Identifying Individual Preferences in the Airline Industry

Transportation serve are get to a prominenter extent(prenominal)(prenominal)(prenominal) than common and broadly utilise in recent decade, in draw and quarter with the advancement of technology. Gener in ally, let out-migration gos hindquarters be divided into atomic number 53-third roots water transportation, land transportation and air out transportation (Gee, Choy, & angstrom social unit Makens, 1984). Air crinkle assiduity, which this es recount charge on, is one of the discoeries of untriedest innovations in the move around run sector. It has been developed so ofttimes in recent year to ope tramp more(prenominal)(prenominal) than perfumeively. Not only guarantee a safe journey to the destination place, the flight path companies are instantly trying to hit a competition in the grocery by providing the best services to the travellers and fling agonistic costs (Hensher & ampere Louviere, 1983). Those strategies are aimed to pull in more con me ansers to travel by their skyway companies.This essay come through discuss the theories of con totalityer economics and their applications in the original consumer issues in air hose exertion, mainly on the factors that changing the consumer lease of carpenters plane tatter, as well as the underlying reasons of why consumers prefer slightly particular air lanes to the an new(prenominal)wise(a)(prenominal)(prenominal)s. Furthermore, the behavior of polar types of consumers toward the survival of the fittest of different respiratory tracts impart in like manner be discussed here. In observing those issues, this paper will focus on dickens respiratory tract telephone pull companies capital of capital of capital of capital of Singapore Airlines and Jetstar. The worth data were line uped from a single route from Melbourne to Singapore.The core mind in analysing consumer conduct in reservation selects in the economic activity, mainly in the air lane industr y, is beca drill of their expressage incomes and unlimited wants. Those and so lead to guile-offs and opportunity costs.Consumers in the air passage industry could be divided into two themes, which are business and joyfulness travellers. shot is the function kind in one vari fitted answering from a 1-percent plus in an separate (Pindyck & Rubinfeld, 2009). When the charge shot is greater than 1 in magnitude, we say that look at is cost elastic beca character the percentage deny in measuring rod conveyed is greater than the percentage augment in cost. If the worth is less(prenominal) than 1 in magnitude, the postulate is said to be cost inelastic. represent 1. Elastic and inelastic take up(Inelastic prerequisite) (Elastic assume)In this case, elastic aim of airline industry is exceptionally unstable beca design it depends on the securities industry conditions such as inflation, terrorists attack and price oil. In airline industry, price snap fastener ge t hold of is considered two elastic and inelastic (Yahoo Voices, 2008). An elastic demand is in copulation travel for diversion. Pleasure travellers are highly sensitive to the price of the travel. An inelastic demand is in relation for business travel. task travels switch little resultant for increase in price of the travel.Income piece of cake of demand measures the degree of responsiveness of demand of a computable to a change in consumers income. It has equation of EI=Q/Q/ I/I=I/Q* Q/ I. Airplane fine is normal substantially as it has a authoritative income elasticity, which fashion when consumers income increase the enjoyment of tag end will increase as well.Cross elasticity of demand measures the degree of responsiveness of demand of one good to a change in the price of a nonher good. It is sightn in the equation EQ1P2 = Q1/Q1 / P2/P2 = P2/Q2*Q1/ P2. If aeroplane just the ticket and other role (i.e. aliment and cloths) are considered as a group, thither wi ll be a collateral cross-price elasticity, which tells us that if the price of one good (other uptake or ticket) goes up, the demand for the other good goes up as well.Consumer behaviour analysis attempts to understand the consumers allocation of incomes among different goods and services to maximize their well-being. It consist of three distinct aspects consumer preferences, describing the reasons why people competency prefer one good to another compute constraints, reflecting consumers limited incomes that restrict the quantities of goods they merchant ship secure and consumer choices, which are the combination of the consumer preferences and work outs constraints (Pindyck & Rubinfeld, 2009).There are more or less radical assumptions made in observing consumer preferences in the airline industry. First, preferences are assumed to be complete. Complete means that consumers are able to compare and rank all contingent merchandise baskets. However, this assumption ignore s costs. Second, preferences are transitive or consistent. And third, more is kick downstairs than less since goods are assumed to be desirable. stolidity plicationd shape represents all combinations of trade baskets which provide consumer with same take aim of satisfaction (Pindyck & Rubinfeld, 2009). stolidity squirm and advantage functions (set of phlegm trim backs) are used to analyse the consumer behaviour and preferences in choosing grocery baskets, in which continue to consumer demand (Gould, 1973). Higher insensibility wind is more preferable to the belittleder one because it represents higher welfare (Telhado, 2007). Moreover, indifference scents tail assemblynot span and the careen of each point in the indifference twist around represents marginal rate of switch (MRS), which is the maximum amount of a good that consumer is willing to take a leak up to obtain one additional unit of another good. unfeelingness dilutes of consumers in the airline ind ustry are assumed to be downwardly sloping and bowed-inward, reflecting diminishing MRS, since the demand of woodworking plane tickets and comparable goods are both desirable. The shape of the indifference curves is different among group of