AERO 4100 / 5100 AIRLINE MANAGEMENT FORECASTS / PRICE DEMANDS CHAPTER 10

DOMESTIC PASSENGER AIR FARES PRIOR TO 1929 --- HIGH COST FOR PASSENGER FARES 1929-1941 --- SHARP DOWNWARD TREND

DOMESTIC PASSENGER AIR FARES AFTER W.W.II CARRIERS REDUCED AIR FARES BROUGHT BACK DISCOUNT FARE PROGRAMS ESTABLISHED BASE FARE ON PER MILE BASIS ESTABLISHED NO SHOW PENALTY ESTABLISHED COACH FARE

DOMESTIC PASSENGER AIR FARES 1952 --- CAB ELIMINATED CENTS-PER-MILE LIMITS COACH FARE SET AT NO MORE THAN 75% OF FIRST CLASS 1960’S SAW A DECLINE IN FARE RATES AND INCREASE IN TRAVEL 1970’S TREMENDOUS INCREASE IN FUEL COSTS 15% INCREASE IN FUEL COSTS

DOMESTIC PASSENGER AIR FARES 1980’S DEREGULATION BROUGHT ABOUT COMPETITION WITH PRICE 1990’S RISE AND FALL OF MANY COMPANIES... BROUGHT ABOUT MANY MERGERS DEVELOPMENT OF LOW FARE / NO FRILLS AIRLINES

PRICING AND DEMAND DEMAND IS THE VARIOUS AMOUNTS OF A PRODUCT OR SERVICE THAT CONSUMERS ARE WILLING AND ABLE TO PURCHASE AT VARIOUS PRICES OVER A PARTICULAR TIME PERIOD.

PRICING AND DEMAND LAW OF DEMAND AS PRICE FALLS ---- QUANTITY DEMANDED RISES AS PRICE INCREASE --- QUANTITY DEMANDED FALLS

PRICING AND DEMAND INVERSE RELATIONSHIP BETWEEN PRICE AND NUMBER OF PASSENGERS BUYING TICKETS CAN EASILY BE GRAPHED. PASSENGERS ON HORIZONTAL AXIS PRICE ON THE VERTICAL AXIS RESULTING CURVE IS CALLED A DEMAND CURVE

DETERMINANTS OF DEMAND MAJOR NONPRICE DETERMINANTS OF DEMAND PASSENGERS PREFERENCES NUMBER OF PASSENGERS IN A PARTICULAR MARKET FINANCIAL STATUS AND INCOME LEVELS OF THE PASSENGERS PRICES OF COMPETITORS AND RELATED TRAVEL EXPRESS PASSENGER EXPECTATIONS WITH RESPECT TO FUTURE PRICES

CHANGES IN DEMAND SHIFT IN DEMAND INCREASE IN DEMAND IS REFLECTED IN A SHIFT OF THE DEMAND CURVE TO THE RIGHT DECREASE IN DEMAND ENTAILS A SHIFT OF THE DEMAND CURVE TO THE LEFT

CHANGES IN DEMAND EFFECT UPON DEMAND OF CHANGES IN NONPRICE DETERMINANTS (1) PREFERENCES OF PASSENGERS (2) NUMBER OF PASSENGERS (3) FINANCIAL STATUS AND INCOME LEVELS OF PASSENGERS (4) PRICES OF COMPETITORS AND RELATED TRAVEL EXPENSES (5) PASSENGERS’ EXPECTATIONS WITH RESPECT TO FUTURE PRICES

CHANGES IN DEMAND CHANGE IN DEMAND --- SHIFTS THE ENTIRE DEMAND CURVE CHANGE IN QUANTITY --- MOVEMENT FROM ONE POINT TO ANOTHER POINT

ELASTICITY OF DEMAND PASSENGERS AND SHIPPERS ARE RELATIVELY RESPONSIVE TO PRICE CHANGES. PRICE CHANGES GIVE RISE TO CONSIDERABLE CHANGES IN THE NUMBER OF PASSENGERS CARRIED. MEASURE THE DEGREE OF ELASTICITY OR INELASTICITY BY THE ELASTICTY COEFFICIENT OR Ed (DELTA = CHANGE)

ELASTICITY OF DEMAND PERCENTAGE CHANGE IN PASSENGER DEMAND E d = PERCENTAGE CHANGE IN PRICE % DELTA Q % DELTA P

ELASTICITY OF DEMAND E d = CHANGE IN PRICE CHANGE IN PASSENGER DEMAND MIDPOINT BETWEEN PASSENGER DEMANDS E d = CHANGE IN PRICE MIDPOINT BETWEEN PRICES

