Sep 19 2008

It’s all about DEMAND! / World – Air fares nosedive amid falling travel demand

Our IB and AP Econ classes here at Zurich International School have just begun our second unit of the year, where the concepts of Demand and Supply are introduced and the effect these have on prices is examined. The first assignment of the new unit was for each student to find an article discussing the demand for a particular good, service or resource, and post it to our Unit 2 wiki page.

If it’s ever unclear whether a change in demand for a good or a service can actually affect the price, the article linked here should make it perfectly clear that demand is a powerful market force. In an industry where it has seemed recently that prices only rise, a recent fall in market demand has driven prices downward, as firms have responded to consumer demand in order to sell their product, which in this case are seats on short and long-haul flights within and from Europe.

Falling demand for business and leisure travel is causing a marked decline in air fares, with UK fares to North America declining by nearly a half, according to American Express.

Air fares peaked earlier this year as a result of rising oil costs. But the slowing global economy has caused that to reverse.

The lowest economy class fares in Europe, the Middle East and Africa fell on average by 12.5 per cent in April to June compared with the first quarter, with long-haul fares down more than a quarter.

But UK fares suffered the sharpest falls, with the lowest economy fares down by an average of 20.2 per cent, including a 49 per cent fall in fares to North America and a 22 per cent decline in fares to Japan, Asia-Pacific and Australia.

Discussion questions:

  1. What factors are driving demand for air travel down within, to and from Europe?
  2. Why does the price of air travel fall as demand for air travel weakens?
  3. Which other industries may have to lower their prices as fewer and fewer people travel between European countries and North America?

About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

14 responses so far

14 Responses to “It’s all about DEMAND!”

  1. Christian Evertzon 23 Sep 2008 at 2:57 am

    One factor of the decreasing demand for air travel is the global economic slowdown. Since companies don't make so much revenue as before, they have to cut down the costs in order to attain the same profit. An example for the cut down of costs is the decline in business flights, since the companies have to save money. However, it's not only the cost aspect that causes a decline in air travel, but also the fact that due to an economic slowdown, there is not so much business going on anymore. Another thing that can affect air travel in a bad way is a decline in tourism in a particular region. This can be due to wars or other catastrophes. Lastly, rising oil prices lead to decreasing demand for air travels, because airline companies have to raise prices in order to make the same profit. Now because of higher prices, there is also less demand for air travel.

    So since there is less demand for air travel, the airline companies have to react and lower the prices in order to make air travel interesting again. Next to the airline industry, the tourist industry is also affected by the decline in demand for air travel. As less people travel by plane, it has to lower prices so that it is worthwhile for people to travel by plane again.

  2. Miguelon 23 Sep 2008 at 4:39 am

    I thought this article was really interesting.

    Some of the factors that could be driving the demand for airline travel down may include the rise in oil prices(which in turn make airplane tickets more expensive), maybe the global warming campaigns have actually started to work and people are starting to think twice before going on long flights for pleasure and as Christian said the global economic slowdown.

    The price of air travel decreases and the demand decreases, and this can be easily seen as a simple supply and demand graph. As demand decreases, air line companies try to stimulate consumer consumption of airline travel by decreasing the prices.

    Other industries which might be affected are all the industries that relate to airline travel. Companies with shops in airports might have to close down as less consumers pass by their stores. Not as many planes will be flown which will decrease the demand for airplane pilots, planes and stewardesses.

  3. Lisa Gon 23 Sep 2008 at 6:55 pm

    As Miguel this article is very interesting and clearly shows demand and the supply in ‘action’.

    The first question asks why the demand for air travel has decreased and there are very many factors which contribute to this. First of all, there is a general oil crisis in the world, and as the supply of oil is running out, the price for oil increases. As this increase in cost of production is passed on to the consumer in the form of higher prices, the tickets become more expensive. Therefore, less people take the plane (a lot those who are not dependent on air travel). Also the situation of the global economy shapes he decision people make, as experts say that the world is going to/might enter a recession, people lose confidence and thus stop spend as much money as they did before (ex: cutting back on air plane expense). The threat of global warming is become increasingly apparent, and people may be willing to cut down on ‘luxuries’ or extra expense. The changes in price are clearly and supply demand situation.