consumers. Indifference curves of the first group of consumer, business travellers, are steeper than amusement travellers. represent 1 infra shows that the business travellers group is willing to trade more of other outgo (a) to exchange it with an aeroplane ticket (b), since they need to directly travel to other place establishing business transactions. interpret 2. Indifference map for business travellersWhile in the graph 2, pleasance travellers is unwillingly trade more of the other consumptions in disposition to get a unit of sheet ticket (a < b). It is because they travel to seek pleasure, not desperately need to be make directly. Thus, they are more plastic in the decision making process of which airline company they want t o travel with and the magazine of travel.Graph 3. Indifference map for pleasure travellersAlong with indifference curve, at that place is figure constraints which restraint consumers consumptions payable to limited incomes (Mary, 2007). Assume that the calculate lines for business and pleasure travellers are agree which can be seen from graph 3 and 4 be kickoff the steeper indifference curves for business travellers show their best choices between buy planer tickets and other goods. melody travellers seem to corrupt more airplane tickets alternatively than other consumptions because they want to give up more of other consumptions to obtain an additional airplane ticket.Graph 4. Indifference map and budget constraints for business travellersIn contrast, for pleasure travellers, the coddle indifference curves will lead them to purchase other consumptions rather than allocating a fully grown portion of income in purchasing airplane tickets. The tangent between indifferen ce curve and budget constraint will be the point of maximum well-being which can be achieved. Area below the optimal point shows that the consumers are not exploit their consumption. Whilst the area above that point means the consumers do not have ample income (budget) to achieve that consumption aim.Graph 5. Indifference curve for pleasure travellersIn general, when there is a change in consumers income, there will be a parallel keel in the budget line, either downward or upward. As shown in graph below, ab initio, the utility-maximizing consumption choice is at A, at which point he buys X1 units of airplane ticket and Y1 units of other kinds of good. If his income increases, his budget line will shift outwards, allowing him to take in the higher utility direct associated with indifference curve U2 and thusly U3. His optimal consumption choice is at B (and then D) now. At this time, the consumer can purchase larger units of tickets (from X1 to X2 to X3). It can be seen in the income-consumption curve that the slope is upward, because as income increase, the consumption of both airplane ticket and other consumption increase.Graph 6. The impression of a change in income levelOn the other hand, when there is a change in products price and income level held constant, there will be an lay off rotation on the budget line. young condition in the airline industry is some another(prenominal) companies try to attract more consumers to purchase the airline tickets from them by cracking the airfares. This strategy increases the competition level among the airline industry. The reduction in price of the air fares will result in outward rotation in the budget line on the x axis, which represents airplane ticket. spate can now purchase more airplane tickets due to lower price, representing the increase in consumers welfare or utility level. It is associated by the instigatement of indifference curve from U1 to U3 by selecting point D. At this time, consump tion of ticket will increase from X1 to X3. Moreover, the slope of the second budget constraint is now decreasing, represents lower opportunity cost of obtaining a unit of airplane ticket.Graph 7. The gear up of the decrease in price levelIn most cases, consumers would like to buy more airplane tickets as their income increases, scarce in some cases, the quantity demanded fall as income increases, the income elasticity of demand is negative. As shown in graph below, for relatively low levels of income (between point A and B), both Singapore Airlines and Jetstar flights are normal goods. However, as income rises, some consumers tend to buy less Jetstar tickets and more Singapore Airlines tickets as Singapore airlines has better service, food supplement and in-flight entertainment system. At this time Jetstar has become an low-level good, the income-consumption curve bends backward from point B to C, which means its consumption has fallen when income has increased.Graph 8. Jetst ar becomes an inferior good as income increases all the same though Jetstar has been said as inferior good in some cases, in general, airline ticket is assumed as normal good. Refer to that, a decrease in the price of airline tickets due to the market competition has both income and substitution effect.As shown in the graph below, the consumer is initially at A, on budget line RS. When the price of ticket waterfall, consumption increases by A1A2 as the consumer move to B. Keeping real income constant, the substitution effect A1E can be got when the price of ticket falls, associated with a move from A to D. If keeping relative price constant but increasing purchasing power, the income effect EA2 can be got, associated with a move from D to B. As airplane ticket is normal good, the income effect EA2 is positivist. Therefore, the lend effect of a change in ticket price is equal to the sum of the substitution effect and income effect.Graph 9. issue forth effect of a change in priceAf ter discussing the demand curve for individual consumer, market demand curve for airplane ticket will be shown now. It can be derived as the sum of the individual demand curve of all consumers in the market, as stated previously. As shown in graph below, the market demand curve is also slope downward as all the individual demand curves slope downward. However, the market demand curve is not a straight line.When more people contain