Determinants of Demand for Airline Tickets - Term Paper Example

? Determinants of Demand for Airline Tickets al Affiliation This document contains a brief introduction of the airline industry with specified determinants for demand of airline tickets generally from customers, within the competitors and based on income flows. It describes how customers choose to buy their traveling tickets and how airlines influence each other on setting prices for airline tickets among other activities using an oligopoly market. Game theory has also been used to elaborate how airlines reach a decision by monitoring the available strategy profile of other competitors. Large carriers in the industry have quite dominated the market, but the tactics of small carriers have been expressed to develop, and be able to penetrate the difficult large carrier zones, by providing frequent services through low cost carrier. It also elaborates the yield management pricing strategy of airline industries to maximize their profits by providing similar services to their customers at different prices. Finally, other concerns that the customers and airlines should consider before respectively buying and selling their tickets, which may affect their satisfaction and benefits are discussed. Keywords: Airline Industry, Customers, Large Carriers, Small Carriers, Low Cost Carriers Pricing Strategy, Demand, Demand Elasticity, Tickets, Profits ,In Flight Amenities Air transportation is one of the fastest modes of travelling in the modern society that has embraced technology and is very concerned with time management. It is very flexible and timely, but not everyone has had the opportunity to use it. The airfares are quite expensive and some societies may view air travelling as a luxury. However, airline customers are offered a variety of airline tickets to purchase according to their suitability. There exist roundtrip, one-way, open-ended, economy class, first class, and child airline tickets, all of which are dictated by specific issues. Airline industries are viewed as an oligopolistic market where several firms within the industry occupy fifty percent or more of the market, which puts a barrier for a new entry into the industry. According toTacker, Fleming, and Vasigh, there are several major factors known to determine the demand for air travel. They include income, ticket price, competitor’s ticket price, economy state, customer’s income, availability of substitute mode of transport and substitute price, customer loyalty, fright frequency, and preference among other minor factors (2008). Airline Industry Oligopoly and Ticket Price Taking an example of U.S. market share of the airline industry, in the third quarter of 2009, the four largest carriers, Delta & North, American, United and Continental airlines held 21.8, 15.2, 13.0 and 10.1percents respectively, totaling up to 60.1 % while the others held the 39.9 %, which best refer to an oligopoly situation(“Airline competition,” 2011). In general Enz states that “air line in United States, European union and Asia are dominated by a few large carriers” (2010, 65). The Airline industry consists of numerous firms global wise, and at an individual nation level, that merge up at times to create competition in service production. An action by any firm carrier in the industry has an impact on the general market since they are interdependent on each other. An entry in the airline industry is often difficult, and the collusion of the few existing companies in the industry gives the merging group superior marketplace control. While providing similar products that at times may be having no variation, it is often associated with insignificant competition if not none preferring product differentiation for a firm uniqueness. If one firm decides to change the ticket price for its customers, then this action would adversely affect the demand of tickets and flow of customers in other firms. Stability of an airline firm in the industry becomes deeply connected to the action and reactions of every single airline firm. If one company decides to reduce the price of the ticket, then all the other firms will work hard to match with the new price. Firms in the airline industry have small profit margins which are very competing, expensive, and risky. Ticket prices of one firm or its competitor fluctuation tends to cause price wars in the industry, since every firm is trying to get hold of a larger percentage of the market. Kleymann and Seristo give an example of a new airline in the U.S. that tried to attack the already established larger carriers by offering lower ticket prices on certain routes, which triggered a price war between the existing competitors, but later the larger established carrier won despite proving a the act benefiting the customers with fare prices (2004). The airline industry can endure anything to keep the price tickets stable and at any cost; despite requiring huge capital and investments, the market penetration, and competition is shun away through an available economic means to keep of competition. In the above situation, the larger airline “could sustain extreme low (and if need be unprofitable) fare levels on a route for the time it took to drive the competitor out of the market by cross- subsidizing that market with funds from other, more profitable routes”( Kleymann and Seristo, 2004, p. 5). The larger carriers use the monopolistic power to control the airline fare prices of internal, and external firms within the industry. Influence of Game Theory Competitors in the airline industry are keen for any change made by their rivals in the market. All the firms in the industry serve as key players in the game, and they all have a particular way with which they attract, and create customer loyalty with the travelers. The trick to survival for any player in the industry is by learning or monitoring the strategies of other firms for any situation and what the profit (payoff) is, by establishing a combination of diverse pricing schemes. One airline may decide to observe the strategy profile of other airlines before making a strategic decision on how to counter a situation. Application of game theory in the market, if well analyzed, and a decision reached provides a good platform for customer competition. Firms are able to come out with suitable programs that offer customers range of affordable ticket prices with regard to their preference. Such competition and observation lead to product differentiation, where companies offer branded serves. The fact that all airline firms in a market have similar information on all the other players’ identities, strategies and playoffs, it becomes possible to formulate a relative plan that will compete, and provide a substitute ticket price for the general market. The airline industry can then make proper timings to implement their plan, after monitoring the general industry strategy profile. In addition to the created competition, the firms use such attractive amenities in the flight so as to create customer loyalty in future. Tactics that make customers comfortable and satisfied are commonly used, which on the cheaper side, offer flexible competition. Using a game theory perspective, each airline has to select an action, and decide whether to get along with the competition put forward by other firms, or choose a different strategy instead. At times, competition (the game) may lead the firms to a similar decision hence offering similar a product or service. The success of an initiative will however depend on the cooperation among the major carrier