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Is Price The Sole Determinant Of Demand And Supply For Air Transportation?

Though 'Price' is a major determinant of demand for any product or service, it is not the sole determinant of demand for air transportation, because the demand for air transportation also depends on several other determinants such as:
  • The availability of seats,
  • Time of a flight,
  • Availability of alternative travel options,
  • Local government regulations and restrictions,
  • Weather, war etc. For instance Countries closing their national borders due to Covid-19.


Factors affecting Demand of Air transportation
  1. Price:
    The price a of an airline ticket plays a crucial role in creating a demand for an airline. E.g. Ticket price from Delhi to Ranchi via Indigo Airlines is 2500/- and via Vistara is 3000/- with both flight timings being nearly the same. A consumer would prefer to take the cheaper air ticket.
     
  2. Competitor's Price:
    If the competitor airline lowers its ticket price it automatically creates a negative demand for other airlines because - Consumers would prefer a cheaper airfare and many people who earlier were unable to afford the ticket can now avail one.
     
  3. Income of the consumer:
    Increase in income of the consumer is directly proportional to the demand of air transportation. Eg. Due to Covid many people lost their jobs or experienced pay-cuts, these people would now cut their travel expenditure or switch to cheaper modes of travel.
     
  4. Level of development of the local economy:
    Development level of an economy is again directly proportional to demand for air travel i.e. rapid increase in business avenues like manufacturing and export hubs or tourism would cause increase in Air travel.
     
  5. Availability and possibility of alternative mode of transportation:
    e.g. For travelling to Jaipur from Delhi, various modes of travel are available -air, train, bus and car. The travelers need to choose based on the urgency to travel, cost involved, time and experience.
     
  6. Benefits and amenities received from the transportation:
    If Air Transport provides comfort and safety to passengers and goods transported, saving time and effort as compared to other alternatives, it would create demand for more options to be available.
     
  7. Advertising, Sales & promotion:
    Airlines which spend on advertising and promotion can gain more demand for their service as compared to the ones who advertise less. Taking reference from Porter's 4P's theory promotion is an important element in creating demand.
     
  8. Frequency of services:
    If there is increase Demand for flights for a particular sector where none exists or present capacity is falling short, it would lead to more supply options and subsequent increase in frequency of air services.
     
  9. Loyalty programs:
    Frequent flying programs provide lucrative benefits/incentives to the travelers thereby alluring them to travel with them.
     
External factors:
Terrorism:
Due 9/11 the air travel demand had reduced considerably as people were scared to travel.

Pandemic (Covid-19):
Since last 2 years the air transportation has suffered a setback as the countries have closed their borders on and off to curb the spread of Covid virus.

War:
war situation in Ukraine is making airlines avoid the airspace above the conflict zone thereby carrying more fuel resulting in increase in price and also increasing flight times.
Weather- in case of volcanic eruptions or storms the flights tend to get cancelled or re-routed thereby affecting demand for alternate routes and airlines.

Development of tourism in other countries:
e.g. All flights in to tourist destinations like Maldives and Nepal usually stop over at Mumbai or Delhi respectively increasing the flights to these airport hubs.

Supply in air transportation refers to the number of seats or number of trips that can be provided by an airline at a given price and given period of time. In air transportation, Supply is not based on demand, it exists irrespective of Demand.

Factors affecting Supply of Air transportation
  1. Nature of Commodity:
    Based on nature, commodities are divided into perishable goods and durable goods. In air transportation, the seats fall under perishable goods which render the supply less elastic.
     
  2. Price of tickets:
    Price is directly proportional to Supply. When the price of air tickets increase, the airlines want to increase their supply but because the no of seats in a aircraft is fixed they can do so only by flying more frequently which again may or may not be possible.
     
  3. Price of resources:
    This is inversely related to Supply. Resources can refer to raw materials used to manufacture an aircraft, fuel (ATF) used to fly an aircraft, the staff etc. any increase in price of the resources would affect the supply. Eg. Increase in price of ATF would lead to increase in cost of flying the aircraft which would severely impact an airline because if the airline were a loss-making venture it would want to reduce operations inorder to reduce cost and sustain in the market.

    Thus, reducing the Supply. For instance, during Covid pandemic many airlines who had placed orders for new aircrafts prior to pandemic to increase their fleet have either cancelled the same or are still waiting its delivery. Deliveries of these aircrafts have been slow on account of several reasons where one of them is the availability of raw materials to manufacture an aircraft.
     
  4. Technology:
    for instance improvement in technology can reduce consumption of ATF by aircrafts which would reduce the cost of flying an airplane. This would ensure that that the airlines continue operations. With technological improvements and adoption of new technologies such use of Artificial Intelligence (AI) in air transport, the overall cost of running an airline or airport reduces.
  5. Entry of new service providers:
    When new airlines come into the market , they tend to increase the supply as now more seats are available to the travelers, more options to travel to different part of the globe would open up.
  6. Government policies and regulations:
    Eg. Closing of national borders to curb the spread of Covid-19 resulted in no air travel as flights had stopped flying thereby reducing the supply

Contemporary developments bring changes in these factors. For instance, the UDAN scheme in India enhanced the regional connectivity thereby affecting both demand and supply in air transportation. Further the increase in Low-cost carriers (LCC) are enabling people from all income groups to enjoy travelling by air.

The technological developments in areas like navigation have made air transportation possible in areas which earlier were just a dream thus giving rise to demand if air travel in those areas. As stated above the technological advancements also help in less consumption of fuel which reduces the cost of running an airline thereby reducing the price of ticket which results in increase in demand.

Recent pandemic situation caused the governments to take policy decisions to close their national borders for certain time period which affected both demand and supply of air travel. The unrest situation in Afghanistan, Syria or Ukraine etc do affect the demand and supply of air transportation.

Thus, we see that any changes that happen in the world whether good or bad, technologically or politically, they bring about changes in the factors affecting the Demand & Supply for air transportation.

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