When an aircraft prepares for departure, every empty seat in the cabin is revenue that will never come back for the airline. In this lesson we look, with worked calculations, at how demand and supply are defined in airline transport, at elasticity, which shows how sensitive demand is to price, income and travel time, at the indicators used to measure supply and demand, at the six groups of factors that affect airline demand, and at the characteristics that set the airline industry apart from other industries.

What will you learn in this episode?

• To define demand and explain why demand forecasting matters
• To define elasticity, distinguish price, income and travel-time elasticity and calculate them with simple examples
• To define airline supply and list the constraints that limit supply
• To define and calculate the ASK, RPK, ATK, RTK and load factor indicators
• Classify the factors affecting airline demand into six groups
• To explain the main characteristics of the airline industry together with their causes

Summary of this episode

1. Demand and demand forecasting

Definition: Demand is the quantity of goods or services that customers are willing or able to buy at various price levels over a given period.

Why does it matter? Forecasting demand correctly is essential for an airline to reach high load factors. If the forecast is wrong, there are two consequences:

• If the capacity offered exceeds demand , the load factor falls, aircraft fly half empty and the airline may make a loss.
• If capacity falls short of demand , the airline misses revenue it could have earned and passengers turn to competitors or other options.

Relationship with supply: Supply and demand affect each other. Airlines adjust the product components to customer wishes to increase demand or to attract existing demand to themselves.

2. Elasticity

Definition: Elasticity is an indicator that measures how strongly consumers and producers react to changes in market conditions. It is calculated as the ratio of the percentage change in quantity demanded to the percentage change in the variable that affects it:

Elasticity = Percentage change in quantity demanded / Percentage change in the influencing variable

Why is it used? It shows which of the factors affecting demand are more influential.

Types of elasticity:

• Price elasticity of demand: The ratio of the percentage change in quantity demanded to the percentage change in price. Because demand falls when price rises, this value usually comes out with a minus sign (for example -0.4 or -2.0); when comparing passengers' sensitivity to price, we look at the size of the number.
• Income elasticity of demand: The ratio of the percentage change in the quantity of service demanded to the percentage change in customers' income.
• Travel-time elasticity: The sensitivity of demand to changes in travel time, calculated in a similar way.

How is it interpreted? An elasticity greater than 1 (as a number) shows that a change in price leads to a larger change in demand, meaning passengers are very sensitive to price. A value smaller than 1 shows that demand reacts less to a change in price.

Worked example 1: If ticket prices on a route rise by 40 percent while demand falls by 60 percent, the price elasticity is 60 / 40 = 1.5. Since 1.5 is greater than 1, passengers on this route are very sensitive to price.

Worked example 2 (business and leisure markets): In general, the price elasticity of business travelers is lower than that of leisure travelers.

• In a business market, let a group of 50 people have a price elasticity of -0.4 and a ticket price of 1,000 TL. If the price rises by 20 percent, demand falls by 8 percent (0.4 × 20) and the number of passengers drops to 46. Revenue rises.
• In a leisure market, let a 300-seat aircraft have a price elasticity of -2.0. The same 20 percent increase cuts demand by 40 percent (2.0 × 20) and the number of passengers drops to 180. Revenue falls.

Consequence: Airlines set their prices according to the elasticity of the market. In a market with low elasticity a price rise can increase revenue, while in a market with high elasticity it can reduce revenue.

What changes elasticity? Price elasticity varies with the competitive situation, alternative transport options and the regulations in the market. For example, for an offshore island air transport has no strong alternative, so the price elasticity of demand is low. Because there are more alternative transport options, travel-time elasticity is higher on short-haul routes than on long-haul routes.

3. Airline supply

Definition: Supply is the quantity of goods or services that producers are willing or able to sell at a given price. Airline supply is the offering of a certain number of seats to customers by the airline, in a given period, in a given market, at a given price.

