The Invisible Hand in the Skies: Exploring the Elasticity Factors Shaping Etihad

Airlines

In the complex, fast-paced world of the aviation industry, where volatile oil prices meet
fluctuating demands, airlines continuously wrestle with economic forces. One such airline
navigating these murky waters is Etihad Airways, headquartered in Abu Dhabi, UAE. Today,
let's zoom into the economic phenomenon of elasticity and its real-world implications on
Etihad, perfect for those with a budding interest in economics.

The Income Elasticity Enigma: Beyond Just Seats

When it comes to income elasticity, Etihad Airways operates in a unique space. Picture this:
You're in an Etihad first-class suite, surrounded by luxurious amenities, from in-flight showers
to a private butler. These high-end experiences come with a high-income elasticity, often
above 1. In simple terms, as incomes rise, people are significantly more likely to splurge on
these premium experiences. An income elasticity of 1.2, for instance, means that if the
income of Etihad's target demographic increases by 10%, the demand for these opulent
amenities will surge by 12%.

Now, let's move to the economy class. Here, the income elasticity is curiously less than 1, at
approximately 0.58. So, what does that mean? Well, even if consumers' incomes go up by
10%, the demand for economy tickets will only increase by 5.8%. Unlike the first-class cabin,
economy class is less of a luxury and more of a necessity for travellers.

Seasonal Swings: Navigating the Calendar of Demand

While Etihad enjoys year-round business, seasonal fluctuations pose a challenge. During
peak travel times, like the holiday season or summer vacations, demand elasticity for flights
hovers around being unit elastic. If Etihad were to increase its prices by 5% during these
times, the number of tickets sold would also decrease by approximately 5%, making it unit
elastic.

Conversely, during off-peak seasons, the demand elasticity dips into inelastic territory.
Suppose Etihad lowers its prices by 10% in an attempt to lure more travelers during these
slow periods. The consumer response might disappointingly be just a 7% uptick in ticket
sales, showcasing a demand elasticity of 0.7.
The Competitive Skies: The Etihad, Emirates, and Qatar Airways Triangle

Ah, competition! It spices up any market, and the aviation industry is no exception. Etihad
finds itself in stiff competition with other Gulf carriers like Emirates and Qatar Airways. Here,
cross-price elasticity comes into play, and it's often positive. For instance, if Emirates slashes
its ticket prices by 10%, Etihad might see a 6% decline in ticket demand, giving us a cross-
price elasticity of 0.6. This mathematical tidbit reveals that customers often perceive Emirates
and Etihad as substitutes and are willing to switch based on price alone.

The Finessing of Strategies: A Balancing Act

In the cutthroat arena of aviation, elasticity isn't just a theoretical concept; it's an actionable
metric. Etihad uses these elasticity numbers to tailor its marketing and pricing strategies. For
instance, during competitive pricing wars, Etihad might choose to remain inelastic in its
pricing. By maintaining its prices but adding value through additional services or perks,
Etihad aims to retain customer loyalty despite the allure of cheaper alternatives.

Wrapping Up: The Numbers Game in the Skies

Elasticity shapes Etihad's strategic decisions, from ticket pricing and seasonal offers to how it
competes with other airlines. For second-year economics minor students, this tale of Etihad
offers a fascinating narrative of how economic theory plays out in real-world businesses. So
next time you're booking a flight and torn between options, remember: there's an invisible
hand—guided by elasticity—that's steering your choices, whether you realize it or not.