Despite the recent gradual decline, the sudden rise in oil prices this year has made it a turbulent time for airlines as 26 of them have gone worldwide, according to IATA (the commercial body representing many global airlines) already wall. For the shrewd management of those who stay, this should be a difficult time to test the basic demand and supply economies of the industry.
I think for most industries, prices are driven by demand rather than cost. This means that instead of merely adding an arbitrary margin to the operating cost base, companies charge what they judge customers are willing to pay for their products, of course also with respect to the competitive offers available. In fact, revenue and market shares, but not profitability, are usually at the forefront of field sales.
But for airlines recently, high fuel prices have made the basic calculation of revenue minus the cost painfully clear that if the price charged cannot cover the cost of transporting a single passenger, this is important for life and death. The challenge, of course, is to determine how far prices can be raised without reducing demand. Air travel is still considered expensive by many people and may be delayed in the face of high prices. At any given time in history, airline managers may have to put the economics of textbooks for price flexibility in such a powerful test in managing their daily activities.
Ironically, the calculation of travel on a per-distance basis (ie, miles or meters) may be the cheapest means of transport on the ground. But how much a customer wants to pay is still determined by how much they understand what you pay, regardless of the cost. While these may be a boon for some business (luxury brands, for example), more often than not, this is a curse for airlines.
With technological advances and product innovation over the years, air travel is offered with more efficient aircraft, better seats, more sophisticated and user-friendly entertainment, greater ticketing comfort, and many additional benefits (at least thanks to airlines) . But as consumerism evolves – the ever-increasing franchises with no extra charge to be taken for granted – it becomes difficult to resolve how to enhance the perceived value of a customer's airline ticket. Sure, it's not just a marketing puzzle, but the entire service delivery team – ground crew and air crew alike – must be part of the solution.