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 FareCompare.com.

"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 fly.com, 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 FareCompare.com, 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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Test your understanding of economics in the news: Is this a change in supply or a change in demand?

The September 25, 2009 article "Airlines Add $10 Surcharge On Busy Travel Days" discusses several changes in airfares.

Several big airlines this week have added $10 surcharges on most tickets for travel on days around Thanksgiving and New Year's.

American and United added the charge for most of their fares for travel on Nov. 29, the Sunday after Thanksgiving, and Jan. 2 and 3. On Friday, US Airways Group Inc. matched the surcharge, and FareCompare.com said Delta Air Lines Inc. added it, too.

Spokespersons for Southwest Airlines Co. and Continental Airlines Inc. both said they had not added the surcharge.

Rick Seaney of FareCompare.com noted that the Sunday after Thanksgiving is one of the busiest travel days of the year, and that the two dates in January are heavily traveled as well.

He said the airlines probably added the charge rather than raise base fares because it was a quick, targeted way to charge more on busy travel days.

"The bottom line this year for consumers is that it's pretty clear that if you procrastinate on your holiday travel, you're going to get stung," he said.

He said holiday fares are still running 15 percent to 20 percent lower than last year, with prices to bigger cities carrying the bigger discount from a year ago.

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

In the September 12, 2009 article "Airlines offer lightest fall schedules since 2001," Associated Press airlines writer David Koenig reports that the airline industry is reducing the number of flights because of "falling demand for air travel."

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? What is happening to the equilibrium price of air travel as a result of these changes in the airline industry?

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.

DALLAS – The U.S. airline industry is shrinking to a size not seen since the months after the 2001 terror attacks.

The airlines have been trimming flights for the past two years, matching the falling demand for air travel. Additional capacity cuts are under way at American, the nation's second-largest carrier, and at No. 3 United.

It could get worse.

Most big airlines depend heavily on a relatively small chunk of passengers who pay the highest fares, "and that's generally business travelers," says Robert Mann, an aviation consultant in Port Washington, N.Y. "If business travel doesn't rebound, we're going to see further (capacity) cuts."

Less capacity means consumers will be left with fewer flights to choose from and planes will be crowded. Fewer seats normally means higher fares but that might not happen this time unless the economy begins a true recovery and passenger traffic picks up.

Airlines measure capacity in "seat miles," the number of miles flown multiplied by the number of seats on the planes. Capacity is crucial in the airline industry in the same way that inventories matter to car dealers and retailers. Too much capacity, and airlines have to cut prices, just as a department store stuck with too many suits and dresses will hold a fire sale. Airlines cut capacity by reducing the number of flights or using smaller planes that carry fewer passengers.

The Air Transport Association, the trade group for big U.S. airlines, estimates that carriers will offer fewer than 12.5 billion seat miles in the U.S. in the fourth quarter. That's not much more than the low of 12.1 billion late in 2001, when airlines were reeling from the Sept. 11 terror attacks, and it's down 13 percent from the fourth quarter of 2000.

After such a steep decline in demand, airline executives and analysts are looking eagerly for any signs of improvement. About the best they can say is that things aren't getting much worse. Airline executives say business traffic is a bit better than it was in the spring but still far behind last year's pace.

David Swierenga, former chief economist for the Air Transport Association and now an airline consultant in Texas, said the decline in demands slows with each passing month.

"The economy has bottomed and is beginning to turn around. Carriers will sit tight and go with the (capacity) cuts they've already made," he says.

Hunter Keay, an analyst for Stifel Nicolaus & Co., also doesn't expect dramatic cuts beyond those already announced. If airlines cut more capacity, he says, it will be on international routes favored by business travelers.

Eventually the economy will recover and airlines will consider adding back service. In past recoveries, airlines added capacity quickly as they scrambled for market share. That created a glut of seats, leading to fare wars and more financial problems.

Aviation consultant Mann said that's because airlines are hooked on growth, which helps them spread out fixed costs.

"They always want to be in a growth mode," he says. "The problem is, you can be in a profitless growth mode too."

Darryl Jenkins, an airline consultant in Virginia, says this recovery will be different because the big carriers have been chastened by overly aggressive growth, high fuel prices and the recession. They've cut costs and don't want to undo those efforts by rushing to add back capacity.

