Assignment 1

Economic Factors that Impact Ticket Pricing in Aviation

Participants:

Abdul Samad Ikram : F2021001010

Abdul Rehman Khan: F2021001041

Mohib Rizvi : F2021001087

Shamil Shahzada : F2021001076

Amaan Danish : F2021001030

Micro Economics, Section: A2

Resource Person

Sidra Raza

Department of Aviation Management

University of Management and Technology

Lahore

1-11-22

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Economical Factors that Impact Ticket Pricing in Aviation

It is of no big surprise that ticket prices are changing from a day to day basis, with them increasing
and decreasing according to the economical conditions of a certain country.
Several factors play an important role when it comes to deciphering the price system in the aviation
industry.
Here we shall be looking into these price-influencing factors and the ways that they play an
important and crucial role in deciding the perfect price of airline tickets from one destination to
another.

Ticket prices change with the season

Seasonality has an immense impact when it comes to ticket pricing. Charging higher fares during
high seasons is very natural for airlines who see this time of the year as an opportunity. They are
able to maximize their profits with the limited seats that they have.
That is why travelers must be ready to pay a premium ticket price during high seasons when they
start planning their trips to certain holiday areas.
However, if you don’t wish to pay a premium amount then you can skip your plans to go during
peak holiday seasons and instead choose to go during other seasons when the ticket prices drop.
e.g. If you wish to go to Hawaii to enjoy the culture and other activities then instead of going
during summers (Peak season), you can choose to go during winters.

Airline price tickets based on oil prices

One of the most important factors that affects the ticket pricing is none other than the fuel. Fuel is
one of the biggest costs of operating a flight and even the most modern aircraft burn several
hundred liters per minute.

When geopolitical events, wars, or other economic conditions cause a change in oil prices, you
will feel that change in your ticket prices. This is why some countries with economic instability
and inflation have higher fares comparatively to the stable ones.

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Airlines follow the laws of Demand
Similar to how seasonality affects ticket prices due to high demand for a particular place, the laws
of demand are more advanced than we think.
Whenever there are big events like the PSL in Dubai or the SuperBowl, tourism is opened up in
that certain destination which increases the demand for the flight ticket. This demand further
increases the prices of the ticket since people are traveling for that one event and because of which
the airlines increase the price.
It can also work in the sense of low demand for the ticket, due to a natural disaster in that certain
area. During the Global Pandemic, India was labeled as a red zone country, preventing many flights
from flying over to that place. However, certain flights did fly there but since the demand was so
low, ticket prices were at an all time high.

This graph shows the phenomena that as the demand and supply of the product increase the price
will decrease and as the demand increase or supply does not then the prices increase.
So these factor do play an important role in ticket prices and effect the consumer buying behavior
which will lead to not being having much satisfaction because consumer wants more and more
from spending less. So these factors plays a vital role in micro economics

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Effect on flight prices due to more competition

Typically, one of the reasons airlines have fluctuating ticket prices throughout the year is due to
competition between them. This competition affects the change in flight prices. In order to set
their prices, airlines check what others are charging for the same and identical routes. When one
airline lowers its rates on a specific route, it's typical to see others rapidly follow because everyone
has to lower their prices to stay competitive and win over the customers. When several airlines are
working for passengers on a specific route, you can get the most affordable flights.

But on the other hand, not just airlines, but the location of the airport in any city also has an impact
on the cost. As small cities have less airports than large cities, the cost of airline tickets to these
cities is lower due to the large number of flights to these cities.

For example: The flight from Los Angeles to Honolulu, which is offered by almost all major US
airlines and is often inexpensive. On the other hand, there are United Airlines-only flights from
Honolulu to Guam, on which you rarely find a deal.

Although a healthy level of competition is necessary to keep the greatest services at most
affordable prices.

Airlines have high fixed costs that include buying and maintaining aircraft and it does not vary
with the level of output. Conversely, variable costs fluctuate with the level of output. For airlines,
these costs include fuel and salaries. In the airline industry, the output for these costs are airline
tickets. Economists explain this combination of factors as Economies of Scale. So, as competition
pushed fares so low that, for many airlines only variable costs were covered. Airlines won’t
typically lower prices below variable costs because then it would be cheaper for them to fly at all.
Covering only variable costs means that fixed costs haven’t been accounted for. This situation
makes airlines go bankrupt and merges.

