The Effect of Price Elasticity of Demand in Airline Industry

The United States carries over one third of the globe’s total traffic, where Over 1.5 billion passengers fly annually. Over the past 20 years, air travel has grown at an average of about 5% per year, the reason for annual change is usually differences in economic growth, and of course other environmental factors, such as the current war. As a rule, the annual growth in air travel has been about twice the annual growth in GDP. Deregulation, liberalization, and competition have essentially altered the management strategies and practices of airlines. Productivity improvements and cost management have been two of the greatest concerns for US airlines for the past twenty years. As a whole, the airline industry must continue to improve their specialization in terms of fleet utilization, pricing and revenue management, and schedule optimization.

Overall, the five forces model suggests that the overall intensity of competition in the airline industry is likely to be severe. Back in the early 1980 's competition was very intense. During the late 1980 's the monopolization of major routes by a few major carriers, the limited availability of free landing spots at major hubs and the emergence of limited brand loyalty and tacit price agreements have all helped reduce the intensity of competition. However, as already mentioned, slumping demand in the early 1990 's plunged the industry once more into a severe price war. Airline travel is a commodity-type product, with limited potential for differentiation.

When looking at the elasticity of demand Southwest is extremely impacted by the elasticity of demand. Items such as externalities, unemployment, inflation, and monetary, fiscal, and federal policies affect the elasticity of demand. The elasticity of demand is based solely on current market conditions, the customer’s purpose for travel, and available substitutes. The airline industry is viewed has being unstable because it is based on current market conditions, and the market is always changing.

Rising fuel prices has a huge impact on the airline industry. In an article published by the New York Times in 2007, oil prices were hovering ‘near $100 a barrel’ which caused the International Air Transport Association (IATA) to ‘slash’ their predicted profits for 2008 from ‘$7.8 billion to $5 billion’ (Clark, 2007). In 2008 high fuel prices were ‘dominant factor’ in the losses that faced the industry, and continued to same effect in 2009 (Dunn, 2009). Diagram 2 shows how fuel price has increased and fallen over the last 5 years.

Anna Zhou E Period Linsdell AP Economics: Predatory Pricing and American Airlines This semester in AP Economics, we learned about different pricing strategies, both legal and illegal, that companies use. One in particular, is predatory pricing. Predatory pricing is a strategy businesses use to target competitors and drive them out of the market, along with creating barriers to entry for new businesses. In America, engaging in predatory pricing can lead to antitrust claims against a business; however, it would have to be proven that the business is lowering prices with an ulterior motive of establishing a monopoly and driving competitors out of the market.

Price Elasticity of Demand is the theory of elasticity that focuses on the relationship between the price and the demand for a good or service. The study of how sensitive consumers are to a price change, is the study of Price Elasticity of Demand (Anderson). The idea is that when there is a change in the price of a good or service the demand will also change. In order to predict consumer behavior suppliers will study the consumer’s responsiveness to price change. Price Elasticity of Demand is measured by a difference in percent changes. The difference between the percent change in demand and the percent change in price (Anderson). If there is a larger respond in the amount demanded due to the price change the good or

1. There are a few trends in the US airline industry. One is consolidation, wherein existing players merge in an attempt to lower their costs and generate operating synergies. The most recent major merger was the United Continental merger, which is still an ongoing affair, but has created the largest airline in the United States by market share (Martin, 2012). Another trend is towards low-cost carriers. In the US, Southwest has been a long-running success and JetBlue a strong new competitor, but in other countries this business model has proven exceptionally successful. The third major trend is the upward trend in jet fuel prices, and the increasing importance that this puts on hedging fuel prices and capacity management (Hinton, 2011).

In this paper Learning Team A will explain how Delta Air Lines (Delta) has been affected by the economy, giving details about the positive and negative externalities as well as the shifts in price in elasticity of supply and demand. We will discuss how quantity demanded and quantity supplied has changed due to price changes and technology innovations. We will discuss how government regulations create surplus or shortage of airline flights.

Oligopoly Behavior in the Airline Industry. Case Analysis This case illustrates the pricing behavior of firms that are oligopoly whose market is characterized by the relative few participating firms offering differentiated or standardized products or services. Such firms in an oligopoly have market power derived from barriers of entry that wards off potential participants. As seen in the case, it is clear that because there are a small number of US Airlines firms competing with each other, their behavior is mutually interdependent – thus, the strategies and decisions by one airline management affect managements of the other airlines whose subsequent decisions then affect the first airline. In the airline industry, such oligopolistic

In April 1992, American Airlines launched "Value Pricing" -- a radical simplification of the complex pricing structure that had evolved over more than a decade following deregulation of the U.S. domestic airline industry. American expected that the new pricing structure would benefit consumers and restore profitability to both American and the industry as a whole. The critical issue raised is: Would American's bold initiative work?

It is relatively price-inelastic for business travel. Due to the budget of their business, encouraging them to travel more frequently by offering low prices will not effect to their travel decision. In another way around, increasing prices neither discourage they to hesitate go travelling.

Airlines use a formula of combining their yield and inventory costs to determine ticket prices. While it is imperative to focus on the idea of being profitable, the focus is to maximize the cost of the flight revenue. One huge factor that encourages an increase in the cost of tickets relates to a customer ordering a ticket close to the departing date, define this as a risk factor because they need to make up for all unsold seats. A high percentage of the revenue is dedicated to overhead costs such as fuel and labor. When a ticket price is higher with one airline than the other, the customer interprets this as being an excessive cost. The demand is greatly affected by the external market

The implications of this analysis are that the focus on the Chinese market is justified. The Chinese air travel industry is booming, and indeed this is fueled by that country's rapid growth and the increased demand for

The growth of airline industry in any country is directly proportional to its GDP growth; the greater the business activity, the more air travel and the higher the GDP of the country. The demand

has a high sensitivity to the economic cycle (Doganis, 2006). The profit margins of the airline