The system provides Market Size data with both number of passengers and prevailing fares by airport pairs. You can use the Fare Formula tab in the QSI Settings panel to adjust fares and total market size. Figure 1 showcases the Fare Formula table, in which you can use two methods – Fare Curve and Specific Fare – to override prevailing fares. Additionally, you can set the Elasticity to adjust total demand.

Specific Fare

To set custom fares for a particular market, enter the corresponding airport pair in the Scope field and specify the fare amount in the Fare field. When doing so, the system will use this fare for the specified market on both directions and disregard any values in the Fare_Base_Param and Fare_Exponent_Param fields.

Fare Curves

Alternatively, you can define fare curves that are used to calculate fare based on the O&D distance. The system requires that fare curves be expressed as power regressions, following this formula:

Fare = Fare_Base_Param * (Distance in Miles) ^ Fare_Exponent_Param
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For example, in row 5 of the figure 1, a power regression is applied to Origin & Destination (O&D) pairs traveling to and from John F. Kennedy International Airport (JFK) during a specific time frame. This regression employs the variable ‘x’ for distance (in miles) and ‘y’ for average fare (in $USD). The input values are as follows:

– Scope: The curve will exclusively adjust O&D fares associated with the JFK airport.

– Fare_Base_Param: The coefficient of distance is set to 16.010.

– Fare_Exponent_Param: The exponent of distance is set to 0.350.

– Fare: This field is left as the default value of 0.0 since it does not apply in this context; the new fare values will be determined based on the curve, and not through an explicit override.

– Elasticity: An external analysis, conducted outside the system, has established that the elasticity of demand for JFK is relatively inelastic, with a value of -0.9.

In this example, the system will use 16.01*Distance^0.35 to assign fares for all O&D pairs to and from the JFK airport.

Fare curves and associated elasticity values are defined external to the system.

Demand Elasticity

Demand elasticity in air service quantifies how passenger demand responds to fluctuations in airfare. Typically, lowering airfares results in higher demand, while increasing fares tends to suppress demand. Within the system, you have the option to input an elasticity value, which the system uses to adjust the projected market size in relation to fare changes. This adjustment is computed by comparing the percentage difference between the regression fare and the initial fare from the market size data. If no elasticity is set (value = 0.0), then the market size estimates will remain static, unaffected by fare alterations.

In the system, the price elasticity of demand is expressed as a numerical value less than or equal to zero. This value represents the responsiveness of traffic demand to changes in price.

– Relatively Inelastic: When the elasticity value is greater than -1, it indicates that the percentage change in traffic demand is less than the percentage change in price. If the elasticity value is 0.0 (default value), there is no change in total market size.

– Unitary Elasticity: When the elasticity value equals -1, it implies that the percentage change in traffic demand is equal to the percentage change in price.

– Relatively Elastic: When the elasticity value is less than -1, it signifies that the percentage change in traffic demand is greater than the percentage change in price. The lower limit on elasticity is -5.0; any values less than this limit will be adjusted to -5.0.

Elasticity is a highly sensitive metric. Utilizing it in forecasts can sometimes result in demand estimation that exceed capacity limits. To prevent that, we advise you to activate the Constrained option located within the Advanced Settings.

Adjustment Hierarchy

The fare adjustment and demand elasticity will be implemented following a hierarchy, with the highest to lowest priority as follows:

1. True O&D-Pair (Both Directions): The first consideration will be parameters set at the True O&D level. You need to specify O&D-pairs in the Scope field with IATA airport codes in one direction, and the model will apply the changes in both directions. Valid examples are “JFKLHR” and “JFK-LHR”.

2. Airport (Origin or Destination): These will apply if there are no applicable O&D-pair overrides. You need to specify the airport IATA code, such as “JFK” and “LHR”, in the Scope field.

3. Mileage Range: These will apply if there are no applicable O&D-pair or airport-based overrides. You need to specify different mileage ranges in the Scope field. Valid examples include “0-1000”, “1000-2000”, and “2000-”.

4. Network (or “System”): These will apply if there are no applicable O&D-pair, airport, or mileage-based overrides. You need to specify the Scope field with “Network” or “System”, or leave it blank.