The marketplace affects where we can and cannot fly.
- If you need to travel between Lima, Peru and Atlanta, you can thank asparagus lovers. More than passenger traffic, Delta values the route because of its asparagus cargo. (While China is by far the world’s largest asparagus producer, Peru exports the most fresh asparagus.)
- Similarly, on its Cincinnati to Paris daily run, Delta carries enough jet parts to have saved this route when they eliminated other international flights from Cincinnati.
- Or, if you are in the oil business, you can easily fly between Baku, Azerbaijan and Aberdeen, Scotland because the 2 cities have a business link.
Although airlines have added 37% more routes during the past decade, they are scheduling fewer flights between smaller and mid-size cities. Specifically, regions that experienced economic distress, like Detroit, Las Vegas and Phoenix have had less air traffic. (My statistics are for the 12 months preceding March, 2011.)
As one officer at the American Association of Airport Executives said, “…in the end, the bottom line is the marketplace…If the passengers [or cargo] aren’t there, it’s really hard for the airlines to justify the service.”
Some final facts: When the US airline industry was deregulated in 1978, route decisions changed radically. Pre-1978, I was able to fly non-stop from LaGuardia in NYC to Peoria, Illinois on relatively empty Ozark Airlines planes. Airlines competed through service and schedule. The inefficiency was okay because the government let airlines charge high enough fares to cover their costs.
Not any more. Now, by deciding where we can and cannot fly, the marketplace oversees efficiency.
Sources and Resources: This WSJ article describes some of “The World’s Oddest Air Routes” while here, the NY Times provides more insight about changes in air travel. In addition, for an excellent interactive graphic, “20 Years of the U.S. Domestic Airline Market in 20 Seconds,” I suggest this website.
Posted by: adminEcon
Tags: airline deregulation, airline market, airlines, Alfred Kahn, American Association of Airport Executives, Armavia Airlines, asparagus, Azerbaijan Airlines, CAB, Civil Aeronautics Board, competition, competitive market structure, Delta Airlines, profits
If you are flying during the holidays, do take a look at the color of your plane.
Is it rather bland?
The reason is deregulation. After 1978, when government stopped approving fares, guaranteeing profits, and allocating routes, the world of flying changed.
If you wanted to fly from NYC to Washington, D.C., you could take the Eastern Airlines shuttle. The sole source of the service, Eastern guaranteed a seat to every customer. Arrive late and the plane is full? Eastern said, “Not to worry. We have an extra plane.” Similarly, Braniff Airways commissioned artist Alexander Calder for artwork on the outside of planes and had designer uniforms for its stewardesses. Neither Eastern (1991 bankruptcy) nor Braniff (1982 bankruptcy) survived deregulation.
Now, in a deregulated world, competition rather than government determines profits. Because painting planes is expensive, airlines avoid colors that need upkeep. Not only is the plane out of service for more than a week but also, you need a lot of paint–250 gallons for a jumbo jet and 60 for something smaller like a Boeing 737.
More from econlife on airline deregulation, here and here.
The Economic Lesson
Deregulation transformed flying. Pre-1978, airlines enjoyed the benefits of monopoly. Afterwards, when the market changed to oligopoly, airlines had to worry about costs, fares, and responding to competition. Here is an excellent video from Annenberg that includes a segment on the impact of airline deregulation.
I just heard in a podcast that being a good economist means lifting the veil off of the unseen. Have you ever thought about the impact of deregulation on the color of an airplane?
An economic question: How were consumers affected by airline deregulation?
Have you ever hesitated to book an airline reservation and, within moments, the price changed? Or, could you have known that delaying your purchase of a ticket to God of Carnage in LA last summer would have saved you almost $70?
The reason is “dynamic pricing.” Airlines do it, hotels also, and now theater owners.
According to the NY Times, Broadway theater owners are using dynamic pricing to cater to the “haves” and “have-lesses.” For airlines, that has meant vacationers paying much less than business travelers. Even for certain restaurants, you could pay more for Saturday evening at 8:00 than Tuesday at 9:30. With the LA example, early ticket purchasers spent $120 but when demand plunged, the price did also.
With dynamic pricing a seat is not just a seat. It becomes a commodity that has to be used when available because you cannot store it. Its customers have different needs, its future demand is uncertain, and its providers have pricing power. Implemented appropriately, dynamic pricing maximizes revenue.
The Economic Lesson
Dynamic pricing is all about price elasticity of demand. If price changes a lot and the quantity we buy remains almost the same, as with medication, then our demand is inelastic. By contrast, if price swings have a big impact on buying, then our response is elastic. With Broadway shows and airline seats, certain consumers have an elastic response to higher prices; when price ascends they say, “No.” Others, the inelastic group, will buy no matter what.
An Economic Question: Thinking of “dynamic pricing,” we could say that we have 2 demand curves among Broadway theater ticket buyers. Explain and draw.
McDonald’s used fryer grease?
Alaska Air might want it. On 75 commercial flights, they will partially fill their tanks with biofuels that contain used cooking oil. Selecting algae for its biofuel blend, United flew from Houston to Chicago on its “Eco skies test flight.”
Commercial aviation is looking at biofuel blends to diminish their carbon footprint. In a WSJ list of 4 airlines, Lufthansa has the greatest commitment with 1200 commercial flights while United, with one, is at the bottom. Next year, the European Union has said it will implement a carbon emissions trading program for airlines. The problem, though, is that biofuels are 6 times as expensive as normal jet fuel.
The Economic Lesson
The key is cost. Thinking of the determinants of demand and supply, what might sufficiently shift a curve to lower the equilibrium price of one or several of the types of biofuel?
An Economic Question: On a demand/supply graph, describe a (hypothetical) reason that the supply curve for cooking oil-based biofuel might shift to the right.
When Starbucks raised its prices during the beginning of 2010, it lowered the price of a tall regular to $1.70. But, if you wanted a splash of foam, a shot of espresso, or a touch of flavor, the addition could be expensive. For a triple grande soy vanilla latte, you would have paid a whopping $6.25.
Their goal, I suspect was to attract coffee lovers who would spend a little and those who would spend a lot. For a basic cup of coffee, the price would be low. However, those who were willing and able to pay more would also be satisfied. In that way, Starbucks could retain a dual clientele.
NPR’s Planet Money explains how Groupon takes advantage of the same idea. People willing to expend the time and energy looking for coupons pay less. But businesses still can take advantage of the group who, ignoring the coupons, are willing to pay more. Again, the business owner can benefit. She does not have to offer lower prices to everyone.
The Economic Lesson
Starbucks and Groupon are engaging in what economists call price discrimination. The perfect example is airlines. An airline knows, for example, that a business traveler might be willing and able to pay more than a vacationing student. Their task is figuring out how to charge the businessperson more. The answer? Give discounts to people who stay over a Saturday night. The price discrimination is not explicit and yet, business fliers are charged a higher price.
In economics textbooks, price discrimination is typically discussed in chapters on monopoly. A monopoly and a smaller firm with a unique good or service have pricing power that have enables them to target different customers with their prices and coupons. Movie theaters discriminate by charging senior citizens less.
Do you think that colleges engage in price discrimination through financial aid?