An integral part of any pricing policy is developing a demand model. Indeed, it

Question

An integral part of any pricing policy is developing a demand model. Indeed, it makes
sense to estimate demand for air travel by O&D markets and derive useful information
from estimated coefficients. This assignment is designed to allow you to apply your
knowledge of economics, data mining, and forecasting to estimate the demand function
for a particular route, operated by a particular airline. You are free to choose any
route/airline combination you desire. However, given the vast quantity of airline-route
combinations, it is expected that each student will have a different selection.
The main goal of this project is to develop an airline demand model in order to
forecast travel demand and traffic conditions in a specific market. You should prepare a 4
to 6 page written report (excluding data and empirical results), as well as about 10
minute presentation. The project should address the issues discussed above, highlight
the variables explored and the rationale for their inclusion, and fully discuss the results
including the statistical significance of their regression models and the better, more
statistically relevant model.
Before you estimate the long-run passenger demand function for your selected
airline route, set up the hypotheses for each of the coefficients of the independent
variables (the expected signs of the parameters for the demand function). It is reasonably
certain that the average fare tends to affect passenger travel negatively, and income will
affect air travel demand positively. You should consider including the following
independent variables in your model:
• Income (per capita disposable income or GDP)
• Airfare for airline route selected
• Competitors airfares in the route selected
• Entry and exit from the market by other airlines served the same market
• Availability and prices of other mode of transportation
• Random events
DOT issues Monthly Air Travel Consumer Report and you can access these data from the
report. Your forecasting methodology should include the effects of hinterland
competition between airlines. Such a model may be used by airlines to enter or exit a
metropolitan area. Passengers from these markets have the choice between different
airlines, and the likelihood of choosing one of these airlines depends on the ticket price,
the number of non-stop flights and the total travel time.
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BA 523 Dr. Bijan Vasigh
You should also include one of the following variables which it may represents passenger
satisfaction such as:
• On time performance
• Denied boarding
• Mishandled baggage
• Customer complaints
In addition to the required independent variables mentioned above, there are likely other
variables or situations that are important for understanding demand during this period.
These variables may be specific to the route you have selected or may be general to the
industry. You should include appropriate variables to examine these impacts.
Using Eviews Software, Excel, or SPSS estimate a linear model with the independent
variables required in Parts A and B, as well as those that you determined in Part B, if any,
and the dataset developed in your analysis.
You have an enormous amount of material to use for this project. Using available
resources (O&D, On-Board, Bureau of Labor Statistics, etc), develop a dataset for the
above variables (Parts A and B) from 1998 through the most current available, on a
quarterly basis. As you initiate work on this project, you’ll find inconsistencies in the data:
average ticket price; number of passengers, or any other data. You have a number of
options available: make assumptions; adjust your data, etc. What you feel is reasonable
given the data and available time and give your justification.
Provide your answers to the following systematically, start it with part a and finish it with
part g. Follow a writing style that is professional and clear.
You Must Format your report base on the Following:
INTRODUCTION
BACKGROUND
The major dubs, aircraft type, number of aircraft, number of employees, and the
financial conditions. Plot the data for your dependent variable on one graph. Explain
and identify the following for the dependent variable used in your analysis.
• The average number of passengers.
• Number of flights
• Number od destinations
• Trend: a gradual increase or decrease in the average number of passengers
over time.

Explanation / Answer

The average number of passengers can be dependent on following variables as per the situation:

• Income of passenger (per capita disposable income or GDP)
• Airfare for airline route selected
• Competitors airfares in the route selected
• Entry and exit strategy of other airlines served the same market
• Availability and prices of other mode of transportation
• Random events which depend on situation

Number of flights depend on various variables including demand of passengers on same route to travel.

It also include average ticket price; number of passengers, or any other data. We have to make assumptions; adjust our data, etc. Independent variables like staff behavior, airport size etc. will not affect the study of finding number of flights.

Number of destinations is dependent on traffic of passengers on particular route. If passenger is not choosing selected destination to fly on frequent basis than destination of flights will reduce as there will not be a profitable business.

It will depend on different dependent variables like:

Airfare for airline route selected

Competitors airfares in the route selected

Availability and prices of other mode of transportation

Trend: a gradual increase or decrease in the average number of passengers
over time.

As per the DOT monthly Air Travel Consumer Report we can forecast the effects of passengers increase or decrease trend by including competition between airlines. Such a model may be used by airlines to enter or exit a metropolitan area. Passengers from these markets have the choice between different airlines, and the likelihood of choosing one of these airlines depends on the ticket price, the number of non-stop flights and the total travel time.

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