EXECUTIVE SUMMARY

The airline industry has covered a long journey from the day it was started. There are various external and internal factors which affect the performance of the airline industry. The objective of this report is to analyse the variation in prices of the airline tickets by using the economic theory. The airlines are using creative methods in implementing new offers to lure passengers according to the changing trends in the market. The ticket prices are set using a formula to generate maximum net revenue.

INTRODUCTION

“Economics is the study of the allocation of scarce resources” (Miles 2005, p 4). It refers to the commercial activities that take place in market such as the production & consumption of the goods and services in the market. The amount of goods the customers are ready to buy at different price levels refers to the demand and the amount of goods manufactured in accordance with the demand refers to the supply in economic terms.

According to Henderson (2004, p 13), there are three laws which form the main basis of economic theory, they are

· “When, at the price ruling, demand exceeds supply, the price tends to rise. Conversely when supply exceeds demand the price tends to fall.

· A rise in price tends, sooner or later to increase demand and to decrease supply. Conversely a fall in price tends, sooner or later, to increase demand and to decrease supply.

* Price tends to the level at which demand is equal to supply”.

Pricing of a product is an important factor for the economic success of any firm. If the prices are high for a product, it gives an indication to the producers that demand is more for that particular product and necessary steps can be taken to increase the production. If prices are low, it shows that demand is less for that product and the measures can be taken to decrease the production.

ANALYSIS OF PRICING IN AIRLINE INDUSTRY

The airline industry is the type of industry whose performance is mainly affected by the external factors. For example, if fuel prices increases then the operation costs of the aircraft also increases. The economy of any country also depends on the airline industry, because it is the main factor in acquiring foreign currency in terms of tourists in to the country. The revenue generated in the form of ticket price is the main source of income for the airline industry. So the price should be in such a way that it covers all the operational costs, maintenance costs and also should be able to generate profit for the firm.