Key concepts

When it comes to discussion of demand for just about any product or service, there is a general misunderstanding both in the media and among the general public of what this concept really is. We often read and hear statements such as “demand for air travel remains strong” or “tourism demand increased by five per cent as compared to the same month last year”. These statements are typically based on some numbers from the data. These numbers, however, do not necessarily represent demand or changes in demand. Rather, what we observe from the data are outcomes of the interplay of forces of demand, supply (the concept of supply is even more misused) and competition – all the forces I will be discussing in more detail in the subsequent chapters. As a matter of fact, an increase in the number of, say, airline passengers, could result from changes in the underlying demand relationship, changes in supply (e.g., new entry on the market, liberalization, or fierce competition), or changes in both demand and supply. The truth is that with so many moving parts in the market system economists themselves are often able to say only with a limited degree of certainty whether the resulting change in quantity and price is the outcome of a change in demand. Yet, pointing to changes in market demand as the underlying reason for whatever is observed in the data is a useful and easy to understand shortcut.

So, let us use this shortcut. Figure 1.1 presents the evolution of global passenger air travel over the last 40+ years, ending just before the Covid-19 pandemic (according to figures reported by the World Bank). We can see that while fewer than 0.5 billion people made a trip by air in 1975; the corresponding number in 2019 was nearly 4.4 billion. This represents a nearly nine-fold increase in demand for air travel. Over the same period, the world's population had nearly doubled, increasing by over 97 per cent. The global inflation adjusted GDP is estimated to have quintupled over the same period.

To visualize the effect of the Covid-19 pandemic on the airline industry, Figure 1.2 compares the number of seats offered on flights (both domestic and international) from select countries over the period from February 2020 to January 2021.