AE 413 MODULE 9

AE 413 MODULE 9

Airline Pricing, Demand, and Cost​

By Jahaziel Vargas-Herrera

PRICING AND DEMAND

​

Of all the marketing variables that influence the potential sales of airline seats and cargo capacity, price has received the most attention since deregulation. For over 200 years, economists have emphasized the price variable in describing the level of demand for products and services.​

Some text here about the topic of discussion

Multiple Choice

_________ is defined as the various amounts of a product or service that consumers are willing and able to purchase at various prices over a particular time period.

• Quantity

• Price

• Demand

• Revenue

• Demand Schedule

Multiple Choice

____________ is simply a representation of a series of possibilities that can be set down in tabular form.

• Quantity

• Price

• Demand

• Revenue

• Demand Schedule

Multiple Choice

TRUE OR FALSE. A fundamental characteristic of demand is that as price falls, the corresponding quantity demanded rises; alternatively, as price increases, the corresponding quantity demanded falls.

• TRUE

• FALSE

This inverse relationship between price and number of passengers purchasing tickets can be presented on a simple two-dimensional graph measuring estimated number of passengers on the horizontal axis and price on the vertical axis (see Fig. 10-1). The resulting curve is called a demand curve. It slopes downward and to the right because the relationship it portrays between price and estimated number of passengers ticketed is inverse.

Subject | Subject

Some text here about the topic of discussion

The law of demand—people buy more at a low price than they do at a high price—is reflected in the downward slope of the demand curve.

​

What is the advantage of graphing our demand schedule? It permits us to represent clearly a given relationship—in this case, the relationship between price and estimated number of passengers—in a simpler way than we could if we were forced to rely on verbal and tabular presentation.

Subject | Subject

Some text here about the topic of discussion

Determinants of Demand

​In constructing a demand curve, a forecaster assumes that price is the most important determinant of the amount of any product or service purchased. But the forecaster is aware that factors other than price can and do affect purchases, in our case, of tickets. Thus, in drawing a demand schedule or curve, the forecaster must also assume that other factors remain constant; that is, the nonprice determinants of the amount demanded are conveniently assumed to be given. When these nonprice determinants of demand do in fact change, the location of the demand curve will shift to some new position to the right or left of its original position (see Fig. 10-2).

Multiple Choice

The major nonprice determinants of demand in the air travel market are:

(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.

• 1,3 and 5 only

• 2 and 4 only

• 1, 2, 3, 4 and 5 only

• 3, 4 and 5 only

Multiple Choice

TRUE OR FALSE. An increase in the number of passengers in a market—brought about perhaps by improvements in connecting flights or by population growth—will constitute an increase in demand.

• TRUE

• FALSE

Multiple Choice

TRUE OR FALSE. A change in demand is a shift in the entire demand curve, either to the right (an increase in demand) or to the left (a decrease in demand).

• TRUE

• FALSE

Multiple Choice

TRUE OR FALSE. A change in the quantity demanded is the movement from one point to another point—from one price–quantity combination to another—on a fixed demand curve.

• TRUE

• FALSE

Multiple Choice

The demand for some air travel is such that passengers and shippers are relatively responsive to price changes; price changes give rise to considerable changes in the number of passengers carried. This is called ________.

• Elastic Demand

• Inelastic Demand

Multiple Choice

The demand for some air travel is such that passengers and shippers are relatively responsive to price changes; price changes give rise to considerable changes in the number of passengers carried. This is called ________.

• Elastic Demand

• Inelastic Demand

Multiple Choice

If a given percentage change in price is accompanied by a relatively smaller change in the number of passengers carried.. It is known as ________.

• Elastic Demand

• Inelastic Demand

Multiple Choice

For other air travel, passengers are relatively unresponsive to price changes; that is, price changes result in modest changes in the number of additional passengers motivated to fly. This is called ________.

• Elastic Demand

• Inelastic Demand

Multiple Choice

If a given percentage change in price results in a larger percentage change in passengers carried. It is known as ________.

• Elastic Demand

• Inelastic Demand

Determinants of Elasticity

Multiple Choice

The determinants of elasticity are:

(1) Competition

(2) Distance

(3) Business Versus Pleasure

(4) Time

(5) Number of passengers

• 1, 3 and 5 only

• 2, 4 and 5 only

• 1, 2 and 3 only

• 1, 2, 3 and 4 only

Multiple Choice

An unusual application of normal fares in that they apply a specific fare to points other than the points between which the fare is determined.

• Promotional fares

• Common fares

• Joint fares.

Multiple Choice

Single fares that apply to transportation over the joint lines or routes of two or more carriers and that are determined by an agreement between them. _______________ are becoming very popular between the major and national carriers and commuter (regional) lines

• Promotional fares

• Common fares

• Joint fares.