that offers a similar action. If all airlines introduce a fee for the luggage, then a single airline decides to end the action as a firm, the disunion of the cooperation then makes all the other firms pull out too for fair competition (Alam, Bodda, Pai, and Sandhu, n.d). Employed Pricing Strategies and Reasons Airlines aim to maximize profits by selling air tickets for similar resources to their customers at different prices. This may seem like discrimination, but it serves right for the customers, who purchase their tickets at different time intervals. The most common pricing strategy employed is Yield management where “prices offered to customers increases as capacity approaches exhaustion” (Smith, 2011, p. 253). The demand for tickets differ with travelers, some of whom are price sensitive and may opt to buy the tickets early in time, which may be offered at a cheaper price before approaching the expiry date for making payment. The price elasticity demand for travelers will always differ, which means that some will book flights earlier while others later. Those who purchase them late may be charged a higher price since airlines, based on the demand analysis, will decide how often they should change prices, and what price to charge for a resource (seat, baggage fee etc). With this, business, first class and regular coach seating are introduced though they differ in comfort and cost. Airlines separate their passengers through restricted and unrestricted fare schemes, which has almost nothing to do with cost, though more flexible through online methods of ticket sales to the customers. Airlines are more dependent on grouping prices where different customers are charged differently depending on such factors like personal income, age, time, and geographical locations. The reason behind the pricing strategy is to ensure maximum profits at all times in the industry, and create, as well as maintain customers by ensuring they acquire the airline service at their favorable prices, available in the schedule at any desirable time. The airline can also be able to detect whether the flights are full, and identify the source of cash flow before providing the service to the customers (especially in the case of low cost airlines that offer lower prices to customers that book early for the service, as long as they remain committed to the flight they booked early). Are Small Carriers able to Carve out a Niche? In the industry, some airlines have differentiated aircrafts; some have large carriers, while others have numerous small carriers that carry fewer people. This is highly influenced by the route characteristics among others, like airport. The choice of small carriers is well connected with the benefit of its high frequency services, how airport capacity is allocated and priced, as well as the competitive environment of the airline operation. Low Cost Carriers have been determinant to penetrate a portion of large carriers, by taking away a significant part of the market share that supports the LCCs to carve out a profitable niche within the industry. Large service providers have been adversely affected by economic conditions, hiking fuel prices, and unsatisfactory safety measures that have seen passengers opt for small carriers, since the occurrence of bomb attacks in the U.S. They avail substitute prices for ticket prices to the customers, while giving out enough safety, just as the larger carriers. They may lack luxurious in-flight amenities, but the low fare prices influence ticket demand in the population within the area of operation. Small carriers are able to reduce the cost, and keep their ticket prices stable. These small airline networks concentrate on providing frequent local connections within the markets, but can also manage a limited number of longer haul connections, where demand is consistently high. Concerns in Determining Demand Just as any seller and buyer evaluate the terms of negotiation, even the airlines and their customers have their concerns in the services offered. Airline customers would like to be assured of their safety in flight, and to some extent based on differentiated services, some request for comfort and other in flight amenities that are available. Customers have varying incomes and this also dictates how and when they purchase their tickets. Some may choose to wait until peak periods associated with reduced fare prices. Airlines also have to watch out for the five forces in the industry namely; rivalry intensity, threat of new entrants, customers’ bargaining power, suppliers’ bargaining power, and the threat of substitutes (IATA 2011). If prices and schedules are not flexible enough, customers may decide to use other modes of transport like electric trains and vehicles. Other existing rival airlines offer stiff competition, which may outdo a firm from the market. Even the new entrants shake the airline industry profitability not necessarily new investors, but as the existing airlines expand their services in new markets. Consumer bargaining power is supported by the consumer protection law influencing airlines cost level on how they compensate for any flight delay (IATA 2011). Airlines have also benefitted through the timely advertising channels via the web from where they operate, and ensuring accessibility to their customers. Airlines have key involved suppliers that offer several critical inputs, though they generally have higher return on capital than the airlines themselves. Aircraft manufactures, assemblers, and reliable labor have high bargaining power in airline industry, which in return affects the order and delivery (IATA 2011). Airline Industry and Airline Tickets Prices Global and individual nations economies tend to fluctuate due to various situations like inflation, and natural phenomena that would affect routes operation within a locality if not globally. Fuel prices, strained labor unions, and even economic income flows highly influence changes in ticket prices for passenger and cargo air transport. Each airline charge on tickets has to be closely related to those of other airlines, but on the contrary, they have to differentiate their service to make a difference with those of others. Ticket prices are the core determinant that influence the flow of customers to wards a particular airline, besides the frequency of service and products. That is why low cost carriers are been able to grow very fast, generating relatively better profits, and penetrating the large carrier markets that are difficult to maintain. Reference List “Airline Competition 1980-2010 R.I.P.” Retrieved November 10, 2012 from http://www.thetravelinsider.info/airlinemismanagement/airlineoligopoly.htm Alam, N., Bodda, G., Pai, G., & Sandhu, P. (n.d). Baggage Fees a Game Theory Perspective Mba211: Game Theory: Team Garde. Retrieved from http://faculty.haas.berkeley.edu/rjmorgan/mba211/2010%20Final%20Projects/Garde%20Final%20V%205.0.pdf Enz, C. A. (2010). Hospitality Strategic Management: Concepts and Cases. New Jersey: John Wiley & Sons. Inc. IATA. (2011, February 12). Vision 2050. Retrieved from http://www.iata.org/pressroom/facts_figures/Documents/vision-2050.pdf Kleymann, B., & Seristo, H. (2004). Managing strategic airline alliances. Burlington: Ashgate publishing company. Smith, T. J. (2011). Pricing Strategy: Setting Price Levels, Managing Price Discounts & Establishing price structures. Belmont: Cengage learning. Tacker, T., Fleming, K., & Vasigh, B. (2008). Introduction to Air transport Economic: From theory to application. Burlington: Ashgate publishing company. Read More