ELASTICITY OF DEMAND ELASTIC DEMAND DEMAND IS ELASTIC IF A GIVEN PERCENTAGE CHANGE IN PRICE RESULTS IN A LARGER PERCENTAGE CHANGE IN PASSENGERS CARRIED TOTAL REVENUE IS PRICE TIMES QUANTITY

ELASTICITY OF DEMAND ELASTIC DEMAND THE REASONING IS REVERSIBLE: IF DEMAND IS ELASTIC A PRICE INCREASE WILL REDUCE TOTAL REVENUE IF DEMAND IS ELASTIC, A CHANGE IN PRICE WILL CAUSE TOTAL REVENUE TO CHANGE IN THE OPPOSITE DIRECTION.

ELASTICITY OF DEMAND INELASTIC DEMAND DEMAND IS INELASTIC IF A GIVEN PERCENTAGE CHANGE IN PRICE IS ACCOMPANIED BY A RELATIVELY SMALLER CHANGE IN NUMBER OF PASSENGERS CARRIED. THE ELASTICITY COEFFICIENT WILL ALWAYS BE LESS THAN 1 WHEN DEMAND IS INELASTIC

ELASTICITY OF DEMAND INELASTIC DEMAND IF DEMAND IS INELASTIC, A PRICE DECLINE WILL CAUSE TOTAL REVENUE TO FALL. ANALYSIS IS REVERSIBLE: IF DEMAND IS INELASTIC--- A PRICE INCREASE WILL INCREASE TOTAL REVENUE. A CHANGE IN PRICE WILL CAUSE TOTAL REVENUE TO CHANGE IN THE SAME DIRECTION.

DETERMINANTS OF ELASTICITY COMPETITION DISTANCE BUSINESS VERSUS PLEASURE TIME NO-FRILLS AIR FARE AND SURVEY WARFARE

TYPES OF PASSENGER FARES NORMAL FARES BACKBONE OF THE FARE STRUCTURE APPLY TO ALL PASSENGERS AT ALL TIMES COMMON FARES APPLY A SPECIFIC FARE TO POINTS OTHER THAN THE POINTS BETWEEN WHICH THE FARE IS DETERMINED

TYPES OF PASSENGER FARES JOINT FARES SINGLE FARE THAT APPLIES TO TRANSPORTATION OVER THE JOINT LINES OR ROUTES OF TWO OR MORE CARRIERS. DETERMINED BY AN AGREEMENT BETWEEN THEM.

TYPES OF PASSENGER FARES PROMOTIONAL FARES DISCOUNTED FARES THAT SUPPLEMENT THE NORMAL FARE STRUCTURE ALWAYS OFFERED WITH SOME KIND OF RESTRICTION SERVE TO MINIMIZE THE RISK OF DIVERTING FULL-FARE TRAFFIC NORMALLY USED WHERE LOAD FACTORS ARE BELOW THE OPTIMUM LEVEL

AIRLINE COSTS DIRECT OPERATING COSTS (VARIABLE COSTS) INCREASE WITH THE LEVEL OF OUTPUT OR AVAILABLE SEAT MILES (ASMs) A SEAT MILE IS ONE PASSENGER SEAT TRANSPORTED ONE STATUE MILE INDIRECT COSTS (FIXED-OVERHEAD COSTS) GENERAL ADMINISTRATIVE EXPENSES SYSTEM WIDE MARKETING ACTIVITIES REAL PROPERTY

AIRLINE COSTS TYPES OF EXPENSES OPERATING EXPENSES FLYING OPERATIONS DIRECT MAINTENANCE MAINTENANCE BURDEN PASSENGER SERVICE AIRCRAFT / TRAFFIC SERVICING RESERVATIONS AND SALES (MARKETING) GENERAL AND ADMINISTRATIVE DEPRECIATION AND AMORTIZATION NONOPERATING EXPENSES

PRICING AND OUTPUT DETERMINATION TOTAL COSTS IN THE SHORT RUN REVENUE PASSENGER MILES (RPMs) ONE PASSENGER TRANSPORTED ONE MILE IN REVENUE SERVICE EXPRESSED IN CENTS PER MILE (KNOWN AS YIELD) TOTAL COSTS IN THE SHORT RUN SHORT-TERM PERIOD REFERS TO A PERIOD OF TIME TOO BRIEF TO PERMIT THE AIRLINE TO ALTER ITS CAPACITY

