Chapter 3
Airline Economics, Markets & Demand
Learning Objectives:
The student will know the following terminology:
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Airline System-Wide Measures
o Traffic / Revenue Passenger Miles (RPM)
ƒ 4 types of traffic
o Yield
o Capacity/ Available Seat Miles (ASM)
o Unit Cost
o Load Factor = Passengers/ Capacity
ƒ Average Leg Load Factor
ƒ Average Network Load Factor
o Rejected Demand/Spill
Basic Airline Profit Equation = Revenue - Cost
o Airline Profit Maximizing Strategies
Air Transportation Markets
o Typical Air Passenger Trip
o Markets
ƒ Opposite
„ Parallel
ƒ City-pair
„ Region-pair
o Direct/ Connecting Flights
o Dichotomy of Demand and Supply
Origin-Destination (O-D) Demand
o Factors affecting Volume of O-D Demand
o Quality of Service Factors
o Total Trip Time Model
o O-D Demand Models
ƒ Linear/ Additive
D = a – bP
ƒ Multiplicative
D = aPb where b<0
o EP = Price Elasticity = ∆% Demand/ ∆% Price
ƒ Business Passengers - “inelastic”
ƒ Leisure Passengers - “elastic”
o ET = Time Elasticity = ∆% Demand/ ∆% Time
ƒ Business Passengers - “elastic”
ƒ Leisure Passengers - “inelastic”
o Saturation Frequency
o 4 Types/ Segments of Air Travel Demand
o O-D Market Demand Function D = M x Pa x Tb
Airline Competition
o Market Share
o Frequency Share
o Market Share / Frequency Share Model “S-curve”
The student will be able to perform the following analysis (i.e. problems):
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What do airlines do to maximize revenues
o Elastic vs. inelastic airfares
Calculate
o Market Share
o Frequency Share
o O-D Traffic
o O-D Supply
o Price Elasticity
o Time Elasticity
o Average Leg Load Factor
o Average Network Load Factor
o Basic Airline Profit
o % Connecting Passengers
o % Non-Stop Passengers
Identify from Diagram
o Point-to-Point vs Hubbing Network
o Different Markets
Calculate frequency of service impacts to Total Trip Time Model