1.0 Overview of Airline Economics, Markets and Demand
Peter P. Belobaba
The provision of air transportation service is driven primarily by
the demand for air travel, as well as the demand for the shipment of goods by air.
Virtually all of the interrelated decisions of the many stakeholders
in the airline industry stem from the need to accommodate the
historically growing demand for air transportation.
And, many of the activities of governments, airlines, airports, and
aircraft manufacturers are determined by the interaction of supply and
demand in a variety of different markets associated with the airline industry.
This chapter provides a foundation for the discussion of
the many facets of the airline industry addressed in
the remainder of this book by introducing some basic airline terminology and definitions,
along with the concepts of air transportation markets and the demand for air travel.
1.1 Airline Terminology and Definitions
In the airline industry,
there exist standard measures of passenger traffic and airline output,
which are also combined to generate several common measures of airline performance.
As we shall see later in this section, some of these performance measures are
not particularly useful on their own, and in fact are often misinterpreted.
At this point, we introduce the measures and their definitions.
1.1.1 Airline Traffic and Revenue
Measures of “airline traffic" quantify the amount of airline output
that is actually consumed or sold.
Traffic carried by airlines consists of both passengers and cargo, which can include air
freight, mail, and passenger baggage.
All-cargo airlines transport primarily air freight, whereas passenger
or “combination" airlines transport a mix of traffic
that can include all four types of traffic mentioned.
Combination carriers can operate a mix of all-cargo (freighter) and passenger aircraft,
but even the passenger aircraft can carry one or more types of cargo
in their belly compartments. In the following paragraphs,
the definitions and examples focus on passenger
airlines, although there is a parallel terminology for cargo airlines.
For passenger airlines, “traffic" refers to passengers carried or enplaned passengers,
as opposed to “demand," which includes both those who boarded the flight(s) and those
who had a desire to travel but could not be accommodated due to insufficient capacity.
Thus, at a given price level (or set of prices),
there exists a total potential demand for air transportation between cities.
Given a limited total capacity (available seats) offered by airlines, this potential total
demand includes both passengers carried (traffic) and passengers unable to find seats,
also known as “rejected demand" or “spill." Passenger airline traffic can be measured
in terms of the number of passengers transported,
but the most common measure of airline traffic is a revenue passenger kilometer (RPK) or,
alternatively, a revenue passenger mile (RPM).
In the following examples, we use kilometers.
One RPK is defined as one paying passenger transported 1 km.
For example, a flight carrying 140 passengers over
a distance of 1000 km generates 140 000 RPK of airline traffic.
The fare paid by passengers to travel by air varies by distance, season,
and conditions and characteristics of the fare product purchased
(e.g., business class or advance purchase excursion fares).
Yield is a measure of the average fare paid by all passengers per kilometer
(or mile) flown, in a market, on a set of routes, or a region of operation for an airline.
Yield is calculated by dividing the total passenger revenues collected by the RPK carried.
In our example,
if the flight that carried 140 000 RPK generates $16 000 of total passenger revenue,
its yield would be $0.114 per RPK (i.e., $16 000/140 000).