PRICING AND OUTPUT DETERMINATION TOTAL COSTS IN THE SHORT RUN SHORT-TERM PERIOD REFERS TO A PERIOD OF TIME TOO BRIEF TO PERMIT THE AIRLINE TO ALTER ITS CAPACITY YET LONG ENOUGH TO PERMIT A CHANGE IN THE LEVEL AT WHICH THE EXISTING FLEET OF AIRCRAFT IS UTILIZE

PRICING AND OUTPUT DETERMINATION TOTAL COSTS IN THE SHORT RUN LAW OF DIMINISHING RETURNS AVAILABLE SEAT MILES INCREASE AT A DECREASING RATE UNTIL ULTIMATE CAPACITY IN THE SHORT RUN IS REACHED

PRICING AND OUTPUT DETERMINATION LOAD FACTOR PASSENGER LOAD FACTOR REVENUE PASSENGER MILES DIVIDED BY AVAILABLE SEAT MILES LOAD FACTORS NORMALLY INCREASE WITH REDUCTIONS IN AVAILABLE SEAT MILES LOAD FACTORS ABOVE 75% OR BELOW 55% ARE UNREALISTIC LOAD FACTORS BELOW 55% WOULD NOT REALIZE A PROFIT

PRICING AND OUTPUT DETERMINATION PROFIT MAXIMIZATION IN THE SHORT RUN LEVEL OF AVAILABLE SEAT MILES TO MAXIMIZE PROFITS GIVEN PRICES REVENUE PASSENGER MILES TOTAL REVENUES TOTAL COSTS LOAD FACTORS

PRICING AND OUTPUT DETERMINATION PROFIT MAXIMIZATION IN THE SHORT RUN EXAMPLE 3.4 MILLION ASMs 2.21 MILLION RPMs YIELD OF $.250 PER MILE TOTAL REVENUE OF $552.5 (IN THOUSANDS) PROVIDES 65% LOAD FACTOR

PRICING AND OUTPUT DETERMINATION PROFIT MAXIMIZATION IN THE SHORT RUN IF THE RPMs DO NOT MATERIALIZE DEMAND DECREASES AT ALL PRICE LEVELS OVER PARTICULAR TIME PERIOD ------REVENUES WILL FALL AIRLINE MUST REDUCE CAPACITY TO INCREASE LOAD FACTOR

AIR FREIGHT RATES AIR CARGO THE MARKET FOR AIR FREIGHT (1) COMMODITY PERISHABLE SUBJECT TO QUICK OBSOLESCENCE REQUIRED ON SHORT NOTICE VALUABLE RELATIVE TO WEIGH

AIR FREIGHT RATES (2) DEMAND UNPREDICTABLE INFREQUENT IN EXCESS OF LOCAL SUPPLY SEASONAL

AIR FREIGHT RATES (3) DISTRIBUTION PROBLEMS RISK OF PILFERAGE, BREAKAGE, OR DETERIORATION HIGH INSURANCE COSTS FOR LONG IN-TRANSIT PERIODS SPECIAL HANDLING OR CARE NEEDED WAREHOUSING OR STOCKS IN EXCESS

AIR FREIGHT RATES THE MARKET FOR AIR FREIGHT AIR CARGO INCLUDES ALL AIR FREIGHT EVERYTHING THAT GOES INTO AN AIR FREIGHTER OR THE CARGO COMPARTMENT ON A PASSENGER FLIGHT (EXCEPT PASSENGER BAGGAGE) IS REFERRED TO AS AIR CARGO A TON-MILE IS ONE TON OF CARGO TRANSPORTED ONE MILE AIR CARGO IS GENERALLY HIGH-VALUE-PER POUND COMMODITIES

AIR FREIGHT RATES THE MARKET FOR AIR FREIGHT AIR FREIGHT IS PREMIUM SERVICE CAN ADD A NEW COMPETITIVE EDGE TO THE MARKETING EFFORT CAN STIMULATE GROWTH IN EXISTING MARKETS ALLOWS TO GO INTO NEW MARKETS WITHOUT MAKING A COMMITMENT TO LARGE, FIXED INVESTMENTS IN WAREHOUSING AND INVENTORIES

AIR FREIGHT RATES THE MARKET FOR AIR FREIGHT TOTAL COST ASSOCIATED WITH CARRYING INVENTORY IS HIGH AIR FREIGHT CAN OFTEN BRING ABOUT DRASTIC REDUCTIONS IN THE COST OF CARRYING INVENTORY

TYPES OF AIR FREIGHT RATES GENERAL COMMODITY RATE NORMAL OR BASIC PRICE APPLICABLE TO ALL COMMODITIES IN ALL MARKETS WEIGHT OF A SHIPMENT INCREASES, THE PER-POUND RATE DECREASES

