The airline industry undergoes seasonal changes which manifest in the form of fluctuating passenger numbers. To ensure stability and to aid in their operations, airlines usually conduct seasonal forecasting. Essentially, seasonal forecasting involves making predictions regarding the number of passengers who will be travelling. Seasonal forecasting plays a vital role in revenue management and cost minimization (Bao, Xiong & Hu, 2012). When an airline understands the number of passengers to expect, it can institute measures to ensure that the needs of these passengers are met. Seasonal forecasting also influences the establishment of infrastructure. Authorities involved in air travel develop infrastructure to match the demand for air transport. Thanks to seasonal forecasting, airlines are able to limit capacity in an effort to lower costs and drive demand.
In the introduction above, it has been pointed out that seasonal forecasting enables airlines to determine capacity. The actions of the airlines have a direct impact on supply and demand. This industry is subject to the same forces of supply and demand. Generally, when a product or service is in short supply, its demand tends to rise. Applying this rule to the airline industry, one may argue that as they limit capacity, airlines essentially reduce supply in a bid to increase demand. To understand how limiting capacity affects demand and supply in the airline industry, it is helpful to examine the state of the industry today. Joining forces with other scholars, Ricky Mack conducted a study on the airline industry. In the report that they authored, Mack and his team argue that the airline industry is experiencing an over-supply (Mack, Jiang & Peterson, 2013). There are too many airlines that are competing for a limited market. As a result of the over-supply, many airlines incur huge costs. As a matter of fact, the high costs of operations have pushed some airlines out of the market. For example, Monarch, an airline based in the UK recently suffered a collapse (Smith, 2017). The case of Monarch serves as evidence that high costs have a damaging impact on the operations of airlines. According to Mack and his team, since the airline industry is congested, airlines are facing a wide range of hardships. These hardships highlight the need for seasonal forecasting and capacity limiting. If airlines could collaborate and limit capacity, they would drive up the demand for air travel. The lack of collaboration among the airlines can therefore be blamed or the hardships that most of them are grappling with.
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In most free markets, the forces of demand and supply interact to determine the prices of products and services. Generally, high demand has an inflationary effect on prices. Supply also influences price. The higher the supply of a given product, the lower the price. The primary objective of limiting capacity in the airline industry is to drive up the prices of tickets (Britton, 2015). A number of airlines in the US are accused of colluding to limit capacity and increase prices. These airlines include American Airlines and United Airlines (Britton, 2015). Their collusion stems from the harsh economic conditions in which airlines operate. The high cost of operations forces these airlines to artificially manipulate capacity. The actions of these airlines suggest that the capacity limiting initiatives affect supply and demand by determining the price of tickets.
Since they are the providers of air travel, airlines are the determinants of supply. Through limited capacity, the airlines are able to restrict the number of flights available, thereby influencing supply. The impact of their actions appears to be rather limited. Today, airlines in the US are known to limit their capacity (Britton, 2015). Despite the limited capacity, consumers continue to have immense influence on the operations of the airlines. For example, thanks to the integration of technologies such as the internet into airline operations, it has become easy for passengers to obtain information on issues like the availability and prices of tickets (Britton, 2015). While the capacity limiting initiative helps to drive demand, it does not rob consumers of their power. Ultimately, it is passengers who determine the direction of demand in the airline industry. The implication of this is that airlines cannot continue to rely on such underhand techniques limiting capacity. They should explore such options as reducing fares and offering more in-flight services to enhance the experiences of travelers.
The discussion above has revealed that the limited capacities that airlines impose have the effect of driving up prices, thereby accelerating demand. It is worth noting that the limited capacities may be counterproductive. Congestions are common at airports as millions of passengers scramble to get tickets (Zou & Hansen, n.d). While the congestions suggest that limited capacity enhances demand, it is also clear that the limited capacities hamper air travel. When they limit capacity, airlines could be setting themselves up for failure. In 2017, reports emerged that such airlines as United Airlines were overbooking their planes and requesting passengers to disembark and create room for essential staff (Victor & Stevens, 2017). As a result of these reports, the reputation of United Airlines suffered. The damaged reputation could set the stage for a reduction in demand. Consumers tend to purchase products and services from companies with a record of excellent services. The case of United Airlines indicates that unless they exercise caution when implementing capacity limits, airlines could suffer damaged reputation and a decline in demand.
In conclusion, seasonal forecasting enables airlines to reliably estimate the number of passengers to expect. Airlines also impose capacity limits to manipulate demand and supply. For the most part, the capacity limits enables the airlines to drive up demand. Furthermore, thanks to these limits, the airlines are able to lower costs and boost revenue. However, when an airline limits capacity, it creates a crisis of congestion and overbooking. As they limit capacity, airlines should not forget that they are in the business of delivering excellent customer service.
References
Bao, Y., Xiong, T. & Hu, Z. (2012). Forecasting Air Passenger Traffic by Support Vector Machines with Ensemble Empirical Mode Decomposition and Slope-Based Method. Discrete Dynamics in Nature and Society. DOI: http://dx.doi.org/10.1155/2012/431512
Britton, R. (2015). What’s really Going on in Airline Pricing and Capacity? Retrieved 7 th February 2018 from https://www.enotrans.org/article/whats-really-going-on-in-airline-pricing-and-capacity/
Mack, R., Jiang, H. & Peterson, R. M. (2013). A Discussion of the Capacity Supply-Demand Balance within the Global Commercial Air Transport Industry. Retrieved 7 th February 2018 from http://www.boeing.com/resources/boeingdotcom/commercial/about-our-market/assets/downloads/AirTransportCapacitySupplyDemandBalance.pdf
Smith, O. (2017). The Biggest Airline Failures of all Time- Where does Monarch Rank? Retrieved 7 th February 2018 from http://www.telegraph.co.uk/travel/lists/the-biggest-airline-failures-of-all-time/
Victor, D. & Stevens, M. (2017). United Airlines Passenger is Dragged from an Overbooked Flight. Retrieved 7 th February 2018 from
https://www.nytimes.com/2017/04/10/business/united-flight-passenger-dragged.html
