In economics 101 I was taught that when demand went down at equal supply, prices went down. I've heard increasing reports of Airlines reducing discounts, firming fares, increasing award mileage: all at the same time as having chronic overcapacity ... what's going on!

And what about when the economy picks up? Will they lower fares when their planes are full again?

I'm not familiar with the syllabus, but did you cover cartels?

Yours in anticipation of this thread being moved to Travelbuzz... (although I'm assuming you paid your tuition fees using a mileage-earning credit card?)

Wingnut

[This message has been edited by Wingnut (edited 10-08-2002).]

While all of these academic notions of the economy are fine and good, the bottom line with the airline industry is the harsh reality that these companies have been losing billions of dollars and the capital markets are saying "no more cash" until the airlines start generating more money. This means reduced capacity, laid off staff, and higher prices. The harsh reality of business is that you cannot continue to sell products under their cost of production. The .coms tried this for a few years, then realized no body wanted to pay for what they had to offer, and all their investors who had been financing these businesses took a bath. The MBAs are learning some basic hard truths about running companies from the old fogies who used to practice cash in/cash out accounting and strive for real profits rather than trumped up margins that exist only in the minds of the accounts and CFOs.

Airlines are definitely trying to push up the lowest leisure fares. It's in part because business travel is way down, due both to resistance to the fares (which went up too far, too fast) and driving rather than flying short hauls because of the time/hassle factor post-9/11.

They're also limiting supply, cartel-like, to apply upward pressure. CO's Gordon Bethune is among the more ardent advocates of this approach, criticizing other airlines that tried to restore capacity after 9/11.

I think the leisure travelers still will win out in the end because of the discretionary nature of the costs and the deep-discount airlines, who also stand to benefit from this.

Its not in 101, but you do cover it later: in the same module you cover deregulation. I get your point though...

The overcapacity notion is hogwash. If there was too much capacity, WN and B6 would not be expanding.

There IS too much capacity of high cost airlines, who can't make money at WN fares.

The travel demand is there at *reasonable* fares. Not at cartel fares.

Is it cartel or common sense? If one lemming decides not to leap over the cliff, and the rest start to follow his lead, is that a cartel? If every airline provided the same basic level of service that WN does, then fares would drop to its level and the carriers might be able to make money. But as long as there are customers for premium service and more than bare bones services, cost structures at the other carriers will be higher, and they will have to charge more for their seats.

Also remember that WN does not interline, goes point to point with a limited route system and has no international service. If all the majors copied this model, how would Americans travel to the rest of the world? Use foreign carriers?

One cannot compare WN and the rest of the industry, so don't over simplify the situation by trying to do so.

As this subject is related to macro-airline economics, rather then "Miles", please continue following it in "TravelBuzz".

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Craig6z
Buzz & United Moderator
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