Case Study: Demand Analysis
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Case Study: Demand Analysis
Introduction
Consumer preferences and financial resources have a significant impact on the demand for air travel. The purpose of this assignment is to provide a deeper understanding of the factors that determine the prices and elasticities of goods and services within the aerospace and aviation industries. Since the world’s population is continuously increasing, there is a constant need for more flights in the aviation industry.In this regard, my preferred market would be the Malaysian airline business, which includes organizations like Malaysia Airline System Berthed (MAS), Firefly, which is a subsidiary of MAS, and Berjaya Air. The subject of my conversation would be airline tickets.
Oligopoly is the best way to characterize the market structure of the Malaysian airline industry. This structure indicates that multiple enterprises compete with one another for the available travelers. This structure also has a higher degree of competition compared to monopoly. Passengers, both domestic and international, make up the vast majority of these airlines’ client base. Air travel has very few viable alternatives since most people who can afford it choose modes of transportation that are both more expedient and more comfortable. Since the bullet train is only available within the country and does not travel to any other countries, it might be considered a minor rival.
Factors determining demand and supply
Price
This is a significant component that plays a role in determining the level of demand and availability of airline services in Malaysia. For the vast majority of people, air travel is an extravagant luxury. The demand for such a service is very variable because it is used primarily by the wealthy, despite the fact that this mode of transportation is extremely pricy(Craig, 2019). The proliferation of low budget airlines and the threat posed by unrestricted users have made travelers increasingly price-conscious.Passengers, on the other hand, may be less price conscious when the revenue gained by these ticket revenue can become insignificant in relation to the overall cost of the trip. It is essential to have the understanding that the components of a trip, such as its routes and modes of transportation, are easily interchangeable. When passengers consider their many alternatives, it may be possible for them to reach a conclusion regarding their flight in a short amount of time.
Customer’s level of income
According to the data available, the income elasticity of demand for air travel is exceptionally high. When people have more disposable income, they are more likely to splurge on non-essentials like plane tickets. Long-distance travel would benefit from higher income elasticities whenever a country’s economy is growing rapidly. Research also shows that those in the middle class have a preference for shorter commute times compared to those in the upper class.
The cost of other related goods
These costs have an effect not only on the demand but also on the supply of airline tickets. If the price of a complementary commodity went up, it would have the same effect on the price of flight tickets, which would, in turn, lead to a reduction in the number of people wanting to buy tickets.
Substitutes
The availability of alternatives can also have an impact on the cost of air travel. In consequence of this, the demand would eventually become exceedingly elastic. Alternative modes of transportation available in the air industry could include high-speed automobiles and bullet trains.
The Number of customers available
A substantial number of purchasers would, in turn, correspond to demand for airline tickets, which would result in a rise in the number of supplies made available by airlines.
Period
When there is a prolonged period, the demand elasticity will be able to grow because customers will be able to modify their behaviors to the pricing throughout the course of the longer period of time.
Demand function using multiple Independent variables For Malaysian airline
| Notation | Functional Specification |
Factor
|
| Pope | P0P1*P0P2*10^-5 | Population |
| Bedim | Bed1*Bed2*10^-6 | The capacity of the beds |
| Dusty | Distance on road | Distance |
| Trite | Dummy variable(0,1) | Transit |
| Prick | Average ticket price | Price |
| Cetin | Number of airlines on the route | Count of Airline |
| Trim | Percentage of flight choices | Travel match |
| Scrim | Availability | Schedule |
| Tami | The time between starting and stopping | Travel Time |
Logarithmic Regression Model
Logy = 0 + 1LogX1 + 2LogX2 + 3LogX3 +…,
When in Liner form it becomes
LogPaxij = 0 + 1LogPrcij + 2LogPopij + 3LogBedij + Trmij+5Ttmi6Trtij 7Cntij +
8Scdij + 9Dstij,
How Changes in different variables influence equilibrium prices and quantity
Flight costs can be estimated using market data on passenger demand and airline capacity. The term “price equilibrium” describes the point at which buyers and sellers reach a mutually agreeable price. If either supply or demand were to shift, the resulting shift in equilibrium pricing would be correspondingly different (O’Connell & Williams, 2016). For example, when gas is cheap, airlines can produce more plane tickets. Therefore, a wider variety of products would be made available at these costs. If production were to remain constant, the demand curve would shift to a new equilibrium, one that would be able to work through the glut of available product on the market.Buyers, who would be the people in this scenario, would have the ability to get more tickets at a significantly reduced cost.
The following factors influence the instantaneous changes in pricing trends for airplane tickets in the industry of airlines. These variables include things like the demand for seats, the cost of gasoline, the length of the routes that are offered, and the availability of seats (Wang, Zhang, & Zhang, 2018). The cost of fuel is one of the most important factors that determines pricing changes in the transportation business. The cost of flying and the operating costs of airlines both go up whenever the gross price of crude oil goes up. Because oil is a resource that is used up extremely quickly, the current state of the oil industry around the world is a highly significant factor. Since oil is a necessary component of airplanes, there is a strong correlation between the cost of the former and the cost of airline tickets (Scott, 2018).
A change in demand caused by a shift in customer preferences would almost certainly have an effect on the price that is offered on the market. An excellent illustration of this is the way in which the earthquake in Japan induced a change in the demand for tourist’s tickets in that country (Spasojevic, Lohmann, & Scott, 2018). The reduction in preference has the potential to bring about an internal shift in demand. A delay or breakdown in the global economy is another important aspect that plays a role in determining the price of airline tickets. When businesses are unable to generate as much revenue as they formerly did, they are compelled to reduce their overall revenue in order to keep their profit margins at the same level. However, it is essential to keep in mind that the drop in air travel is not due to the costs associated with flying; rather, it is due to the economic downturn that has been caused by the inability of enterprises to pick up. During the Asian crisis that occurred in the late 1990s, for instance, the number of individuals traveling to these nations was able to decrease by a good amount, which is an example of a beneficial thing.
When it comes to airplane travel, another important consideration is the government and the legislation it enacts. For instance, under this scenario, MAS, with the assistance of the Malaysian government, might be able to contact Singapore airlines about establishing a direct flight between Kuala Lumpur and Singapore in response to the continuously growing demand for such a service (Daley, 2016). The two administration are on good diplomatic relations and will come to an agreement since it is beneficial to the economic growth and development of both countries.
Conclusion
The aviation industry in Malaysia can be described as being extremely dynamic, with demand and supply at appropriate times playing a significant role in shaping the industry to a large extent. When discussing this industry, it is impossible to determine whether a statement is accurate or untrue because it is continuously evolving. However, the majority of economists agree that the number of airline tickets sold doubles after every ten years.
References
Craig, C. (2019). Estimating the income elasticity of demand for international air travel.
Daley, B. (2016). Air transport and the environment. Routledge.
O’Connell, J. F., & Williams, G. (2016). Air transport in the 21st century: key strategic developments. Routledge.
Wang, K., Zhang, A., & Zhang, Y. (2018). Key determinants of airline pricing and air travel demand in China and India: Policy, ownership, and LCC competition. Transport Policy, 63, 80-89.
Spasojevic, B., Lohmann, G., & Scott, N. (2018). Air transport and tourism–a systematic literature review (2000–2014). Current Issues in Tourism, 21(9), 975-997.
