Originally Posted by
Cloudship
Another argument to be careful of is the price war. In the airline industry this is always held as an axiom, yet if you were to apply that same thinking outside of aviation you will fall flat. If the price being offered is too far below cost, there is no point in trying to match that price. Unless there is some substantial reason why an airline has greatly reduced costs, that airline must be loosing money as well. It is easier for a big company to survive losses than a small one - let the rival undercut their own prices and literally bleed themselves to death.
Ah, but what is the cost of a ticket?
An airplane flying completely empty costs a lot of money. An airplane flying packed with passengers and luggage costs slightly more (it is heavier, burns more fuel and needs more catering).
If the airline would fly empty or half-full plane then they can decrease their loss by filling the empty seats with passengers who pay just the marginal cost and slightly more. But if everyone pays the marginal cost then the airline loses as much as they would lose flying the plane empty. So, the profitability of flight depends on getting some passengers to pay much more than the marginal cost, such that those tickets would cover the base cost of empty flight and leave a profit.