    It would make sense that the as energy cost increase, the price increase. Most consumer goods are more expensive than before. For example, cloths in Zurich have generally increased in price as it more expensive to produce. Also food price have increased (this is not only due to in oil prices, but there is a lack of food on the world). Other industries which would be affected would be those connected to the airline industry. Other ways of transport, such as maybe boat/train may also suffer from lower prices. And as Miguel said, the people employed by the airlines will suffer.

  4. Bastien Vogton 23 Sep 2008 at 10:18 pm

    I agree with Christian, but I believe that there is on driving factor. The man driving factor for the low demand for air travel is the slow down in business between north America and Europe. Because the business' are making less revenues that need to lower their costs to keep their high profits. A second factor is the high price of oil. This makes fueling a plane more expensive, which makes flights more expensive and causes less people to fly. The price for air travel is falling as is the demand for air travel. Now that no one needs to fly the airlines have lowered the prices to attract more people to fly. As soon as more people start flying the demand will rise again along with price for fairs.

  5. Bjorn Kvaaleon 29 Sep 2008 at 2:15 am

    The demand for air traffic is decreasing due to the determinants of demand. I agree with Christian that the rising oil prices, a complement to air travel, make the demand for air travel lower. As the price of oil increases, the price of each ticket will also increase because each company must make a profit. Yet seeing that little consumers want to pay an expensive price, the air travel firms must cut down on costs elsewhere. This is achieved by cutting down on some flights, as Christian also mentioned, but also by cutting down on other expenditures (loans, etc.). Also, the size of the market is decreasing, which affects the demand for air travel directly. I also agree with Miguel because the tastes and preferences of the consumers could be influenced through the constant global warming campaigns.

    The tourist industry is definitely being affected by the decrease in air travel. As the size of the market decreases, the demand for tourism will also decrease. Also, transportation firms might have to lower prices due to the high oil prices.

  6. Gabrielon 01 Oct 2008 at 5:02 pm

    I completely agree with Christian and Basti, the main cause for the demand for the tickets to fall is the economic slowdown the world is going through. This affects both normal consumers and businesses. Businesses have less money to spend and therefore have to minimize costs in order to make a profit. Also there is less business going on and therefore business people don't have to travel as much. Consumers have less money in general and therefore are saving money for more important things such as food and shelter. As stated earlier demand for tickets is decreasing and therefore the price should also decrease for consumers to be interested in travelling by plane again. So, the air line companies are trying to increase demand by decreasing the prices. If the the prices are low, then more and more people will buy airline tickets. Oil is a complement of airplanes and therefore there is a indirect relationship between the oil prices and demand for airline tickets. As oil prices are increasing then tickets should also increase and the demand for tickets would decreases. The problem is that as demand falls, the prices have to be cheaper for consumers to buy. The tourist industry may have to lower the prices because they are linked to airplane tickets. If less people are using planes, then that also means that less people will be going on tourists guides.

  7. Helene Gleitzon 17 Oct 2008 at 12:36 am

    I very much agree with Christian, the current economic debacle has influenced people to try to save the money. Traveling to the United States, to Europe or to Japan is a luxury that not everyone can afford. Most firms have even been cutting back on job related travels, in order to save some 'extra cash'. Everyone is looking out for their capital, they are trying to spend less and less on things that are not necessary. Another factor that has influenced air travels is the rising prices of oil. In order to make the same profits and stay afloat, airline companies have to raise their fares as well. This does not give the incentives for people to travel more. Due to the rising prices of tickets, the demand for air travel has decreased. And therefore, the companies lower their prices to attract consumers, and make it somewhat affordable for the average family. As the United States is a popular touristic spot, tourism will have to adapt its prices as well. Hotels and resorts will have less tourists coming from Europe or Asia as less and less people are able to afford vacations or expensive holidays abroad.

