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AVIATION ECONOMICS CHAPTER 3 PASSENGER MOVEMENT:

AVIATION ECONOMICS CHAPTER 3 PASSENGER MOVEMENT: THE SIGNIFICANCE OF PASSENGER LOAD FACTORS & STRATEGY FOR PASSENGER MARKETING. In this chapter, we will look at Load Factor and RPM Traffic Peaks and Valleys Capacity vs. Demand Pricing in relation to load factor Passenger marketing.

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AVIATION ECONOMICS CHAPTER 3 PASSENGER MOVEMENT:

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  1. AVIATION ECONOMICS CHAPTER 3 PASSENGER MOVEMENT: THE SIGNIFICANCE OF PASSENGER LOAD FACTORS & STRATEGY FOR PASSENGER MARKETING

  2. In this chapter, we will look at • Load Factor and RPM • Traffic Peaks and Valleys • Capacity vs. Demand • Pricing in relation to load factor • Passenger marketing

  3. Load Factor • One of the most vital statistics in the airline business • One of measure of equipment utilization- Revenue Passenger Load Factor (RPM-Load Factor) • Figures of RPM expresses the relationship between • Available seats-miles AND • RPM realized

  4. It has a critical impact on the cost and quality of air transportation-Why? • 65% of airline’s costs are directly related to the operation of the aircraft and are independent of the number of passengers on the aircraft. • Hence, a high load factor will allow the allocation of these costs over a large number of passengers

  5. In the end, resulting in lower costs per passenger, which allows for lower fares (i.e. lower ticket price)

  6. Traffic Peaks and Valleys The idea is all transportation modes must operate during the traffic peaks and valleys in order to meet the public need Airline load factors are seasonal Daily and hourly load factors fluctuate even more Thus, airliner must make sure there are sufficient flights during peak hours

  7. But sometimes, airline has to provide positioning flights to cater the load for peak hours • Positioning flights: Aircraft has to flown virtually empty from one city to another late at night or early in the morning to have the plane ready to meet rush-hour demand.

  8. Capacity vs. Demand Capacity is ability-What can airliner offer? While, demand is requirement-What is required from the airliner? Demand for air transportation is highly cylical At micro level discretionary leisure traffic picks up in the summer, so, airline enjoy higher load factor (seasonal) At macro level: stable vs. fluctuate economic condition

  9. When the economy is stable and growing • Consumer confidence is strong • Demand grows • Load factor improve • THUS, increase PROFITABILITY! • BUT… • When economy falters • Unemployment increase • Consumer confidence declines • Individuals postpone discretionary travel • SO, PROFITS SUFFER!

  10. Airline cannot fine-tune capacity to match demand-Why? • Aircraft itself inflexible • If 757 equipped with 160 seats, that seats supply on particular schedule • Can neither be shrunk nor expanded • Total number of flights offered by airline on a given day varied

  11. Depends on passenger demand • Weekdays vs. weekends • Ordinary days vs. Holidays • BUT… other factors limit airline’s capacity to adjust daily seats to daily traffic • Fix frequency of flight for certain route-to avoid cancellation • The day of week patter can’t usually vary in precise and predictable manner

  12. AND • Interrelation between two different routes • SO, flights seats usually UNIFORM and FIXED

  13. Pricing in Relation to Load Factor • The idea is to increase load factor- that is to gain profit minimize cost with a reasonable price offer to the passenger • One approach utilize is off-peak pricing, that is.. • Introduce promotional fare to attract passengers during slack period • Slack period: Passenger demand declines/insufficient • Just like off-peak night coach service, low fare ticket price is offered by airliner

  14. Advantages: • Empty seats on low-traffic days are filled with passengers who are willing to travel on those less popular days-Why ? CHEAPER! • Additional passengers add very little to the cots (primarily meal service), BUT they add a great deal to the flight’s total profit!

  15. Disadvantages: • The timing of the peak varied from route to route • Peak hours to go to Sabah might differs from peak hours to go to Johor Bharu- So, it is quite impossible to have off-peak pricing to all routes • It injects complications into the pricing structure- Fluctuation of ticket price

  16. Therefore, it is essential for airliner to estimate the accuracy of its demand (particularly passenger demand) • AND strategize its marketing (especially airline passenger marketing)

  17. Important Key terms • Load factor • Revenue Passenger per Mile (RPM) • Positioning Flights • Off-peak pricing

  18. GROUP DISCUSSION If your airline has to provide positioning flights due to rush-hour demand, discuss how can you gain profit and minimize cost based on your capacity vs. demand?

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