, and if supply at each price falls, the
supply curve shifts to the left.
• To differentiate between a movement along a supply curve and a shift
in the supply curve itself, we say that:
• A movement along the supply curve is a change in the quantity
supplied
• A shift in the supply curve itself is called a change in supply

19. 2.3 Equilibrium
At the point of intersection between the
demand and supply curves, there is no
shortage and no surplus, and so no
tendency for anything to change. This
point of intersection is therefore the
equilibrium point, and reveals the
equilibrium, or market clearing,
price and quantity.

20. 2.3 Equilibrium
• If the price is below its equilibrium value, demand will be greater than
supply and there will be a shortage of that good. This will bid up the price,
which will in turn reduce quantity demanded and increase quantity
supplied, until quantity demanded equals quantity supplied again, and the
price is at its market-clearing level.
• If price is above its equilibrium value, supply will be greater than demand
and there will be a surplus of that good. Firms will undercut each other and
so the price will fall, which will increase quantity demanded and reduce
quantity supplied, until quantity demanded equals quantity supplied again,
and the price is at its market clearing level.
• Therefore free-markets automatically correct themselves and find their
equilibrium position.

21. 2.3 Equilibrium
Anything which increases demand at each
price will shift the demand curve to the
right. This will create a shortage and an
increase in the price. The end result is a
higher equilibrium price and quantity.
Anything which reduces demand and shifts
the demand curve to the left will lead to a
lower equilibrium price and quantity.
If supply increases at each price, so that the
supply curve shifts to the right, this will
create a surplus, and thus price will fall. At
the new equilibrium, price is lower and
quantity is higher.

22. 2.3 Equilibrium
Both the demand and the supply curve can
shift at the same time.
The position of the new equilibrium then
depends on the relative size of the shifts in
the two curves, and it may not be possible
to say whether price or quantity will
definitely be higher or lower in the new
equilibrium.
For example, if demand and supply both
increase, equilibrium quantity will definitely
be higher, but the equilibrium price could
be higher or lower depending on whether
the shift in the demand curve is greater
than or less than the shift in the supply
curve respectively.

23. 3.1 Elasticities
• Elasticities measure the responsiveness of a thing to changes in another
thing. We can calculate elasticities with respect to any two things we want.
The calculation of an elasticity is always the proportional change in the
variable being effected, divided by the proportional change in the variable
doing the effecting.
• What we in Economics are most interested in is elasticities of demand and
supply, for example, by how much quantity demanded changes when price
changes (price elasticity of demand), income changes (income elasticity of
demand) of the price of other goods change (cross price elasticity of
demand), or by how much supply changes when the price changes (price
elasticity of supply).

24. 3.2 Price Elasticities of Demand

25. 3.2 Price Elasticity of Demand
• Note that the elasticity is always calculated in terms of proportional (i.e.
percentage) changes, rather than absolute changes. This gets round the
problem of comparing changes in things measured in different units. Also,
it makes clear whether we aredealing with big or small changes, which is
not the case with absolute changes in prices or quantities (for example, is
a £1 change in price a big change? – it depends. Yes, if we are looking at
the price of a newspaper, no if we are looking at the price ofa house).
• Example:
• If a 40% rise in the price of hotel room squantity of hotel room demanded
to fall by 10%, the price elasticity of demand for hotel is -10/40 = -0.25.
• Note the price elasticity of demand will always be negative, since a rise in
pricereduces demand, and vice versa.

26. 3.2 Price Elasticity of Demand
Elastic demand – when the price elasticity of demand
is greater than 1 in absolute
value, i.e. more negative than -1, e.g. -2.
Inelastic demand - when the price elasticity of
demand is less than 1 in absolute
value, i.e. between 0 and -1, e.g. -0.5.
Unit elastic demand - when the price elasticity of
demand is exactly -1.
The more elastic is demand, the flatter will be the
demand curve at any point.
The more inelastic is demand, the steeper will be the
demand curve at any point.
Hotel guests? Business v Leisure?

27. 3.3 What govern price elasticity of demand?
• Number of substitute goods – the more substitutes, the more elastic
is demand.
• The proportion of income spent on the good – the greater the
proportion of income spent, the more elastic is demand.
• The time period under consideration – the shorter the time period,
the more inelastic is demand.
• Necessity
• Also – Who’s paying // Brand Loyalty

28. 3.3 What govern price elasticity of demand?
• Number of substitute goods – the more substitutes, the more elastic
is demand.
• The proportion of income spent on the good – the greater the
proportion of income spent, the more elastic is demand.
• The time period under consideration – the shorter the time period,
the more inelastic is demand.
• Necessity
• Also – Who’s paying // Brand Loyalty

29. 3.4 Price Elasticity and Firm’s Revenue
• Revenue = price x quantity.
• Therefore, if demand is elastic, revenue/expenditure falls following a
price rise, since quantity demanded falls proportionally more than
the price rises.
• If demand is inelastic, revenue/expenditure rises following a price
rise, since quantity demanded falls proportionally less than the price
rises.
• If demand is unit elastic, revenue/expenditure stays the same
following a price rise, since quantity demanded falls proportionally
the same amount as the price rises.

30. 3.5 Income Elasticity of Demand
Think about the case of a Japanese restaurant business

31. 3.7 Price Elasticity of Supply

32. 4. Demand and Traffic

33. 5. Traffic Defined
1. Total Enplanement (Total passenger)
- What are the problems with this measurement?
Alternatively, RPK/RASK
2. Revenue Passenger-Miles Kilometres (RPK) / RASK
- Distant weighted meatures generated by flying one revenue
passenger per mile
- i.e.

