Demand and supply in the airline industry

Airlines have announced price cuts targeting leisure travelers through the usually busy winter holiday season and beyond. Analysts view the moves as an attempt to woo back consumers who are putting off trips in response to the unfolding economic crisis.

Translation: income falls (or is expected to fall or is more uncertain), demand falls creating a surplus and price falls.

The downturn is emerging as the biggest threat to the industry since it was buffeted by summer fuel prices. Now fuel prices are retreating, but so is the demand for seats.

Translation: Don't buy airline stock.

In theory, there should be few empty airline seats. Airlines have eliminated about 200,000 seats per day by zapping routes and grounding planes.

Translation: Supply fell ...

The reduction was supposed to give airlines room to raise fares. But analysts say winter sales suggest that airlines are struggling to fill their planes.

Translation: But demand has fallen even farther ...

And where you have empty seats, you have discounts, says Rick Seaney, chief executive of FareCompare.com, which allows travelers to compare prices among Web sites.

Translation: Creating a surplus which leads to falling prices.

Source: Holiday airfares drop and ticket demand slumps.

Comments

[dWj]

If I may separate out short-term versus long-term components, the elimination of routes and grounding of planes looks like a reduction in short-run supply; the reduction in fuel prices suggests an increase in long-run supply (a shifting out of the LRS curve).

The reduction in SRS was undertaken in response to a reduction in expected demand; the whole supply-demand framework makes no sense if you allow changes in demand to move supply curves contemporaneously.

[UrbanWorkbench]

Living in a small rural community that hosts an airport serviced by one airline - Air Canada, the faith that local decision makers are placing on the fact that this airport will have flights makes me wonder.

The realities of commercial economics are most readily seen in the airline industry where profit margins have always been slim and only the fittest (or government subsidized) survive.