Aviation Economics and

Sustainability
BBA SEM 4
UNIT 1: Economics of Supply and
Demand.
 UNIT 1
• Economics and Its Types
• Rule of Supply and Demand
• Passenger Classification
• System Optimization
 What Is Economics?
• Economics is a social science concerned with
the production, distribution, and consumption
of goods and services.
• It studies how individuals, businesses,
governments, and nations make choices on
allocating resources to satisfy their wants and
needs, trying to determine how these groups
should organize and coordinate efforts to
achieve maximum output.
 Types of Economics
• Microeconomics focuses on how individual
consumers and firm make decisions; these
individuals can be a single person, a household, a
business/organization or a government agency.
• Macroeconomics studies an overall economy on
both a national and international level. Its focus
can include a distinct geographical region, a
country, a continent, or even the whole world.
 The law of demand
• The law of demand states that, as price
increases, the quantity demanded decreases.
In other words, quantity demanded has a
negative relationship with price.
• A demand curve is a graphical description of
the demand schedule, and the quantities of a
good that customers are willing and able to
buy at alternative prices in a given period of
time.
 Factors affecting demand for air
transportation
• ticket price
• competitor’s ticket price
• passenger income
• state of the economy
• availability of other modes of transportation
• passenger loyalty
• in-flight amenities
• frequency of service
• safety
• aircraft type, location of airport
• random factors, such as volcano ash cloud and 9/11 or threat
of terrorism.
Characteristics of demand for air
transportation
DEMAND – Why is demand so fickle?
• Demand is highly cycle, depending on
time of day, day of week and season.
• Demand can be adversely affected with
broader changes in the economy; recession
can erode disposable income, GDP, and
consumer confidence, which can, in turn,
chill demand for air travel.
• Price elasticity's of demand are
segmented along leisure and business
traveler lines.
DEMAND – Why is demand so fickle?
• Business travelers tend to be less-price sensitive
than leisure travelers;
• Business travel is paid for with pre-tax dollars, and
usually
• results in tangible benefits, such as increased
sales;
• Leisure travel is paid for in post-tax dollars, results
in intangible benefits, and can be postponed if
times are bad;
• The market also is segmented according to
distance, with surface modes of transport
competing for short-distance trips.
Rules of Thumb by Market analysis on
Supply and Demand
+1% in disposable income = +2.7%
•

traffic
•-10% in fares = +3% traffic
• +10% in fares = -3% traffic +7%
revenue
 BASICS OF SUPPLY
• One of the key reasons why the airline
industry has faced financial difficulties and has
profit margins well below many other
industries is that its demand fluctuates
constantly but its supply is relatively fixed.
 BASICS OF SUPPLY
• Lack of flexibility in the supply function makes
it very difficult to manage capacity effectively.
The perishability of air transport services, the
high fixed costs, and the predetermined
capacity in the form of schedules that are
published well in advance of the flight, make
supply relatively unresponsive since an airline
cannot shift its supply at short notice.
 Factors affecting supply
• ticket price;
• price of resource inputs:
– fuel prices
– labor costs
– landing fees
– aircraft costs
– maintenance costs
 Factors affecting supply
• navigation charges;
• technology;
• availability of other mode of transportation;
• government regulation;
• stochastic factors:
– weather condition
– strikes.
 Air Travel
• Air travel remains a large and growing industry.

• It facilitates economic growth, world trade, international

investment and tourism and is therefore central to the
globalization taking place in many other industries.

• Travel for both business and leisure purposes grew strongly

worldwide
Demand-Based Pricing

Passenger
Market
Segmentation

Business Traveler VFR Leisure Traveler

Large Corporation Small Business Emergency Visit Leisure Visit The Wealthy The Not So Wealthy
16
 Supply Demand Optimization
• To optimize Supply and Demand on daily basis
the airport and airlines are needed to be
optimized
• We live in the age of IT and majority of aviation
management and operations takes are
dependent on robust IT software.
• Optimization of these IT systems will enhance
optimization in the aviation industry thus trying
to reduce the gap between supply and demand
and
 Key Aviation Systems
– Airline reservation system (ARS)
– Baggage handling system (BHS)
– Customer relationship system (CRS)
– Fare Quote System
– Flight Information Display Systems (FIDS)
– New Distribution Capability (NDC)
– Passenger name record (PNR)
– Passenger Service System (PSS)
– Revenue management system (RMS)
– Safety Management System (SMS)
 AIRLINE RESERVATION SYSTEM DECISION SUPPORT SYSTEMS
DEPARTURE SYSTEMS
Schedules & availability Fleet management
Departure control system
Fare quotes & rules Schedule optimization
Gate control
Passenger information Revenue management
Flight dispatch
Ticketing Flight operations systems

MARKETING & CRM SYSTEMS TRAVEL INTERMEDIARIES GLOBAL DISTRIBUTION SYSTEM

Direct bookings Traditional agents and TBW Availability: schedules

Loyalty programs Travel management companies Pricing: fare quotes & rules

Customer service Tour operators & wholesalers Distribution: booking & ticketing

TRAVELERS IN FLIGHT TECHNOLOGIES

Business & leisure Entertainment

Groups Communications

Frequent flyers Crew support systems

FIGURE 7.1 Key IT systems used by airlines.