34. RASK

35. CASK

36. Real Life Example: DD

37. 6. Segmentation

38. 6. Segmentation for Airlines
1. Purpose of Journey:
Business
Leisure
VFR
Nok Air Case: 40 20 40%
+ Hajj charter flight

39. 6. Segmentation for Airlines Cont’d
2. Length of Journey
- Reasons why LCCs works with in 4 hours flying time
- Short haul, importance on airport and convenient on the ground
- Long Haul, importance in-flights service (IFE, seats)
- Still air fare will always an important factor
Considering
- 1. BKK-CNX TG 4700, FD 2000
- 2. BKK FRA EK 36000, UIA 32000

40. 6. Segmentation for Airlines Cont’d
3. Country/Culture of Origin of the Travellers
- Different Requirements: Dietary, Religious, Booking behavior,
Linguistics
- National Airlines: TG, Thainess, Culture, Linguistic
- Global Branding: Emirates, Etihad, Easyjet, Air Asia

41. • https://www.youtube.com/watch?v=0N3J6fE-0JI
Air France Safety Demo

42. International Airlines

43. International Airlines

44. 6. Segmentation for airlines cont’d
1) Business
- Frequency
- Flexibility
- Benefits (FFPs, Comfort)
- Company pays!!!!
- Thai Gov’t, MPs (Freebies, VIP treatments, Front row)
- Elasticity of demand:……………. Elastic or inelastic?

45. 6. Segmentation for airlines Cont’d
2) Leisure (+VFR)
- Price
- Self-paid
- Strong seasonal fluctuation
- Changing buying behaviours: Travel agents (commission
cuts) to direct sales -> Hugh effects on the travel industry
- Elastic or inelastic demand? Price sensitivity?
- Of the two, which group of passengers do airlines
preferred? Why?

46. 7.Drivers for air transport demand

47. 7. Drivers for air transport demand
1. Price (Remember the Elasticity of Demand)
2. Income – Disposible Income
- Emerging markets
- The rise of Middle Class
- Indonesian / Thailand Case
- How consumptions have changed in Thailand in the past 20 years?
3. Exchange Rate (Int’l Tourists – comparing different beach
destinations)

48. 7. Drivers for air transport demand
4. Service Attributes
- Schedule
- Trip time
- Inflight products/services

49. 8. Fluctuฟะรนืห

50. Service attribute: What are airlines’ products?
• Airline industry product’s is intangible unlike manufacturing industry
• Instantly perishable and can not be stored
• Intangible and multifaceted
-

51. 1. What are airlines’ products?
Route as product
- The rise and fall of TPE : and potential rise again
- Connectivity through hubs: DXB v traditional
kangaroo route
- Nok with the highest domestic destinations

52. 1. What are airlines’ products?
In-flight Products/Service
- Through touchpoints Booking-Baggage arrival
- What are touchpoints?

53. 1. What are airlines’ products?
Fare structure as product
Air France International Fare structure

55. 2. Product life cycle

56. 4. Product Life Cycle in the
Aviation Industry: Boeing

57. 4. Product Life Cycle in the
Aviation Industry: Airbus
- ETOPS
revolution
- Engine
Change

58. 4. Product Life Cycle in the
Aviation Industry: IFE
- Audio
- Feature film
- Personal Screen
- AVOD
- Larger screens
- Touch Screen
- USB/ Self-content
- WIFI
- What’s next?

59. 4. Product Life Cycle in the
Aviation Industry: Seats
- Lounge Chair
- Flat Bed
- Aisle Access

60. 7. Airline Product
7.1 Cabin and Class
- Declining Seat Pitch for Economy (min 28)
- Seat Abreast on 777, 330
- Premium Economy Class Development
- The Flatbed in Business Class and Decline of First Class

61. 777 Cabin: United v Philippine
Airlines

62. Economy

63. Premium Economy

64. Business Class:
Highly innovative

65. First Class: Increasingly matched by Business
class

66. 7. Airline Product
7.2 Network, Frequencies and Timing
A. Network:
- Hub or Direct? Pros and Cons (BA v Easyjet)
- Problem of Constraint (Slot, operating hours – noise banned at night
at LHR, traffic rights)

67. 7. Airline Product
7.2 Network, Frequencies and Timing

68. 7. Airline Product
- Business
travelers
require
frequency and
timing as they
need flexibility
- Travellers
wanted to
arrive early and
back late to
utilize the full
holiday leave

69. 7. Airline Product
7.3 Punctuality
- No one would wanted to fly on a often-delayed airlines
- Compensation mechanism

70. 7. Airline Product
7.3 Point of Sale service
- Agent – Declining
- OTA
- Booking Office - Declining
- Call Centre – Declining
- E-Commerce - Leading

71. 7. Airline Product
7.3 Reservation and Overbooking
- Shuttle Service (Go-show) on important airbridges
- Overbooking to earn more revenues (highly-
controversial)
- What are the points of consideration for overbooking?

72. 7. Airline Product
7.4 Airport Service
- Important part of the journey
- Particularly shorthaul
- Aiming to be stressfree, business traveler friendly
- London City Example
- Business class lounge

73. Inflight Service
• Crew
• Meal
• Entertainment
• Seats
• Selling through national image

74. Arrival
• Baggage Collection
• Priority Baggage
• Arrival Lounge
• Complaint/Baggage issue handling

75. Fluctuation in Demand
1. Cyclical Fluctuation
- Economic Cycles
- Demand Peaking – Seasonal Peaking / Weekly peaking/ Daily Peaking
2. Directionality
- Less pronounced than freight, why?
- Think about Asia Minor flights to BKK

76. Capacity Management
• Back to Supply Theory
• What can we do in Short terms?
• What can we do in Long terms?