Airline ticket pricing and purchasing practices

Economics

Explaining Airline Ticket Prices with Supply and Demand

Airline ticket pricing is known to be dynamic, with the airfares increasing and decreasing. It may appear logical that tickets will be priced differently depending in the distance travelled; with tickets for longer distance at a higher price compared to tickets for short distance flights. However, pricing does not operate in this manner, and ticket prices may have nothing to do with the distance travelled, but reflect the supply and demand conditions.

The concept of supply and demand indicates the way prices are reached in any market. To consider why tickets to Casper, Wyoming to Denver, Colorado, and from Denver to Orlando, Florida may be the same, the first stage will be to look at how supply and demand impacts on price. In general terms, as the price for a product or service increases the demand will decrease, as the product or services becomes less affordable, and fewer people will purchase the product. Likewise, when the price of a product or service decreases the demand is likely to increase, as the product becomes more affordable more people may want to make a purchase. This can be presented in a simple graph, the quantity demanded along the x axis, with the price along the y axis, the downward sloping demand line shows that the quantity demanded will increase as the price decreases, and the supply line shows that suppliers will want to supply more as the price increases, higher prices with the same costs result in higher profits. When the two lines are placed on a graph, the point at which they cross is the point of equilibrium and will indicate the price that can be charged and the level of demand at a point where supply and demand are equal. In figure 1 below, the P. indicates the price at the point of equilibrium.

Figure 1; Supply and demand lines

This knowledge may be used by firms to mange their prices to stimulate or reduce demand. If demand increases so it exceeds the supply, for example, there are more passengers wanting to travel on a specific flight, than the available seats, the airline will be able to increase the prices until the demand decreases, and the demand and supply reach a point of equilibrium at a higher pricing point, as shown in figure 2 the price will increase along the supply curve (line) and the price will increase.

Figure 2; Increase in demand

If the airline has a surplus, with more seats available that the expected demand, the decreases in demand result in a decrease in price as the demand curve moves to the left and the point at which is crosses the supply line will be a lower price. These scenarios all assume that the supply remains the same. The complexity emerges when more than one airline has flights on the same route, as the supply will not all be in the control of a single airline, but the level of supply still impact on the way prices are determined; if one airline reduces the supply the other airlines may also benefit from that reduced supply.