Identifying the drivers of air fares

Airline fare setting is a complex and dynamic process, varying by carrier, route and time. It lies at the heart of an airline’s commercial strategy as it aims to maximize the return on its assets employed, namely its aircraft and its people. The following report seeks to describe clearly and comprehensively how the numerous factors an airline has to juggle play into the fare that passengers ultimately face.

The intent of this report is two-fold. Firstly, to provide some clarity around this fare setting process, which can often seem opaque, and secondly, to analyze objectively the linkages between airport charges and air fares, in light of some of the recent debates on this topic. At a very basic level, one would expect that a change in any significant cost item would impact the eventual price charged, and this is indeed an attractive narrative. However, there are two key questions to ask first: 1) do airport charges fall into the significant category? And 2) do changes in airport charges automatically translate into changes in air fares? Or, as we contend, do changes in these costs often get subsumed within the bigger commercial considerations an airline faces, such as the degree of competition on a route, the season and type of day, the availability of slots, or indeed fuel prices or labor costs.