Free Essay: Seasonal Forecasting in Airline Industry

Limiting the number of flights means the responsible airline will be reducing the supply of their services. The direct consequence of this is that the number of people looking for such flights will increase significantly. There will be more bookings on the fewer trips due to an increased demand on the flights themselves, necessitated by a drop in supply. Equilibrium - the balance between supply and demand - is often a temporary position that is never stable, so businesses often struggle between either more demand than supply or its reverse, but never a balance between the two (Brueckner, 2004). Airlines usually have dedicated spaces for business class tickets, although they are generally far less than their economy class counterparts. Be that as it may, opting to offer fewer flights would affect both the economy and business class equally. Suryani, Chou, & Chen (2010) argue that both internal and external factors affect flight volumes and the frequency of such flights. The number of trips that an airline undertakes in a day influence congestion, which in turn impacts the related costs of such crowding to the airline, and later on the effect on airfare and the subsequent demand for their services.

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Understanding seasonal forecasting is essential to an airline because it determines the impact of such decisions as changing the number of flights per day to capitalize on economies of scale, or to increase demand and, as a result, the price. The term "economies of scale" refers to the reduced cost of producing a particular good or service due to the increased volume of such products (Babic & Kalic, 2014). In some cases, however, diseconomies of scale occurs, where the cost of making a single product rises as the volume increases. The latter scenario is likely to take place in business class ticketing, costing the airline considerably more than it would otherwise have spent. For instance, an escalation in the average number of flights stretches the capacity of the airline, increasing congestion at the runway (Suryani, Chou, & Chen, 2010). The resulting costs may be detrimental to the airline's budget.

Business class passengers, as aforementioned, are fewer in number than their economy class counterparts. Increasing the number of flights for such customers would be an effort towards diseconomies of scale. The first way through which diseconomies of scale would occur is that more trips mean that the steady landing and takeoff of airplanes would increase runway utilization (Babic & Kalic, 2014). Consequently, they would require more runway, and use the additional capacity even more (Suryani, Chou, & Chen, 2010). So doing would lead to congestion, increasing its associated costs to the airline, which they would have to transfer to the customer. The result would be increased airfare, which would reduce the demand for the services, thereby impacting the daily flight rate. Reducing the number of daily flights, therefore, would work in the airline's favor, as opposed to increasing them.

Alternatively, as the demand for business class seat increases, the need for more space to accommodate them does so as well. More space translates to less dynamic capacity (Babic & Kalic, 2014). As a result, the terminal maneuvering area required to ensure seamless flights rises, which decreases terminal utilization (Suryani, Chou, & Chen, 2010). Incorporating the business class customers into this dynamic, high demand for this service leads to the aforementioned negative consequences, which are presumably counterproductive to the airline's business strategy. If they do not burden the customers with the substantially higher costs, they will make far less profit or suffer losses. By limiting the number of flights the airline provides to their customers, they can reduce these adverse consequences by ensuring the demand for their services is at a manageable level (Babic & Kalic, 2014). Consequently, they would be on a profiteering path.

One way through which the airline can achieve economies of scale is by limiting the range of services they offer. While business class does have some benefits to the customer, such as more comfortable seats, meals, drinks, and sources of entertainment, it may be advantageous to maintain just a few business class flights, rather than offering a full-scale supply (Babic & Kalic, 2014). They would then improve the efficiency of such trips and ensure the few customers experience the best service they can provide. Therefore, restricting the number of flights per day for business class is a strategy of targeting a small market segment and capitalizing on it. The aim is to sustain a high resource utilization that will keep the few customers coming back. Furthermore, the airline may consider acquiring aircraft dedicated exclusively to the business class clientele, in which they would all travel at once, rather than at different times.

In conclusion, more business class flights do not necessarily translate into higher profits. The congestion at runways would create more inconveniences for the airline, accruing more costs, which they would need to recover from the customer. By limiting the supply, the airline also increases the demand for their service, which they may use to raise their prices considerably and profit more as a result. However, more flights per day also mean less effective terminal utilization, increasing the congestion at airports. The airline may attempt fewer flights on dedicated planes for business class customers, who would all travel at once and save the cost of flying them several times a day.

References

Babic, D., & Kalic, M. (2014). Airline network structure in competitive market. Tehnika, 69(6), 1023-1031. doi:10.5937/tehnika1406023b

Brueckner, J. K. (2004). Network structure and airline scheduling. Journal of Industrial Economics, 52(2), 291-312. doi:10.1111/j.0022-1821.2004.00227.x

Suryani, E., Chou, S., & Chen, C. (2010). Air passenger demand forecasting and passenger terminal capacity expansion: A system dynamics framework. Expert Systems with Applications, 37(3), 2324-2339. doi:10.1016/j.eswa.2009.07.041