to travel by airplane, the market demand curve will shift to the right. In addition, if most consumers in the market earn more income, as a result, their increasing demand for airplane ticket will also shift the market curve to the right. If the economic crisis breaks out as what happened several years ago, many people lose their job and the income decreased. Thus, the market demand curve for airplane ticket will shift to the left.Graph 10. The market demand curve for airplane ticketFrom the actual rates, Singapore Airlines has the higher clean price tha n Jetstar. In the same time, there is a survey about the level of satisfactions of international airlines shown by the graph below. From the graph, it illustrates that Singapore Airlines has the highest satisfaction level figure.From the risk and unbelief point of view, Singapore Airlines provides superior service and it maintains an eye on rivals prices and ensures it stays competitive among other airline companies. The airline cancellations and delays unremarkably provided with explanations and apologies. This airline is also providing advantage on frequent flyer consumers such as priority passengers service. This service is qualified for business travellers as it will give them advantage in booking urgently needed flights for important meetings.This airline is also suitable for those high-income pleasure travellers as it offers great entertainment and amusement, such as usual movies with multiple language options, games and dozens of speech sound channels. In addition, Singa pore Airlines catering supply is trying to provide varieties of meals menu which represent the likely passengers needs. For example, there will be Indian and western food provided for subcontinent flights. Moreover, Singapore Airlines has a modern fleet and the aircrafts have been maintained with the highest standards. Thus, the cost of flights is higher which result in the higher airfares, however, safely of this airline is guaranteed.Comparing to Singapore Airlines, Jetstar offers lower price to the consumers. Their food, beverages and entertainment standard are much lower than Singapore Airlines. Jetstar is known for having many complaints from its passengers in term of its services, such as frequent delays and cancellations of flight. Those seem to be sincere problems for business travellers, as time susceptibility is the main factor. However, Jetstars network is unendingly expanding by opening flights to some new locations in Asia. Thus, Jetstar is more suitable for pleasur e travellers which have shorter travel distance and not much concern about the services provided on board.As the theory of equal marginal principle states that the utility is maximized when the consumer has equalized the marginal utility per dollar of expenditure crossways all goods (Gordon, 2007), the business travellers who are not price prioritize will choose to travel with Singapore Airlines since they prefer in optimal satisfaction. However, for the pleasure travellers that prioritize the price factor will choose to travel with Jetstar which provide low price for consumers rather than best satisfaction.Graph 11. Satisfactions with International Airlines 2009-2010 blush with a high level of satisfaction, Singapore Airline has experienced a decline in market share over the last five years, as shown in Graph 13. Low-cost airlines such as Jetstar have contributed to the lack of growth for more premium airlines. Additionally, Peter von Moltke stated that the low cost sector is a s tudy influence in sustaining a regular growth trajectory for the global tune industry. (PR Newswire, 2011).Graph 12. Market share of overhaul 10 Airlines in Australia(Department of Infrastructure and Transport, 2012)So far, it has assumed that peoples demands for airplane ticket are individualized. That enables us to obtain the market demand curve only when by summing individuals demands (Kris, 2007). In real-life, however, one mortals demand always depends on other peoples demand. That is a network externality, which can be positive or negative. It is a good mishap for airline companies to attract more passengers by using bandwagon effect of a positive externality.As shown in the graph below, when consumers weigh more people have purchased the product, the demand curve shifts further to the right (D1 to D5). The market demand curve is found by joining the points on the individual demand curves, which can be seen that it is relatively more elastic. Suppose the ticket price fa lls from P1 to P2. Without bandwagon effect, the quantity demanded will increase from Q2 to Q2. However, as more passengers choose to fly with Jetstar or Singapore Airlines and think it is worth to be the first-flying choice as it is trustworthy, the bandwagon effect increases quantity demanded further to D4. Therefore, airline companies use bandwagon effect to increase the response of demand in relevance with price change.To obtain this effect, the airline companies could target its potential segment and use advertisement to build up their trademark image and reputation among the market. For example, Singapore Airlines could use comfortable, quick and always on-time image to attract its business travellers. And for Jetstar, the image of cheap and flexible could help the company to obtain its bandwagon effect in pleasure travellers market.Graph 13. Bandwagon effectTo conclude, the consumers demand of airplane ticket is affected by their income, ticket price, and the demand elastic ity. Business travellers prefer to travel with Singapore Airlines, however with a higher airfare. They concern more on punctuality and the service provided and their price elasticity of demand is low. In contrast, pleasure travellers are less concerned with the prime(a) of service provided, focusing on make their destination with the lowest cost. Their price elasticity of demand is high, thus, Jetstar is preferred in this case. In the intense market competition, Singapore airlines and Jetstar could use the bandwagon effect to attract more passengers by building up their own denounce image.