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Demand Elasticity Impact On Airline’s Profitability On Zagreb-Dubrovnik Airline Route

Croatia Airlines, a national air carrier in Croatia, faces profitability issues for years. It partly relies on Government subsidies for a minimum daily number of flights between the capital and the other Croatian cities. Since Zagreb and Dubrovnik are the most distant and without fast road route (there is no highway in the Dubrovnik-Neretva county), the number of passengers is significant, as well as the turnover. This paper analyses how revenue management on the Zagreb-Dubrovnik-Zagreb air route could improve Croatia Airlines’ profitability. The revenue management analysis is based on the determination of demand function dynamics on the mentioned route. Data required for obtaining this research was taken from Croatia Airlines database, but modified using the authors’ formula in order to preserve corporate secret. Profit management analysis on the above mentioned route is based on the analysis of a revenue function. It is because, due to the agreement Croatia Airlines has with Croatian Government, a fixed number of daily flights to Dubrovnik and back fixes the cost component of a profit function. Therefore only revenue function has a dynamics to be analysed, which in turn depends on demand function. Demand function is estimated as a function where the number of daily passengers (quantity, dependant variable) is affected by a corresponding daily average ticket price, and a moving average of a temperature (10 days average) as a deseasoning tool in the time period 2013-2018. Again, knowing that the daily costs are fixed, a maximum daily revenue can be directly related to a unit demand elasticity. The findings show that, applying the pricing policy here suggested, a 7.5% profit increase can be by a good price management. Furthermore, it was shown that the company sets prices mostly in the inelastic zone of demand, showing that the profit rise could be acquired by a smart, non-linear price increase, depending on the season. Finally, an obvious, but very interesting finding was obtained, confirming that the rise of temperature and the fall in prices cause more passengers to travel on this route.

Pricing policy ; demand elasticity ; temperature ; revenue management ; seasons

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