Constraints limiting supply: aircraft capacity, airport capacity, airline capacity, passenger demand and slot allocation. A slotis the time window allocated at an airport for an aircraft's take-off or landing.

Difference by market structure: In markets with free competition, supply (aircraft type, number and times of flights) is set freely by the airline. In markets with economic regulation, capacity may be limited and this freedom shrinks.

4. Measuring supply and demand

• Available seat kilometers (ASK): Shows the amount of service the airline offers to the market, that is, how many kilometers of carriage the seats offered for sale can provide. Calculation: Number of flights × seat capacity × flight distance. Example: A single flight with a 180-seat aircraft on a 1,000 km route produces 180,000 ASK.
• Available tonne kilometers (ATK): The cargo-side counterpart of ASK.
• Revenue passenger kilometers (RPK): The number of paying passengers multiplied by the flight distance; it shows the part of the output offered that is sold, that is, demand. Example: If the same flight carries 135 paying passengers, 135 × 1,000 = 135,000 RPK is obtained.
• Revenue tonne kilometers (RTK): Shows the distance over which paid freight is carried; the freight counterpart of RPK.
• Distance is sometimes measured in miles instead of kilometers.

Load factor: An efficiency indicator that shows how much of the capacity offered is sold, frequently used in cost and revenue analysis.

Load factor = (RPK / ASK) × 100

Example: If RPK is 90,000 and ASK is 120,000 on a route, the load factor is (90,000 / 120,000) × 100 = 75 percent. In the single-flight example above it is (135,000 / 180,000) × 100 = 75 percent.

5. Factors affecting airline demand

The main determinants of demand include ticket prices, passengers' income levels, the prices of competitors and other means of transport, the number of passengers in the market, price expectations, economic conditions, passenger preferences, customer loyalty, on-board facilities, flight frequency, the level of safety, and extraordinary developments such as epidemics or security problems. These factors fall into six groups:

1. Demographic factors: Total population, working population and the propensity to travel. Example: a city with a large population and many employed people.
2. Geographic factors: The location of cities, the distance between them and climate conditions. Between nearby cities that can be reached quickly by ferry or bus, the airline's chances fall once the time spent at the airport is added. On remote islands, or in regions with harsh winters where road travel is difficult, the situation is reversed.
3. Economic factors: Income level is one of the most important determinants; as income rises, travel increases. Economic and commercial interaction between cities and countries also increases demand.
4. Sociocultural factors: Holiday habits, the length of official and religious holidays, attitudes toward travel, and the flights of people who migrate for work and those who travel for religious purposes.
5. Characteristics of airline product components: Ticket price, total door-to-door travel time, flight frequency, on-time departure, direct or connecting flights, the size of the flight network, the convenience of departure and arrival times, comfort on long-haul flights, frequent flyer programs and safety. For business travelers, travel time and flight frequency are often more important than price.
6. Characteristics of other transport options (substitute transport): Passengers make their choice by considering price, duration, timing and comfort together. Especially on short-haul routes, air travel competes with road, high-speed rail and sea transport. Example: the launch of high-speed train services on the same route.

Other characteristics of demand: Airline demand is an input to many industries such as tourism; the source states that nearly half of the world's tourism activity takes place by air. Demand is variable and seasonal: it peaks in periods such as the summer months when schools are closed, the New Year and religious holidays, and it even varies by day of the week and time of day. Airlines adjust supply to demand with summer and winter schedules and try to raise demand in off-peak periods with campaigns.

