Airport express bus fares in Larnaca
Larnaca Airport Express is a private bus operator with a concession at the airport. It currently charges €5 per single trip and carries 18,000 passengers per month. Fixed costs are €45,000 per month and variable cost is €1.50 per passenger. The operator proposes raising the fare to €6. A passenger survey suggests that at €6, 12% of current passengers would switch to taxis or shared vans and 5% would use the public bus instead; the remaining 83% would stay. The airport authority requires the operator to publish a single tariff, but the operator is considering a resident fare of €3 and a tourist fare of €7. Tourist demand is concentrated in summer and is thought to be less price-elastic than resident demand. The bus has spare capacity outside peak hours but is full at 07:00–09:00. The operator wants higher profit but fears losing the concession if service quality or passenger numbers fall sharply.
1. Calculate the price elasticity of demand implied by the survey and the effect of the €6 fare on monthly revenue and profit. Advise the operator.
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Elasticity: The fare rises from €5 to €6, so %ΔP = (6 − 5)/5 × 100 = 20%. The survey implies a fall of 12% + 5% = 17% in passengers, so %ΔQ = −17%. Using the simple formula, PED = −17/20 = −0.85. Demand is inelastic over this range, but the estimate is survey-based and may overstate switching if respondents exaggerate.
Before: Q = 18,000; TR = 18,000 × €5 = €90,000; variable cost = 18,000 × €1.50 = €27,000; total cost = €72,000; profit = €18,000.
After: Q = 18,000 × 0.83 = 14,940; TR = 14,940 × €6 = €89,640; variable cost = 14,940 × €1.50 = €22,410; total cost = €67,410; profit = €22,230. Profit rises by €4,230.
Advice: On these figures the fare increase is profitable because demand is inelastic. But the margin is thin: revenue barely changes, and the gain comes from lower variable cost. The breakeven quantity at €6 is where 6Q = 45,000 + 1.5Q, so Q = 10,000. The operator has room before losses, but should test the fare in one season, protect peak capacity, and monitor the 5% who switch to the public bus.
2. Evaluate whether the operator should replace the uniform €6 fare with resident and tourist fares of €3 and €7. Refer to elasticity, arbitrage and regulation.
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Economic logic: Third-degree price discrimination raises profit when two groups have different elasticities and the markets can be separated. Tourists arriving at the airport often have luggage, time pressure and few substitutes, so their demand is likely to be inelastic; residents know the public bus and can plan, so their demand is likely to be more elastic. Charging tourists more and residents less can increase total revenue without raising total capacity much.
Conditions: Separation must be enforceable. If tourists can buy resident tickets online, or residents resell tickets, the scheme breaks down. The operator would need ID checks or a resident card, which adds administration and queueing costs. The airport authority requires a published single tariff, so the scheme may breach the concession unless approved as a social tariff.
Welfare: Residents gain consumer surplus; tourists lose. If the tourist fare is too high, tour operators may redirect passengers to shared vans, damaging the concession. The resident fare of €3 is still above variable cost €1.50, so each resident trip makes a contribution.
Recommendation: Trial the scheme only with a verified resident card, a capped tourist fare and published data. If separation costs exceed the revenue gain, keep a uniform fare and use off-peak discounts instead.