TYPES OF AIR FREIGHT RATES SPECIFIC COMMODITY RATES ESTABLISHED FOR UNUSUALLY HIGH VOLUME SHIPPING OF CERTAIN PRODUCTS BETWEEN CITY PAIRS SPECIFIC COMMODITY RATE IS LOWER THAN THE GENERAL COMMODITY RATE TO REFLECT THE ADVANTAGE TO THE CARRIER IN REGULAR HIGH-VOLUME SHIPMENTS

TYPES OF AIR FREIGHT RATES EXCEPTION RATES HIGHER THAN THE USUAL AIR FREIGHT RATES AND REQUIRE SPECIAL HANDLING

TYPES OF AIR FREIGHT RATES JOINT RATES PUBLISHED RATE FOR TWO OR MORE AIRLINES PRIORITY RESERVED AIR FREIGHT SERVE SHIPPERS OF HEAVY OR BULKY FREIGHT PROVIDES RESERVED SPACE ON A SPECIFIC FLIGHT SPEED PACKAGE SERVICE SMALL PACKAGE FAST DELIVERY SERVICE AIRPORT-TO-AIRPORT RATE BASED ON DISTANCE

TYPES OF AIR FREIGHT RATES CONTAINER RATES RATES ARE LOWER WHEN SHIPPER FILLS CONTAINER PACKAGING COST CAN BE REDUCED SHIPPERS CAN SEAL CONTAINERS TO PREVENT PILFERAGE CONTAINERIZED SHIPMENTS ARRIVE AS ONE COMPLETE UNIT COUNTING AND CHECKING THE SHIPMENT IS SIMPLIFIED TRANSPORTATION COST OF HIGH-DENSITY FREIGHT SHIPMENTS IN CONTAINERS OFTEN IS LOWER THAN SURFACE TRANSPORTATION EXCESS POUND RATE

SPECIAL AIR FREIGHT SERVICES ASSEMBLY SERVICE DISTRIBUTION SERVICE CARRIERS GENERALLY DO NOT PROVIDE ASSEMBLY AND DISTRIBUTION SERVICE ON THE SAME SHIPMENT AIR FREIGHT FORWARDERS PROVIDE BOTH SERVICES AND MAKE THEIR PROFIT FROM THE BULK SHIPPING RATES

SPECIAL AIR FREIGHT SERVICES PICK UP AND DELIVERY SERVICE OTHER SPECIALIZED SERVICES ARMED GUARD SERVICE SIGNATURE SERVICE HUMAN REMAINS SHIPMENTS RESTRICTED ARTICLES (CFR TITLE 49)

FACTORS AFFECTING AIR FREIGHT RATES COSTS OF THE SERVICE ALLOCATION OF COSTS IN COMBINATION AIRCRAFT IS DIFFICULT MAXIMUM DEVELOPMENT OF AN AIR CARGO INDUSTRY REQUIRES THE OPERATION OF ALL-CARGO AIRCRAFT WHOSE COSTS MUST BE MET VOLUME OF TRAFFIC --- REDUCED RATES FOR LARGER SHIPMENTS

FACTORS AFFECTING AIR FREIGHT RATES DIRECTIONALITY FREIGHT TRAFFIC IS ALL ONE WAY RATES SET LOWER LEVELS IN THE OFF-DIRECTION TO EQUALIZE THE FLOW OF TRAFFIC CHARACTERISTICS OF THE TRAFFIC DENSITY OF THE COMMODITY UTILIZATION OF AVAILABLE SPACE AND CAPACITY OPTIMIZED STACKING LOSSES

FACTORS AFFECTING AIR FREIGHT RATES VALUE OF THE SERVICE CONSIGNOR --- USUALLY THE SHIPPER CONSIGNEE ---- THE PERSON NAMED AS THE RECEIVER OF THE SHIPMENT COMPETITION CAPACITY EXCEEDS DEMAND THERE IS CONSIDERABLE PRESSURE TO LOWER RATES

SMALL---PACKAGE BUSINESS BOOM SMALL--PACKAGE SHIPMENTS GENERALLY RESTRICTED TO PACKAGES OF LESS THAN 70 POUNDS HIGH-PRIORITY BUSINESS SHIPMENTS PICKED UP AT THE SHIPPERS DOOR OR A PICK-UP STATION CAN BE DELIVERED AS EARLY AS THE FOLLOWING MORNING

SMALL---PACKAGE BUSINESS BOOM FEDERAL EXPRESS UNITED PARCEL SERVICE (UPS) U. S. POSTAL SERVICE EMERY PUROLATOR COURIER ROADWAY PACKAGE EXPRESS DHL