by Shadrach Swante Kambai
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 performance 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:
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). So, regardless of how other airlines are lowering ticket prices, airlines operating in a competitive business climate must conduct thorough market research and analysis before deciding on their ticket rates in relation to their cost of operations.
Ticket Prices and Elasticity:
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 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 slightly, 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.
Unitary Elastic: This is a bit of an exception. The change in quantity demanded will match the change in price. But in the airline industry, this is not very typical.
Demand Elasticity and Profitability:
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).
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.
Fernando, J. (2021, September 12). R-Squared Definition. Investopedia; Dotdash Meredith. https://www.investopedia.com/terms/r/r-squared.asp
Gallo, A. (2015, August 21). A Refresher on Price Elasticity. Harvard Business Review. https://hbr.org/2015/08/a-refresher-on-price-elasticity
Kenton, W. (2020, April 29). Price Elasticity of Demand. Investopedia. https://www.investopedia.com/terms/p/priceelasticity.asp