ABSTRACT
Airfares should cover the costs of running the airports, ATM services and costs of aircraft operations. From theory (and as discussed in Chapter 1), the social optimal fare level is where the passengers pay the marginal cost of use. The air transport industry has fixed costs connected to airports, communication and aircraft operations. Even leased aircraft means fixed costs for the airlines during some period of time, and even at the departure level there are fixed costs that cannot be avoided once the aircraft is set into operation (e.g. depreciation, crew, charges for airport services and maintenance). However, the marginal costs per passenger are low (in-cabin service, extra fuel). Hence, the air transport industry is encumbered with economies of scale. Under such circumstances, marginal cost pricing would incur financial losses, because the fixed costs are not covered. Under these circumstances, a fare level equal to average costs would give total cost coverage, but a number of passengers will not have the willingness to pay a fare level significantly above marginal costs. On routes with thin traffic, fares equal to average costs would mean a fare level significantly above the marginal costs. This is depicted in Figure 17.1. Here, demand D1 shows the demand on a thin route, where the difference between the efficient marginal cost price (PM) and the average cost price P1 is large. Average and marginal cost pricing, depending on market size https://s3-euw1-ap-pe-df-pch-content-public-p.s3.eu-west-1.amazonaws.com/9781315566368/fd415cbd-a936-48b1-ab5a-59b1d32101df/content/fig17_1_B.tif" xmlns:xlink="https://www.w3.org/1999/xlink"/>
