Fixed costs do not vary with the scale of operations, and will be incurred even if the flight is cancelled. Examples of fixed cost are the rental cost of leased planes, which is time- but not operations-sensitive, and general administrative costs such as salaries. Constant costs, which cease if the flight is cancelled but are invariant to the volume of traffic carried, are also high. Examples of constant costs are the subsistence allowance paid to the cabin crew, and landing fees, which do not depend on the number of passengers, but will not be incurred if the flight is cancelled. Variable costs, which vary with the volume of traffic carried, have traditionally been quite low in the airline industry. They include ticket commissions, baggage handling, and cabin amenities including food and beverages, among other passenger-related costs.

With the recent spate of cost cutting, where ticket commissions to travel agents have been eliminated by the major airlines (with the exception of Southwest Airlines), a cap of $100 commission on international flights, and drastic reductions in the quantity and quality of meals, variable costs have gone down.

To counter the effects of the September 11, 2001 terrorist attacks, U.S. airlines have reduced fares to lure back lost passengers. As a result, load factors for 2002 are estimated to be around 72 percent, but the breakeven passenger load factor has risen to 81 percent, so losses for 2002 are estimated at $9 billion. (3) Thus there is a tremendous imperative to fill up the planes, even with marginal low-fare passengers, as long as they clear variable costs. All of this is possible, because the airline passenger market consists of segments with different price elasticities of demand: business travelers who travel on corporate accounts, fare-sensitive pleasure travelers, business travelers flying on their own accounts, children