6. Characteristics of the airline industry

1. Economies of scale and scope: Economies of scalemean that average cost falls in the long run as output increases; airlines can benefit from this by increasing the number of flights and RPK, although the source also includes views arguing that this is not always possible. Economies of scope mean that unit cost falls when resources are shared across more than one product. Difference: economies of scale concern producing more of the same product, while economies of scope concern offering more than one product with the same resources.
2. Oligopolistic market structure: oligopolyis a market in which few firms operate, products are similar and barriers to entry are high. Usually only a few airlines operate in a city-pair market. Barriers to entry stem from economic regulation, high investment and operating costs, the difficulty of finding trained labor, slot problems at large airports and the advantage that the wide networks of existing large airlines provide. The airlines are interdependent: one airline's pricing decision directly affects the others. Cause and effect: Because competition based on constant price cuts can erode the revenue of all airlines, they turn to non-price competition by differentiating their service components.
3. The difficulty of capacity management: The industry is closely linked to the world economy; economic slowdowns and crises reduce demand, and excess capacity raises unit costs and lowers revenue. The source cites the oil crisis of the 1970s, the regional crisis of the early 1990s, the contractions caused by security concerns and epidemics in the early 2000s, and the 2008–2009 global financial crisis as examples of such periods. Airlines use revenue management to sell a fixed number of seats in the way that brings the highest revenue.
4. High labor and fuel costs: The industry is among those most affected by increases in oil prices. The need for a qualified workforce raises labor costs; the rate of unionization, which varies from country to country, is also among the factors affecting wage levels.
5. Deregulation, liberalization and privatization: In airline transport, which was one of the most tightly regulated industries in the world until the 1980s, markets have gradually been deregulated and the state's ownership role has diminished. This topic is covered in detail in Unit 3 (Weeks 5–6).

In short

For an airline, forecasting demand correctly is the precondition for setting capacity correctly. Elasticity shows how sensitive demand is to price, income and travel time; supply and demand are measured with ASK, RPK and the load factor. Demand is shaped by demographic, geographic, economic and sociocultural factors, as well as by product components and other transport options. The industry stands apart from others through economies of scale and scope, its oligopolistic structure, the difficulty of managing capacity and high costs.

Key concepts

• Demand: The quantity of goods or services that customers are willing to buy at various prices within a given period.
• Elasticity: The ratio of the percentage change in quantity demanded to the percentage change in the variable that affects it.
• Price elasticity of demand: The ratio of the percentage change in the quantity demanded to the percentage change in price.
• Income elasticity of demand: The ratio of the percentage change in the quantity demanded to the percentage change in income.
• Travel-time elasticity: The sensitivity of demand to changes in travel time.
• Airline supply: The seat capacity offered to customers in a given period, in a given market and at a given price.
• Slot: The time window allocated at an airport for an aircraft's take-off or landing.
• Available seat kilometers (ASK): Number of flights × seat capacity × flight distance; an indicator of supply.
• Revenue passenger kilometers (RPK): Number of paying passengers × flight distance; an indicator of demand.
• Available tonne kilometers (ATK) and revenue tonne kilometers (RTK): The cargo-side counterparts of ASK and RPK.
• Load factor: (RPK / ASK) × 100; the part of the capacity offered that is sold.
• Economies of scale: The decline in average cost in the long run as output increases.
• Economies of scope: The decline in unit cost achieved by sharing resources across more than one product.
• Oligopolistic market: A market in which few firms operate, barriers to entry are high and firms are mutually interdependent.
• Revenue management: Offering a fixed number of seats for sale at variable prices in a way that maximizes revenue per flight.

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Sources used:
Sarılgan, A. E. (2016). Havayolu işletmeciliğine ilişkin temel kavramlar [Basic concepts of airline management]. In E. Gerede and A. E. Demirci (Eds.), Havayolu Yönetimi [Airline Management] (Unit 1). Eskişehir: Anadolu Üniversitesi Yayınları.

📚 Academic Use Note: This content is a supporting learning resource prepared with reference to a published course text; it does not replace textbooks, lecture notes or your instructor's teaching. The sources to be used for exams and assessments are your course's official curriculum and the sources recommended by your instructor. The simplifications and interpretations in the narration are for teaching purposes; TT Institute Academy cannot be held responsible for any consequences arising from possible errors, omissions or outdated information. The sample prices and sector information in this lesson belong to the period in which the source was published.

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