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Understanding the Demand for Air Travel

How to Compete More Effectively

June 21, 2006 by Frank Budde, James Goth, Ross Love, Dale Schilling, and Ben Woffenden
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This report is the first in a series on the airline industry produced by The Boston Consulting Group’s travel and tourism practice. Upcoming topics will include the impact of China and India on long-haul travel, the rise of Middle Eastern carriers, and the role of the megahub in future airline traffic flows.

Two rules of thumb often cited throughout the airline industry are “Demand for air travel grows twice as fast as gross domestic product” and “Airline yields always drop over time.” Both statements are at least partly true. Yet few industry participants stop to think about how fundamentally intertwined they are.

Individual airlines, as well as the industry as a whole, suffer when care is not taken with demand forecasting. The challenge lies in distinguishing between growth in underlying demand and growth in induced demand. Excess capacity beyond underlying demand will lead to declining yields as airlines lower prices in order to induce demand for seats that would otherwise go empty. Therefore, airline managers must be rigorous in calibrating their growth plans to the outlook for underlying—rather than induced—demand.

When individual airlines seek to understand true underlying demand, they improve their competitiveness by exposing threats and opportunities that could easily escape their notice. A better understanding of demand can also improve economic outcomes for the industry as a whole by eliminating a factor that contributes to industry overcapacity.