The paradox of air fares

Though having gradually come down recently, the spikes in oil prices this year have made it such a tumultuous time for the airlines that 26 of them worldwide, according to IATA (the trade body which represents many of the world airlines), have gone to the wall already. For the shrewd management of those who remain, this should be a challenging time to test out the basic economics of demand and supply for the industry.

I believe for most industries, prices are demand-driven rather than cost-based. It means rather than just adding to arbitrary margin on to the base of operation costs, companies charge what they judge the customers are prepared to pay for their products, of course-so in consideration of the competitive offers available. As a matter of fact, revenue andmarket shares, not profitability but are usually top on the field sales' mind.

But for the airlines recently, the high fuel prices have made the basic arithmetic of revenue minus cost painfully clear that if the price charged cannot cover the cost of carrying one passenger, it is a critical matter of life and death. The challenge, of course, is in determining to what extent prices can be put up without dampening demand. Air travel still is perceived as extravagant by many people and may be put off in face of higher fares. At no time in history, perhaps, that airlines managers have to put the textbook economics of price elasticity to such vigorous test in running their day to day activities.

See Also : The Visual Display of Quantitative Information