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Does airline fares vary with the distance it travels?

As we discussed earlier, aircraft's major cost is its fuel so the higher fuel consumed the higher fare
vice versa, right? But not in all scenarios.

Airlines have to pay different charges which vary within the airspace and where it is going. If an
aircraft is traveling domestic then it will cost less airspace charges and other expenses but if it
travels the same distance internationally then it will charge more comparatively.

It is also impacted by the economic situation of the country. You might think we already covered
that in the oil prices section, but adding flight time costs much more than that: paying the crew,
over flight fees, extra food, and drinks onboard. However distance do impact the fare but with
respect to where it is going

Business travelers affect ticket prices

Business travelers are far less likely to be affected by the increase or decrease of ticket prices.
Their main goal is to reach a certain destination, at a specific date and time and through a specific
airline as well.
These business travelers often book seats in the premium and business class which are far more
expensive than economy, thus being valuable assets for the airline itself. They are also given
special treatment which leads these people to choose that specific airline in their future trips as
well.
Unlike business class, leisure travelers are, however, sensitive to the increase in ticket prices.
Leisure travelers are those who use airlines to go to another country or place for vacation or for
some event. Thus, with the increase in prices they avoid using airlines and often cancel plans for
a time when the demand and price for the air ticket is lower.

Timing of the flight affects the ticket price

Airlines price their tickets very particularly, even considering the day and time of the flight.
Therefore, they will price them higher if they know that Monday early flights would be in high

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demand. On the other hand, Wednesday morning 5am flights are frequently slow, therefore they
will provide a discount.

The most affordable days to fly are Tuesdays, Wednesdays, and Thursdays, as well as Saturdays.
Other days of the week fall on weekends, when many people travel and rates are at their greatest.
Even the hour can fluctuate, particularly on routes where there is a lot of competition.

For example, British Airways operates flights from New York to London almost every hour in the
late afternoon and evening. Analysts are continuously determining which hours of each day are
the most valuable because they are not all valued similarly.

Low-Cost Airlines vs. Full-Service Carriers

A Low-cost carrier airline is typically lower cost than a Full-Service carrier because it doesn’t
offer traditional services normally included as part of the fare. Thereby, offering lower fares
because of their less comforts. They charge premium charges like full-sized carry-on, checked
baggage, drinks on the plane. This is the main profit for the low-cost carriers; they charge a low
fare for the ticket to charge a premium for basically anything else they can.

Whereas in Full-Service Carriers they charge more fares than low cost airlines because they offer
passengers in flights entertainment, meals, beverages and comforts in the ticket price. There are
multiple cabins in full-service carriers and usually these aircrafts are bigger than Low-cost Airlines
which is also a major reason for high ticket prices for Full-Service Carriers.

Flight fares depend on the timing of your purchase

Timing plays a vital role in ticket price , plane tickets usually get expensive closer to the departure
dates. Flights are inexpensive when booked between four months and three weeks before your
departure date. Booking too far in advance isn’t the best choice either, as airlines would take
advantage of planners to get a higher price. Mostly the tickets are cheapest in midweek.

Airlines factor Taxes and Fees into prices

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Cost of the tickets also varies with tax and the charges the airline has to pay during the flight.
These surcharges may vary country vise. Bigger airports are more likely to have higher taxes and
fees whereas larger planes cost more to land on the runway.

International flights collect their own special taxes, such as customs and border patrol fees.
Airlines sometimes also have to pay charges to use some other countries' airspace so it also varies
what kind of lane they choose to fly. Airlines have to pay aerodrome charges such as parking,
service charges, boarding bridge charges etc. These charges and taxation become a factor that
impact ticket pricing.

Conclusion

In conclusion, the economical conditions of a country play a vital role in deciding the ticket prices
of an airline. Whether it is the cause of global increase in the oil prices or during high or low
seasons when traveling is at its peak or when the distance of traveling is longer from the parent
country, the prices of tickets vary from airline to airline.

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