Nigerian airlines must understand the elasticity of demand for their services and consider it when making pricing decisions and implementing profitability strategies because effective management of demand elasticity and profitability can help airlines remain competitive and profitable in the highly dynamic and complex airline industry. Due to the inherent complexity and sensitivity of the airline industry, every marginal change in any of its elements can have a significant impact on its profitability because the economic elasticity of airline service demand and pricing is very high. However, regardless of price elasticity in the industry, airlines can continue to be profitable and sustainable if the owners are prepared to ensure operational effectiveness, regulatory compliance, innovation, professionalism in all their conducts, and the use of data for efficient decision-making. This article will discuss the relationship between airline profitability and the law of demand and ticket price elasticity.
Law of Demand:
The relationship between demand elasticity and profitability is significant for Nigerian airlines because it affects pricing decisions and ultimately, the bottom line. In general, businesses that face elastic demand for their services have more flexibility to increase their prices without losing customers. On the other hand, businesses with inelastic demand may struggle to increase their prices without losing significant sales volume. Therefore, as the price of airline tickets rises, the number of passengers demanding tickets falls. Likewise, as the price of the ticket falls, the number of passengers demanding the ticket rises (Kenton, 2020). Given that the current demand elasticity for airline services in Nigeria has significantly reduced while the competition is increasing as a result of the new players, airlines operating in Nigeria must therefore conduct thorough market research and analysis before deciding on their ticket rates in relation to their cost of operations.
Ticket Prices and Elasticity:
The elasticity of demand for airline tickets is influenced by a number of factors, such as the availability of substitutes (e.g. other modes of transportation or alternative destinations), the strength of consumer preferences for a particular airline or route, and the overall economic conditions affecting consumers. Therefore, setting the right airfare is challenging, especially in a competitive business environment. Given that it has such a significant impact on the company’s profitability, pricing is actually one of the hardest tasks that the commercial department of an airline must complete. Understanding “price elasticity,” as it is known to economists, is one of the most important aspects of pricing (Gallo, 2015). Data analytics can be used by airlines to predict demand at various price points. The degree to which customers are responsive to changes in ticket prices is known as the price elasticity of demand.
Demand elasticity for airlines is classified into 3 categories and each one describes how passengers will react to a change in prices:
Inelastic Demand: This indicates that even if ticket prices significantly increase, there will still be a large demand for tickets. As an illustration, consider the case of Nigeria, where airlines raised ticket prices to reflect the country’s current economic situation and the Christmas holiday season effect, but demand didn’t really decline because its the holiday season and there were no reliable alternatives to flying due to the country’s insecurity issues. Figure 1 (Passengers movement at Lagos domestic airport for 2021)
Elastic Demand: This means that if ticket prices change even a little bit, passengers will greatly change how often they demand airline tickets. For instance, if any airline lowers ticket prices, no matter how small, on popular routes like Lagos-Abuja, Lagos-Port Harcourt, and Lagos-Kano in Nigeria, customers will rush to buy their tickets first except there are no available seats because of the economic downturn and the security situation in the country.
Demand Elasticity and Profitability:
The airline industry’s profitability is highly dependent on pricing strategies, which can be influenced by demand elasticity. Airlines with more elastic demand may need to lower their prices to attract more customers, while airlines with less elastic demand may be able to charge higher prices. Every airline must be able to turn a profit, and if they are ever unable to do so for whatever reason, it poses a major risk to the operations’ safety, sustainability, effectiveness, and compliance. The airline’s revenues are jeopardized if ticket prices are excessive or do not take into account the important elements affecting passengers’ decisions to buy tickets. Therefore, it is a wonderful accomplishment for any airline to be able to assess and determine the appropriate ticket price that will boost customer loyalty (Fernando, 2021).
Conclusion:
Airline owners must emphasize the appropriate application of economic concepts when developing marketing strategies that will provide them a competitive advantage over their rivals by utilizing the usage of their data to make economically motivated decisions toward profitability. Given the situation in Nigeria right now, it is crucial for any airline to have competitive pricing if it is to succeed. And in addition to price elasticity of demand, airlines must also consider other factors that can impact profitability, such as fuel costs, labor costs, airport fees, and taxes. Successful airlines carefully manage these costs and seek to optimize their operations to maximize profitability.
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Great insight