  8. Theresa Mehlon 07 Nov 2008 at 1:57 am

    I agree to Helen. Flying is a luxury that a lot of people cannot afford! Since income is a determiand of demand when peoples incomes are declining, less will book a flight for summer vakation and more people will choose other related ways of airplanes (cars, trains, busses) to get to their vacation spot, since their prices are cheaper (other related good's prices).

    As the demand declines the quantity of demand declines and firms, which are afraid of going out of business decrease the price of airtravel. If price is decreased, due to the law of demand, people will start buying more of it.

    Now because of competition, other industries will lower their prices to, since people will tend to book the cheapest flights possible.

  9. Jason Fedoron 24 Sep 2009 at 1:33 am

    1)What factors are driving demand for air travel down within, to and from Europe?

    Income is much lower, causing people to be more careful about where they spend their money. Air travel is expensive and a Normal Good, and therefore when incomes decrease, fewer people take planes.

    2)Why does the price of air travel fall as demand for air travel weakens?

    As demand decreases, the price falls. Prices are set by supply and demand, and if the demand weakens, but the supply is the same (same amount of planes and pilots and flight attendants trying to make a living), the prices will fall, trying to encourage travelers to take a plane flight.

    3)Which other industries may have to lower their prices as fewer and fewer people travel between European countries and North America?

    Complementary goods, such as fuel, airplane manufacturers, food for the airplanes, travel agencies and others' prices will fall as fewer people take long plane flights.

  10. Lara Fuhrmannon 25 Sep 2009 at 3:45 am

    1.) The factors who are driving the demand for air travel down are incomes. The people earn less, therefore they can afford less. So less people would take planes. Or if the prices go up the demand would go down, because the flights are more expensive, so less people would go on vacation, because less people can afford it.

    2.) As a demand for air travel weakens, the price falls. Because the demand affects the price. As the demand for flights decreases, the less people are going on the flights, therefore the have to lower the price in order for more people to go on a plane. If they lower the price more people can afford the flights and more people will buy the flights.

    3.) As fewer and fewer people are traveling, the affect is big on other suppliers for planes, like the travel agencies or the food caterings or the workers don't have much to do, that's why their number will decrease as well.

  11. Gavin Steinhublon 25 Sep 2009 at 7:00 am

    As everybody else has correctly stated, the reason that the demand for the plane tickets and therefore the price, is because of the slow economy. I do however disagree with what Lara previously said about it being because of the income. Sure some people will be laid off or take a pay cut during bad economic times, but i dont think that is enough to make a drastic impact like this. During economic hardships, consumers marginal propensity to spend will decrease, and the marginal propensity to save will increase. This is how most rational consumers think, where during bad times they save more money "for a rainy day" and spend less money on things that arent necessities.

  12. Gelando Makrideson 25 Sep 2009 at 4:35 pm

    The global economic slowdown has caused a change in the expectations of consumers. This causes them to save their money and refrain from unnecessary spendings, such as holidays via airline travel. Because of the law of demand, as the demand for airlines falls, in order to regain consumer interest the airlines lower their prices. This increases the consumer surplus and overall potential for utility. The other industries that will be affected will most likely be the complementary goods such as airplan supplies, fuel and travel agencies and ticket booking businesses.

  13. […] It’s all about DEMAND […]

  14. FARID AL-AHDABon 01 Oct 2012 at 5:25 pm

    shut up its common sense when price increases the demand for the price to go down is more and less people travel by plane in the other case prices go down more go by plane and economy gets more profit or income in that specific thing
    and the demand increases.

    less people go by plane they might as well decrease the size of the airport so that they do not lose so much income unless they decrease the price of one ticket