Multiple Choice

Discounted fares that supplement the normal fare structure. They are always offered with some kind of restriction, such as minimum length of stay, day of the week, or season.

• Promotional fares

• Common fares

• Joint fares.

Multiple Choice

_____________ involve changes—increases or reductions—to actual fare levels, in contrast to the rules, restrictions, and/or footnotes that accompany most fares.

• Adjusting Rules and Restrictions.

• Fare Actions

Multiple Choice

TRUE OR FALSE. The more competition there is (the more substitutes and alternatives), the more responsive (elastic) consumers will be. For example, if four carriers are operating flights within 15 minutes of one another to a particular city and one offers a lower fare, a passenger likely will fly with that carrier, all other things being equal.

• TRUE

• FALSE

Multiple Choice

TRUE OR FALSE. Adjusting Rules and Restrictions. This second set of tactics involves the periodic adjustment of rules and restrictions that accompany most fares rather than the dollar amount of the fares.

• TRUE

• FALSE

Multiple Choice

What are the steps in analyzing a fare decrease?

(a) subtract dilution

(b) Subtract refunds

(c) Subtract advertising

(d) Subtract additional variable passenger costs.

(e)Add spill.

(f) Add rejected demand by other airlines.

• a, c, b, e and f

• f, e, d, c, b, and a

• a, b, c, d, e and f

• c, d, a, b and f

Multiple Choice

TRUE OR FALSE. The objective of inventory management is to maximize individual flight revenue. In the simplest terms, inventory analysts face the task of selling as many seats as possible at the highest possible fares.

• TRUE

• FALSE

Multiple Choice

TRUE OR FALSE. Cost is a major determinant in pricing the airline product.

• TRUE

• FALSE

Multiple Choice

All those expenses associated with and dependent on the type of aircraft being operated, including all flying expenses (for example, flight crew salaries and fuel and oil), all maintenance and overhaul costs, and all aircraft depreciation expenses..

• Nonoperating Costs and Revenues

• Direct Operating Cost

• Indirect Operating Cost

• Fixed vs Variable Costs.

Multiple Choice

All those costs that will remain unaffected by a change of aircraft type because they are not directly dependent on aircraft operations, including expenses that are passenger related rather than aircraft related (such as passenger service costs, costs of ticketing and sales, and station and ground costs) and general and administrative costs.

• Nonoperating Costs and Revenues

• Direct Operating Cost

• Indirect Operating Cost

• Fixed vs Variable Costs.

Multiple Choice

Includes those expenses and revenues not directly related to the operation of an airline's own air transportation services.

• Nonoperating Costs and Revenues

• Direct Operating Cost

• Indirect Operating Cost

• Fixed vs Variable Costs.

Multiple Choice

TRUE OR FALSE. Airport charges normally have two elements: (1) a landing fee related to the weight of the aircraft and (2) in some cases, a passenger facility charge levied on the number of passengers boarded at that airport.

• TRUE

• FALSE

• Fixed vs Variable Costs.

Multiple Choice

TRUE OR FALSE. The hull premium is generally calculated as a percentage of the value of the flight equipment and may range from 1 to 2 percent, or lower, depending on the airline, the number of aircraft insured, and the geographic areas in which its aircraft operate.

• TRUE

• FALSE

Multiple Choice

TRUE OR FALSE. Liability premiums are generally based on the estimated number of revenue passenger miles flown.

• TRUE

• FALSE

Multiple Choice

Flight equipment maintenance costs are divided into three categories:

(1) direct maintenance on the airframe

(2) direct maintenance on the engines

(3) direct maintenance on the propeller

(4) direct maintenance on the wings

(5) maintenance burden

• 1, 4 and 5

• 1, 3 and 5

• 1, 2 and 5

• 2, 3 and 5

Multiple Choice

TRUE OR FALSE. Depreciation periods can vary by aircraft, with the period for wide-body jets ranging from 8 to 10 years.

• TRUE

• FALSE

Multiple Choice

TRUE OR FALSE. The annual depreciation charge or cost of a particular aircraft in an airline's fleet depends on the depreciation period adopted and the residual value assumed.

• TRUE

• FALSE

Multiple Choice

_____________ are all those expenses, apart from landing fees and other airport charges, incurred in providing an airline's services at an airport.

• Station and ground expenses

• Passenger Service Costs

• Reservations, Sales, and Promotional Costs.

• General and Administrative Costs.

Multiple Choice

_________ are those costs that increase or decrease with the level of output, or available seat-miles (ASMs), that an airline produces.

• Variable costs

• Fixed Cost

Multiple Choice

These costs, for the most part, are avoidable in the short term.

• Variable costs

• Fixed Cost

Multiple Choice

________ costs that are unavoidable in the short term.

• Variable costs

• Fixed Cost

Multiple Choice

_______ are those direct operating costs that, in total, do not vary with changes in ASMs.

• Variable costs

• Fixed Cost