What factors affect airline pricing decisions?
There are, of course, many factors that affect the prices that airlines charge their customers. Some of these include:
- Labor costs. Many airlines have been trying hard to reduce labor costs so that they can also reduce prices and remain competitive.
- Fuel costs. Rising fuel costs were one of the major factors that led to increases in airline fares in the last decade or so.
- Demand. The number of travelers and the prices they are willing to pay has a very important effect on the prices that airlines are able to charge.
- The internet. The ability of passengers to easily find out the fares offered by competing airlines forced prices down.
The factors affecting the airlines pricing decisions identified in the answer posted above. However there are additional factors. In my answer I am giving a more comprehensive list. Also I have classified these factors in five groups - cost, demand, supply, competition, rates and taxes, and government regulation. Also, I have provided some additional insights into how these factors behave in some specialized way for the airlines industries.
Costs in airlines can be classified according to the degree to which these depend on the turnover. The capital cost of the aircraft and related facilities are fixed costs. Overhead costs of establishment are also relatively fixed. For example, with the same fleet of aircraft, an airlines may change the number of destination to which it flies. This will change the establishment costs associated with the number and type of destinations served.
Fuel constitutes the biggest component of the variable costs. Labour cost change only partially. Only some additional allowance paid to the flying staff is directly related to the level of operation. Other variable costs such as the refreshments served in the aircraft is relatively low. However, such in-flight facilities can be provided only by reducing the passenger carrying capacity of aircraft.
Another major component of variable cost is the charges paid to the airports for takeoff, landing, and other ground support facilities.
The selling cost are also significant, when the sales is done through selling agent. However the sales cost are much lower for the booking made made by the customers directly through the Internet. For this reason, airlines often offer lower fares for booking made through the Internet.
Variable cost in the airlines are proportional to the full aircraft carrying capacity, rather than the actual number of passengers carried. When a place flies between two destinations, most of the cost remains same irrespective of the number of passengers on the flight. For this reason many airlines offer heavily discounted fares for filling the seats on flights that remain unbooked even on the day of flight.
In airlines the demand is often classified according to the extent to which a passenger is able and willing to change the travel schedule and the elasticity of demand in relation to price. Thus airlines employ various means to charge higher fares to passengers with rigid travel plans and offer discounts to customers with flexible travel schedules.
Class of travel is also an important aspects of the demand. Thus pricing decision includes not only the fare, but also the division of total passenger carrying capacity of aircraft in different classes of travel.
In airlines the supply varies in blocks equivalent to full aircraft capacity. It is not possible to match supply with exact number of passengers. Also it is not possible to change the schedule of flights at short notice. Often the changes in schedules is planned weeks in advance.
Like all other industries the completion also plays an important consideration in pricing decision. This completion is closely linked to the availability of flight at a time convenient to passenger.
Rates and taxes
These are paid to government and other statutory agencies. These may be treated as a component of cost.
Some times government puts restriction on the fares that can be charged.