Seasonal travel demand and peak load pricing on the Australia-U.S.A. air route

Since the early 1970's international travel and tourism have become important issues to many governments and of course the airline operators who have had to contend with rapidly rising costs of operations and capital. To some extent this problem has been alleviated through rapid technological advances made in the aviation industry. At the same time the airline operators have become aware of the leisure travel market which throughout the mid to late 1970's has provided the airlines with a boom period. This boom is slowly tapering off at a time when major carriers have just completed a re-equipment phase aimed at a growing market; pricing strategies have become an increasingly important tool for the operator to increase utilisation of their capacity. Many researchers have used econometric techniques for estimating airline demand functions, from these studies aggregate fare elasticities, different fare class elasticities, income elasticities and other service elasticities have been estimated. Each of these studies has shown the importance of fare and income elasticities in the leisure travel market. These basic estimates have helped to form some useful pricing policies. Recently operators and policy makers have noted the variability of demand for travel over time; as supply is fixed in the short run, operators have experienced periods of excess supply and periods of excess demand. To combat this variability of demand over time, operators have introduced seasonal pricing. As this is a recent innovation, no research work has been done on estimating the cross relationship between travel seasons. This study attempts to estimate the cross relationship between travel seasons on the Australia-U.S.A.-Pacific air route. 2. Seasonal and directional imbalances were cited by the Review Committee on Australian international civil aviation policy as being one of the major problems facing airline operators operating to and from Australia. Seasonal demand imbalance refers to the fact that travellers have preferred months of travel, which tends to lead to periods of high demand being concentrated into a few months of the year. Directional demand imbalance refers to the growing disparity between arrivals and departures into Australia. Figure 1 highlights both seasonal and directional demand imbalances. For Australian leisure travellers travelling to the United States the peak months are May, June, August and December. The off-peak months are February, March, October and November and the official shoulder months are January, April, July and September. While for travel from the U.S.A., the peak months are August, September, October and January; the shoulder months are February, July, November and December and the Off-peak months are March, April, May and June. Seasonal demand imbalance focuses on travel in one direction, while the directional imbalance focuses attention on travel in both directions. For instance, a good example of the directional imbalance problem is that the peak travel months for Australians going to the U.S.A. are May and June, which are the offpeak travel months for Americans visiting Australia. Both these imbalances create problems of which capacity utilisation is a major one. In 1979 the operators on the Australia-U.S.A. route made a conscious attempt to smooth out demand. They introduced seasonal price variations on the advanced purchase fare (APEF), the Group inclusive air fare (G.I.T.) and the Budget fare. The effects of these fares can be seen in Figure I. for true origin destination leisure travellers on the route for 1979 to 1980. The results are still unclear, but there appears to be a reduction in travel in the peak (Australia to U.S.), while off peak travel seems to be increasing in both travel directions. This study estimates the cross relationship between travel seasons using the ordinary least square technique. The results from the model will be used to determine the optimum level of fares for each season to ensure efficient utilisation of existing capacity