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

2. DOMESTIC PASSENGER AIR FARES
PRIOR TO HIGH COST FOR PASSENGER FARES
SHARP DOWNWARD TREND

3. 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

4. DOMESTIC PASSENGER AIR FARES
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

5. 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

6. 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.

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

8. 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

9. 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

10. 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

11. 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

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

13. 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)

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

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

16. 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

17. 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.

18. 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

19. 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.

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

21. 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

22. 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.

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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 $ (IN THOUSANDS)
PROVIDES 65% LOAD FACTOR

32. 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

33. 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

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

35. 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

36. 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

37. 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

38. 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

39. 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

40. 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

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

42. 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

43. 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

44. 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

45. 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)

46. 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

47. 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

48. 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

49. 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

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