Airlines are suffering but passengers are getting hit twice

Tuesday, July 1, 2008

I took this picture in South Boston while I was running around Pleasure Bay at Castle Island. Castle Island is a popular spot for weekend family outings. People swim, windsurf, walk, run and they do it all under the flight path for Logan International Airport. Most of the families are fine with the planes flying overhead while they are enjoying the sun; better the flight path be over the ocean, rather than over their backyards. However, airline passengers do mind the recent surge in ticket prices.

Along with the rest of us, the airlines have been hit with escalating fuel costs. In May, the price of regular gasoline was up 31% since last year, and the price of energy (also including heat and electricity) was up 17%. As the chart illustrates, the surge in energy prices started in November 2007 and has continued unabated. Previous to that, the U.S. enjoyed falling or rising slightly energy prices since September 2006. Compared to history, the price increases are nothing new, but the actual price for gas and energy are setting records.

Given that one of the largest costs for each flight taken by an airline is fuel, many airlines are trying to accommodate the sharply rising gasoline prices with gimmicks and rules. Some of the airlines are bringing back the minimum stay requirements, and others like American Airlines, are scaling back flights. On the other hand, Southwest Airlines, being one of the few airlines that is earning positive revenues, is taking advantage of its rivals’ troubles by acquiring precious landing rights at some of the nation’s most treasured airports. As the chart below illustrates, all of the major airlines are in trouble.

What does this mean for you as a consumer? I hate to say it, but your ticket prices are getting hit twice: once from the supply side and again from the demand side.

The supply side

Many of the airlines, like American, Continental, and United, are considering (or already have started) cutting flights. This is a reduction in the supply of flights – either now or in the near future. Falling supply leads to a price increase, so expect ticket prices to rise very soon and definitely by Christmas (or New Year’s Eve if you like).

The demand side

If you are a rational person, then what did you think when you read ‘definitely by Christmas (or New Year’s Eve if you like).’ You thought that it would be a great idea to purchase your ticket now if the prices are going to rise in the second half of 2008. This is an increase in the demand of flights today – an expected rise in prices tomorrow causes demand to rise now. An increase in demand leads to a price increase, so simply believing that the airlines will cut flights soon causes prices to rise now.

Farecast Live Search predicts ( how well, I do not know) the fluctuations of ticket prices over the next 7 days. I thought that this sounded interesting, so I searched for a flight to Denver in August (going to a wedding). According to Farecast, there is a 76% probability that over the next 7 days my ticket price will be $25-$91 less. Since this is based in historical data, which cannot possibly take into account the recent spikes in gasoline prices, I am skeptical. However, I will wait the 7 days to see if the price does fall by $40. That would be great if I could pay $410, rather than $500.

Sticker shock will last throughout 2008 and into 2009 because passengers are getting hit twice: once from supply and again from demand. The best thing for you to do is to decide whether or not you must travel over that period. Don’t worry about when to buy your ticket because the price is just going up.


lotto winners July 1, 2008 at 8:48 PM  

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