
Mathematical representations
of the relationship between
demand and explanatory
variables

Major factors affecting
demand in a given O-D
market
› Price of air travel
› Total trip time, T
› Demographics of the market

Additive
P
› D=a-b P
D
Q
P

Multiplicative
› D=a P b , b<0
D
Q

Elasticity is a measurement of the
responsiveness of quantity demanded
to changes in price
› Negative for “normal” goods
› Typical range, -0.8 to -2.0

“elastic” demand
“inelastic” demand

› Leisure Travel
› Business Travel
P
P
D
10%
10%
D
Q
16%
Q
8%

P
Airlines will aim to
increase revenue by
› Increasing fares for
inelastic business
travelers
› Reducing fares for
elastic leisure travelers
D
Q

“elastic” demand
“inelastic” demand

› Business Travel
› Leisure Travel
T
T
D
1%
1%
D
Q
X%
Q
Y%

Traditional demand segments:
› Business
› Leisure

Not all business or leisure travelers have
the same characteristics or preferences

Price and Time sensitivity can be used to
identify different demand segments
Price Sensitivity
Low
High
Time
Sensitivity
Low
High
I
Time Sensitivity
&
Insensitive to Price
II
Time Sensitive
&
Price Sensitive
IV
Insensitive to Time
&
Insensitive to Price
III
Price Sensitive
&
Insensitive to Time

For a given O-D Market,
› D = M x Pa x Tb
› M: market size parameter
› P: average air travel price
› T : Total trip time
› a, b : price and time elasticities
Business Air Travel
Demand
Personal Air Travel
Demand
First Class
Dfb
Dfp
Coach Class
Dcb
Dcp
Discount Class
Ddb
Ddp
Good demand models are very useful as
predictive tools of O-D demand
 Price and Time elasticity are important
factors for demand segmentation

› Proper demand segmentation increases
revenue

Airlines provide different classes or
qualities of service at different price
levels