Airline ticket pricing: economic rationale for equal fares across unequal distances

Airline ticket prices might seem illogical at times, but they are actually based on careful consideration of the different contributing factors. To the outside observer, the distance between airports is probably the most important factor, but in reality there many other considerations that are just as important if not moreso. The cost inputs are a factor and these affected by the distance, but competition also plays a critical role, as does the perishability of the product.

McAfee (2006) argues that the most important variable is competition. The number of airlines competing on a given route has become a critical variable since the deregulation of the airline industry in the United States brought about conditions of competition on most routes. Thus, the most popular routes are highly competitive and it is with these routes that prices are the lowest. This explains why some routes to smaller centers are subject to higher prices -- there are fewer airlines running those flights. In some cases, a given route might not have any competition at all. In such situations, the industry structure is that of a monopoly, and the airline on that route is likely to extract monopoly rents. Indeed, the most highly competitive routes are often used as loss leaders to drive traffic to the smaller routes. Airlines have very thin margins on popular domestic routes, and make up for that with higher margins on the routes with less competition. Included in the latter category are international routes, many of which are subject to government controls. Under situations of government control, only two airlines might fly a given international route (one from each country), meaning that those carriers are operating in a duopoly. Duopoly pricing is subject to the conditions of supply and demand (Investopedia, 2012). If supply is artificially restricted and demand is high, then the prices charged by those airlines will be potentially very high.

Inputs remain something of a factor in flight costs. The two biggest input costs are fuel and staff, both of which are correlated with the length of the journey. All other factors being equal, a longer flight would cost more than a shorter flight and indeed prior to deregulation this was typically the case (McAfee, 2006). Airlines may price below these costs, knowing that the flight is a loss leader to drive traffic to more lucrative routes. It is highly unlikely that any airline would price below cost on a popular route.