This summer the airlines were busy, but weak fall bookings led them to offer deeply discounted fares to fill seats normally taken by business travelers. Southwest ran a sale with some seats as cheap as $30 each way on some routes.

Rick Seaney, the CEO of FareCompare.com, thinks the best of the fall sales are over. With airlines cutting capacity, and having sold many fall seats during the recent promotions, planes will be crowded.

"I can't imagine we'll see anything but firm pricing," Seaney said. "There are still some $99 coast-to-coast deals occasionally, but it's much more random."

During the recession, low-fare airlines such as JetBlue, AirTran and Southwest have done better than their bigger rivals. The discounters set the prices on many routes, and the network carriers generally match them.

Even Southwest, however, is shrinking about 6 percent this year, and has announced a slightly scaled-back schedule for early 2010.

Bill Owen, Southwest's chief scheduler, says the airline has been trimming unprofitable routes, but "If it's full of full-fare business travelers, we're not about to cut that flight."

JetBlue is bucking the industrywide contraction and will add capacity in the second half of the year. The New York-based airline caters to U.S. leisure travelers and has avoided the meltdown in international business travel. It picks targets for growth carefully — it's expanding in the Caribbean while shrinking on cross-country U.S. routes.

In setting capacity, JetBlue of course studies its own traffic but also keeps an eye on what competitors are doing. Robin Hayes, JetBlue's chief commercial officer, insists that the airline doesn't try to forecast the economy.

"These are plans we put in place back in the spring," he says of the expansion now taking place. "We take a long-term view, and we don't try to guess when the recession will end."

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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 Kayak.com.

Also, flights booked through Orbitz.com 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 Travelocity.com.

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

In the August 20, 2009 story "Fall airfare sales cutting deeper than usual," Associated Press writer Joshua Freed talks about airlines cutting airfares. Is this change in the price of air travel caused by (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 and then illustrate this price change 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: Only one of the curves has shifted.) There is a link at the bottom of this posting that provides the answer.

MINNEAPOLIS – Airlines are cutting fares deeper than usual this fall in an effort to fill seats.

American and Southwest both launched fare sales this week, and United is running several sales, too.

While it's common for airlines to use discounts to fill planes during the slower fall travel months, the discounts this year are deeper and more widely available than last fall, said FareCompare.com CEO Rick Seaney.

"The prices we're seeing now are just absolutely superb" compared with this time last year, he said. They're still a little above the fares airlines were offering over the winter and spring when demand was in a free-fall, he said.

Business travelers, the most profitable for airlines, have been staying home for months as companies cut travel back to only the most essential flying. Steep discounts kept leisure travelers in the air through the summer, though at prices that often don't cover the cost of the flight. Still, airlines are better off flying at a loss than parking the plane and incurring what would often be an even bigger loss.

Cheap seats are easier to get under some of the sales than others.

The sale by Southwest Airlines Co. applies to flights from Sept. 9 through Jan. 7, but sale fares aren't available on Fridays or Sundays. And it blacked-out flights around Thanksgiving — Nov. 24 through Dec. 1 — and near Christmas and New Year's Day — Dec. 18 through Jan. 4. Tickets must be purchased by Sept. 3. Some seats are as cheap as $59 each way plus taxes.

UAL Corp.'s United, meanwhile, is running several sales, with fares for travel between Chicago and Houston for $102 each way, and travel between Atlanta and Denver for $109 each way. Tickets have to be purchased by Tuesday for travel by Dec. 16.
Another sale covered Washington Dulles to several East Coast cities for travel through Nov. 18. Tickets must be purchased by Friday. Both sales are valid only for travel on Tuesday, Wednesday, or Saturday.

The sale by AMR Corp.'s American covered flights between New York and five other cities: Miami, Chicago, Dallas-Fort Worth, San Francisco, and Los Angeles.

The New York to California flights were $109 each way, a number that caught Seaney's eye. It's close to the $99 each-way fare for coast-to-coast travel that fliers watch for but seldom get, he said.

Also, some carriers are undercutting each others' direct flights with one-stop flights to the same cities.

"There's a lot of really low-ball deals out there if you're willing to put up with connecting," he said.

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