What factors affect airline pricing decisions?

The factors affecting the airlines pricing decisions identified
in the answer posted above. However there are additional factors. In my answer I am giving a more
comprehensive list. Also I have classified these factors in five groups - cost, demand, supply,
competition, rates and taxes, and government regulation. Also, I have provided some additional
insights into how these factors behave in some specialized way for the airlines
industries.

Cost:

Costs
in airlines can be classified according to the degree to which these depend on the turnover. The
capital cost of the aircraft and related facilities are fixed costs. Overhead costs of
establishment are also relatively fixed. For example, with the same fleet of aircraft, an
airlines may change the number of destination to which it flies. This will change the
establishment costs associated with the number and type of destinations
served.

Fuel constitutes the biggest component of the variable
costs. Labour cost change only partially. Only some additional allowance paid to the flying staff
is directly related to the level of operation. Other variable costs such as the refreshments
served in the aircraft is relatively low. However, such in-flight facilities can be provided only
by reducing the passenger carrying capacity of aircraft.

Another
major component of variable cost is the charges paid to the airports for takeoff, landing, and
other ground support facilities.

The selling cost are also
significant, when the sales is done through selling agent. However the sales cost are much lower
for the booking made made by the customers directly through the Internet. For this reason,
airlines often offer lower fares for booking made through the
Internet.

Variable cost in the airlines are proportional to the full
aircraft carrying capacity, rather than the actual number of passengers carried. When a place
flies between two destinations, most of the cost remains same irrespective of the number of
passengers on the flight. For this reason many airlines offer heavily discounted fares for
filling the seats on flights that remain unbooked even on the day of
flight.

Demand

In
airlines the demand is often classified according to the extent to which a passenger is able and
willing to change the travel schedule and the elasticity of demand in relation to price. Thus
airlines employ various means to charge higher fares to passengers with rigid travel plans and
offer discounts to customers with flexible travel schedules.

Class
of travel is also an important aspects of the demand. Thus pricing decision includes not only the
fare, but also the division of total passenger carrying capacity of aircraft in different classes
of
travel.

Supply

In
airlines the supply varies in blocks equivalent to full aircraft capacity. It is not possible to
match supply with exact number of passengers. Also it is not possible to change the schedule of
flights at short notice. Often the changes in schedules is planned weeks in
advance.

Competition

Like
all other industries the completion also plays an important consideration in pricing decision.
This completion is closely linked to the availability of flight at a time convenient to
passenger.

Rates and
taxes

These are paid to government and other
statutory agencies. These may be treated as a component of
cost.

Government
Regulations

Some times government puts restriction on
the fares that can be charged.