The Effect of Price Elasticity of Demand in Airline Industry

1288 Words Jun 7th, 2008 6 Pages
The global airline industry is experiencing cold season since the terrorist attack in 2001. Though china’s airline suffered less from the 9-11 effect, price hike of fuel has also plagued the industry. Moreover, in response to the entry of the WTO, Chinese government has phased out regulations upon airline industry and encouraged competition by introducing budget airline. To maintain competitive advantage and considerable profit margin as a domestic leading airline company, China Southern Airlines Co. Ltd. (CSA) needs to design a pricing strategy in accordance with the natures of the distinct markets. The principle of price elasticity of demand will help elaborating how different pricing tactics are applied to different market segments. …show more content…
Elasticity in the Context of Air Travel Demand

Using a single elasticity for all market segments is inappropriate as elasticity in airline industry is anything but unanimously identical as an aggregated market. In air travel, ideally market segment boundaries should be defined by first separating leisure and business passengers and second long-haul and short-haul flights. The reason is that we expect different behaviour in each of these markets. Given that no statistical figures as to elasticity in China airline market are available, the Canadian research data is employed as follow which works the similar way by nature.

The ranges of values shown capture the middle one-half of the estimates and encompass the median, which is represented by a black dot.

As the figures indicate, elasticity values can and do differ significantly between travel distance, type of traveller and even domestic and international routes. Long-haul international business segment represents the highest price inelasticity, which means that price variation has little effect on passenger turnout. Meanwhile, short-haul business comes second at -0.7, which is also price inelastic. Short-haul leisure segment has the greatest absolute value of price elasticity, which means that passenger turnout is heavily influenced by pricing mechanism. In general, long-haul flight is less elastic than short-haul

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