Thursday, January 7, 2010

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

In the January 7, 2010 Reuters article "U.S. airlines align to start new year with higher fares," Karen Jacobs and Deepa Seetharaman report U.S. consumers can expect to pay more for air travel in 2010.

Can you illustrate these changes in the market for air travel using supply and demand analysis?

Do these changes include (a) an increase in the supply of air travel, (b) a decrease in the supply of air travel, (c) an increase in the demand for air travel, or (d) a decrease in the demand for air travel?

Read the article below and then illustrate these changes in the market for air travel with a graph that shows the initial positions of the supply and demand for air travel and the new positions of the supply and demand curves. (Hint: Do both curves shift?) There is a link at the bottom that provides the answer.
ATLANTA/NEW YORK – If you thought U.S. airlines would reduce fares following a laundry list of new security rules after an attempt to blow up a U.S.-bound plane on Christmas day, you would be wrong.

Rising oil prices and signs that business travelers are gradually booking more flights has emboldened some U.S. airlines to ring in the New Year with higher ticket prices.

UAL Corp's United Airlines instituted a $6 to $10 domestic roundtrip fare increase on December 30 that was matched by other major carriers, according to

"Given the pressure on (airlines') bottom lines and if oil continues to rise, the pressure is going to be there to find additional sources of revenue," said Brian Clark, general manager of, an airfare search engine that is a unit of TravelZoo.

The post-holiday period is among the most lackluster for travel companies as the reopening of schools and cold weather discourages travel. The success of fare increases hinges on whether airlines can align to prop up prices.

Clark said current fares are less than 5 percent higher than a year earlier, while Rick Seaney, chief executive of, noted that some pricing is back up to pre-2008 levels.

"I don't expect prices to go up dramatically, but I do expect them to increase incrementally," Seaney said, adding that he did not expect the latest security concerns to cause as much disruption for airlines as the 2009 H1N1 swine flu outbreak, which soured demand for travel to Mexico.

Seaney said U.S. airfares reached bottom at the end of May and early June as carriers sought to occupy seats in the weak economy, while international ticket prices touched the lowest point of their declines in late July and early August.

Airlines have been encouraged by signs that business demand was recovering from the deepest recession since the Great Depression. Executives at carriers such as AMR Corp's American Airlines and US Airways Group last month cited evidence that business demand was improving.

This week, Continental Airlines, which depends heavily on business traffic, estimated that its mainline unit revenue fell between 4.5 percent and 5.5 percent in December. In November, this measure fell 9.8 percent and in October, it dropped 15.2 percent.

"The trends are definitely up for business travel coming back," Seaney said. "But it's a slow trickle, it's not a quick jump."

Shares of major U.S. carriers rose on Thursday as oil prices pulled back. The Arca Airline index was up 2.3 percent in morning trading.

Delta Air Lines shares gained about 5 percent, while Continental, UAL and AMR were up more than 4 percent in late-morning trading.


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