Saturday, September 12, 2009

Test your understanding of economics in the news: Is this a change in supply or a change in demand?

In the September 12, 2009 Milwaukee Journal Sentinel article "Airline competition driving down prices at Mitchell," Tom Daykin reports that airfares from Milwaukee have decreased recently.

Is the reduction in the price of Milwaukee airfares caused by (a) an increase in the supply of flights from Milwaukee, (b) a decrease in the supply of flights from Milwaukee, (c) an increase in the demand for flights from Milwaukee, or (d) a decrease in the demand for flights from Milwaukee?

Read the article below and then illustrate this price change with a graph that shows the initial positions of the supply and demand for a seat on a flight from Milwaukee and the new positions of the supply and demand curves. (Hint: Only one of the curves shifts.) There is a link at the bottom that provides the answer.
With AirTran Airways and Southwest Airlines providing more competition, now is a good time to book a flight out of Milwaukee's Mitchell International Airport.

Fares for flights departing from Milwaukee this fall have dropped 20% compared with fall 2008, according to data compiled by

Also, flights booked through departing Milwaukee between the day after Labor Day and the Sunday before Thanksgiving are 21% cheaper than the same period last year.

But it gets even better, according to Simon Bramley, vice president of flights for

His numbers show that the average airfare for a Milwaukee departure is 16% less than the national average for January through October. But for the upcoming period from November through March, the average airfare for a Milwaukee departure will be 30% less than the national average.

"That's a pretty significant discount," Bramley said.

Not coincidentally, Southwest Airlines begins service in Milwaukee on Nov. 1. The discount carrier will offer 12 daily nonstop flights to Baltimore, Kansas City, Las Vegas, Phoenix, Orlando and Tampa, Fla.

"It's obviously true that when any new airline starts service in a city, prices drop," Bramley said.

While Southwest has built its business as a low-fare carrier, some of the big savings can be found on its rivals flying from Milwaukee, Bramley said. Some airlines offer flight and hotel packages that Southwest doesn't provide - providing another way to find a bargain, he said.

Even before Southwest announced its plans for Milwaukee, fares were dropping because AirTran, another discount carrier, was greatly expanding its service, said Bramley and Vaughn Cordle, an airline industry consultant.

"It was kind of a no-brainer" that Southwest and AirTran service expansions would drive down fares for Milwaukee travelers, said Cordle, who operates Airline Forecasts LLC.

Both AirTran and Southwest have been adding flights after Oak Creek-based Midwest Airlines cut service nationwide by around 40% last year.

As a result of those reductions, Midwest, long the dominant carrier in Milwaukee, saw its market share drop. Midwest, which in recent years had a market share of around 50%, had a 34% share in June, the latest month for which airport data was available.

AirTran in June had a 24% market share at Mitchell International.

Midwest was recently sold to Indianapolis-based Republic Airways Holdings Inc., which has restored service from Mitchell International to Los Angeles and Louisville, Ky., and plans to add more flights out of Milwaukee.

Meanwhile, travelers like Jim Fontanini are enjoying the savings.

Fontanini regularly travels from Milwaukee to St. Louis to see his girlfriend. He used to pay around $150 for a roundtrip flight on Midwest Connect, the Midwest Airlines commuter service. But Midwest dropped nonstop flights from Milwaukee to St. Louis last year, so Fontanini began to drive instead.

Fontanini lately has been finding cheap flights, including a $78 roundtrip ticket booked for October on American Airlines.

"I'm back to flying," he said.


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