I've been thinking...
How can Mapleflot/Air Milton/whatever-you-call it claim that air fares will not rise? It can, because the duplicitious corporation is telling the truth and lies at the same time. They'll make more money, improve their operating stats,
and satisfy the Competition Bureau/Transport Canada/transport minister.
Let's say we have two cities and each day, let's say there are 1000 pax travelling in one direction. For the sake of simplicity, let's assume we have two airlines (no names given or implied
http://www.flyertalk.com/forum/wink.gif ) each operating 10 flights a day with airplanes that hold 100 pax. (Thus an averaged load factor of 50%.)
Now, let's say that given the cutthroat domestic competition between these two unnamed airlines
http://www.flyertalk.com/forum/smile.gif, on each flight there are 10 fare classes with 10 seats each with prices $10, $20, etc., up to $100 for the full fare (same for both airlines). A fully loaded plane would therefore generate gross revenue of $5500.
Next, assuming that each pax always finds and purchases the lowest fare available, these 1000 passengers a day will settle into the lowest available fares and therefore the two airlines always succeed in selling only the $50, $40, $30, $20, and $10 fares. Each half-full plane generates only $1500 in gross revenue, while the passengers pay an average fare of $30. The two airlines together pull in $30000 gross each day, one direction only.
(To add to the fantasy, let's pretend that one of these two airlines allows its elite frequent fliers upgrades from any class. Whoops, I'm getting sidetracked here
http://www.flyertalk.com/forum/smile.gif.)
Recently, one of the unnamed two airlines bought its smaller, and money-losing rival. The combined airline now decides to slash domestic capacity...
Let's say now there are only 16 flights between the two cities. The load factor now improves to 62.5%. On average, each plane load now generates $2275 in gross revenue. Capacity has gone down by 20%, but the airline in one day, one direction pulls in now $2275 * 16 = $36400, making a gross revenue increase of 21.3%.
Now let's say that the airline has gone hog-wild with its capacity slashing and reduces the number of flights to 10 a day. Now the load factor is 100%, the airline execs are cheering, and the angry pax now pay an average fare of $55, leading to daily total, one-way gross revenue of $55000, for a whopping 83% increase in revenue for a meager 50% reduction in capacity. The average fare, in this scenario, has also gone up by 83%.
The transport department now steps in on behalf of disgruntled fliers and approaches the mega-airline. They respond by saying that the fare rules and prices have stayed the same and to prove it, they say "Look here: the proportion of discounted fares is still the same. We're just making more money because we streamlined our operations."
The discounts are just as deep and there's still the same number of $10 fares on each flight. So they are telling the truth.
Or are they?
FewMiles.. (And few Q-miles too.)