Airfare

Robert Chapin
2012-09-30T22:48:42+00:00

What is the ideal price for a ride on an airliner?

This week’s discussion topic is the affordability of airline tickets.

I am a believer in economy of scale.  With larger airlines and larger airplanes, the cost per passenger-mile to the carrier decreases, driving down costs and prices.  With lower prices comes greater demand.  In theory, there exists an optimal price at which the airline makes the most profit with the best combination of prices and seats filled.

In practice, of course, airlines are not a simple exercise of microeconomics.  Fuel costs fluctuate, safety is paramount, and reputation is everything.  Even the demand curve can have unexpected twists.  As explained in the Concorde documentary Part 3, upper-class passengers are less likely to know the cost of their own ticket.  Concorde was successful through 1999 largely due to a British Airways decision to increase the ticket price against flat demand.  This illustrates what the airlines would look like if they decided to return to a smaller, luxury class operation.  Fewer seats, higher prices, and extravigant service could be profitable, but only to the extent of the demand for luxury transportation.

It seems there are advantages in both having class-based offerings as well as serving the largest practical number of customers.

Similar to hotels, airlines use auctions and reverse auctions to fill empty seats at a discount.  This is counterintuitive in other businesses.  Imagine bidding for tickets at a movie theater instead of waiting in line to pay a fixed price.  This would make some tickets more accessible to low income families, but would also put a premium on assigned seating and early reservations.  This is one of the main drivers of affordable airfare today.

Do you consider flying to be a special occasion?  Is there an annual airplane ride in your vacation budget?  Tell me in a comment below.

30 Sep 2012

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  • I consider flying to be a special occasion. However, this is different from family to family. The one and only time I’ve traveled somewhere on an airliner was when my family and I took a trip to Cancun my senior year of high school. Also, really good video on Air France.

  • Prof Wall says:

    Really interesting comparison of airline and movie theater tickets. So do you think these “reverse auctions” are a benefit or detriment to the airline’s bottom line?

    • Robert Chapin says:

      Using auctions is purely a business decision. It is the natural next step following the transition from travel agencies to direct sales. Now in addition to direct sales there are silent auctions. It is indeed beneficial to the airlines because they can fill more seats and add some marginal revenue to each flight.

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