Cheap flights - elasticity and effective demand

Double-digit annual inflation rates in the prices of airline tickets for the low cost carriers will bring about a radical restructuring of the industry according to a report in today’s Times. I have tended to assume in the past that the demand for cheap airline tickets was fairly inelastic - for most people the price of a return flight for a holiday is a low percentage of their annual income; holidays in the sun have come to be regarded as an essential part of the year for millions of travellers. And for those with second homes in the mediterranean flights are pretty much unavoidable. The Times article hints at a low price elasticity of demand

“According to analysts a 10 per cent increase in fares typically leads to a 6.5 per cent fall in passenger numbers. Budget airlines carry an estimated 45million British passengers a year. If fares rise by 20 per cent over two years, passenger demand looks set to fall by more than five million.”

So the predicted large contraction in demand isn’t down to any fudnamental change in demand elasticity - more the scale of the fare hikes which are pricing thousands more out of the market - effective demand is taking a hit. I suspect the response may be even greater if the low cost airlines continue to fashion new ways of extracting revenue from their passengers. Doug McVite is quoted as saying “it is probably only a matter of time before some joker suggests charging for using the toilet. The whole experience of flying budget will become even more unpleasant.”

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