Elasticity of demand refers to the way in which the demand for a product or service varies with changes in external variables, such as price. Airline travel is subject to elasticity in varying degrees depending on the distance travelled. Long-haul flights are much more inelastic and subject to less variation in demand than short-haul flights. Several other variables have an effect on consumer demand for airline travel.
Air travel is largely price elastic. This means that as the cost of air travel increases, demand decreases. Price elasticity is influenced by the income of consumers, seasonal variations, consumer tastes, quality of service, the availability of substitutes and other factors. There is great variation in the price elasticity of air travel. Business travellers will still maintain their demand levels even when air travel prices increase. Short-haul flights see a dramatic decline in demand when prices increase due to the availability of substitutes, such as trains, whereas international flights might not be subject to the same variations since travelling by air is largely preferred to travelling by sea.
The income of consumers is a major variable that affects the demand for air travel. Lower income consumers are more likely to reduce their demand for air travel than those with higher incomes. Low income consumers are also more likely to change their demand patterns during periods of economic recession, which reduces the demand for long-haul flights and increases the demand for short-haul flights as they opt for holidays closer to home. High income consumers are more likely to maintain their demand levels regardless of price increases, economic shocks or other external factors.
The demand for leisure travel is largely influenced by airline ticket price reductions, or sale prices. The leisure travel segment consists of holiday-goers looking for bargains, so their choice of travel destination is influenced by available sale prices. The better the deal appears to be, the greater the demand for airline travel.
Consumer confidence levels influence the demand for air travel. When consumer confidence is low, such as when faced with increased prices in goods and services, high inflation rates and falling home prices, demand for airline travel decreases, especially in the leisure travel segment. Conversely, an increase in consumer confidence results in increased demand across the leisure and business travel segments.