The airline industry has covered a long journey from the day it was started. There are various external and internal factors which affect the performance of the airline industry. The objective of this report is to analyse the variation in prices of the airline tickets by using the economic theory. The airlines are using creative methods in implementing new offers to lure passengers according to the changing trends in the market. The ticket prices are set using a formula to generate maximum net revenue.
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“Economics is the study of the allocation of scarce resources” (Miles 2005, p 4). It refers to the commercial activities that take place in market such as the production & consumption of the goods and services in the market. The amount of goods the customers are ready to buy at different price levels refers to the demand and the amount of goods manufactured in accordance with the demand refers to the supply in economic terms.
According to Henderson (2004, p 13), there are three laws which form the main basis of economic theory, they are
· “When, at the price ruling, demand exceeds supply, the price tends to rise. Conversely when supply exceeds demand the price tends to fall.
· A rise in price tends, sooner or later to increase demand and to decrease supply. Conversely a fall in price tends, sooner or later, to increase demand and to decrease supply.
* Price tends to the level at which demand is equal to supply”.
Pricing of a product is an important factor for the economic success of any firm. If the prices are high for a product, it gives an indication to the producers that demand is more for that particular product and necessary steps can be taken to increase the production. If prices are low, it shows that demand is less for that product and the measures can be taken to decrease the production.
ANALYSIS OF PRICING IN AIRLINE INDUSTRY
The airline industry is the type of industry whose performance is mainly affected by the external factors. For example, if fuel prices increases then the operation costs of the aircraft also increases. The economy of any country also depends on the airline industry, because it is the main factor in acquiring foreign currency in terms of tourists in to the country. The revenue generated in the form of ticket price is the main source of income for the airline industry. So the price should be in such a way that it covers all the operational costs, maintenance costs and also should be able to generate profit for the firm.
There are various factors which are taken into account while determining the price and they play a crucial role in generating the revenues for the firm.
* The firm’s own costs
* The current and emerging competitors
* The behaviour of potential buyers
* Regulatory authorities
THE FIRM’S OWN COSTS
The airline industry incurs heavy costs in terms of maintenance, operations, and employees. So the pricing of tickets is in such a way that they can at least cover the costs and also at the same time generate profit for the firm. The price of a ticket depends upon the time when it is booked because they main focus is to fill the maximum number of seats. In order to meet the demands of the market the airlines should be elastic enough to operate more number of services so as to cut down any extra operational costs. They follow a systematic approach in general a computer based operation which gives them an idea about passenger load and helps in predicting the number of empty seats. The price of a ticket when booked at the last minute and when booked in advance has some variation in price so as to reduce the risk of flying with unsold seats.
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THE CURRENT AND EMERGING COMPETITORS
With the advent of many competitors in to the airline industry there is a strong competition among them. They use the global distribution system which gives the airfare of a particular airline, availability of a flight along with their competitor airfare. This gives a wide variety of choice to the customers, because they have an idea of airfare in all possible airlines and can go for a best deal available. This system gave way to a tough competitive market in which all the airlines set their prices on a minute basis depending upon the market conditions.
THE BEHAVIOUR OF POTENTIAL BUYERS
The passengers are the main source of revenue to the airline industry. The price depends upon the number of days in advance the ticket is booked. There are different types of offers such as if the ticket is booked on Saturday or Friday the airfare is different and the airfare is again different for a two way trip and a single way trip. The festive season is the time when flights are usually in high demand. The computerised system allows them predict the low price when booked in advance and also the exact time to step up the price to make maximum profit depending upon the demands of the market. For example, if any destination has the potential of more number of passengers then the airlines may step up the price if the ticket is booked in the last minute so as to generate more revenue. In the same way they reserve some seats for business class who book their tickets in last minute that end up paying more for the ticket and at same time it helps in making them more loyal to a particular airline.
There are authorities which keep track of all the airline prices that are set by the respective airlines. They implement a set of policies which form the guidelines for the airline industry. The airlines are not allowed to set the prices at their will in order to maintain a fair trade policy. The external factors such as tax paid to regulatory authorities also plays important role in fixing up a ticket price.
The airline industry tries to make most of the revenue from the ticket prices in order to manage the expenses and to yield profits. Their approach towards the ticket price is to obtain maximum net revenue by exploiting the demand in the market. This also implies to the different pricing strategies they follow to obtain their formulated goals such as avoid flying with unsold seats, making customer loyal to the particular airline and also stop the customers from going to their competitors.
Miles, D. Et al. (2005). MacroEconomics. Chichester: John Wiley & Sons, Ltd
Henderson, H. D. (2004). Supply And Demand. Montana: Kessinger Publishing, pp. 8-15.
Vasigh, B. Et al. (2008). Introduction to air transport economics: from theory to applications. Hampshire: Ashgate Publishing Limited.