April Financial Report Filed With Court

[usair_begins_with_u]

First, the PE of D is actually -0.64, not 0.64. The negative indicates that when price increases, demand decreases and vice versa. A positive would indicate that when price increases demand also inceases.

Because the law of demand says it will always be negative, many economists ignore the negative sign in front of price elasticity...

Besides that, all the demand curves I have ever studied sloped upward towards the left.. A price increase will always lead to a decrease in demand, unless you want to talk about things like giffen goods, but we wont go there. Price is always negatively correlated with demand. Did you mean total expenditures would increase perhapse?

All the bucketing in airline pricing makes it EXTREMELY difficult to to determine a true PED, because on the same flight you may have 10 different fares. Add to that the dynamics of changing fair rules, and restrictions? Bah.. Forget it.

The price elasticity for the demand for air travel is surely well above 1 (suggesting high elasticity), and has been growing due to things like improvements in video conferencing, and 9/11 airport screening restrictions.


As a bench mark, price elasticity for restaurant meals is 2.2

 

[funguy2]

I was speaking in pure mathematical terms... The negative denotes an inverse relationship. While I good not think of an example where the inverse relationship between Price and Demand would exist (in normal situations), I didn't realize it was so common as to drop the negative sign.

I just figured that the rare positive PE of D is part of some advanced econ with which I am not familiar.

While I have no specific evidence, I would tend to agree that PE of D > 1 for air travel. That said, busdrvr supplied a study which suggests that it is <1. And his study was produced by folks who know more about economic theory than I.

 

[usair_begins_with_u]

That study blows... probably why it was never published any place I have ever seen.. but I give them an A+ on the math lesson in regession, I really need to brush up on my regression analysis... lol dummy variables..

First, it uses no post 9/11 data.. Id make the argument that as 9/11 changed the airline industry as much as deregulation.

Second, the sample (1990-2000) does not acurately reflect the technological changes like internet pricing, video conferencing which really grew after 1999.

Third, the guys doing the study admitted that controlling for dummy variables caused a 100% differential in their estimate for demand elasticity, yet could not offer any tangible reason why. Hmmm a 100% delta in the dependant variable is due to unknown origins .. sounds pretty "statistically significant" if you ask me.

Typical academic approach... these are not real world guys, flying on an airplane is like going to a restaurant... its nice, but not necesary.. i.e avg demand elasticity >>> 1

The whole idea of inventory management was to control price by by the elastiicty of the traveler, thats why you have so many fares... fare rules etc.. In this day and age, the reality is, across the board fare increases by any individual carrier will surely lead to less revenue, and everybody knows it.

 

[Busdrvr]

Thanks UBWU for sparing me the hassle of producing numerous links that show the typical economic convention of representing Elasticity as an ABSOLUTE value. kudos for pointing out what a giffen good is verses Snoop Dog, Common and Lighthouse albums which are Geffen goods..... . One commonly cited Gifffen good is Shmirnoff Vodka, which saw it's demand go up after raising it's prices. Some economist counter there is no such thing since by raising price, they created a "new" product with a higher implied quality, butthat discussion is for another day.

To clear up some other points:
typically speaking, all "normal" products have a region of Elastic demand, unitary demand and inelastic demand. It just depends on the price level. the lower the price, the more inelastic.

The 2.4 elasticity number is from prior to 1997 and applies to ONLY the "cheap seats".
the same studies found last minute traffic (business, funerals and such) to be highly INELASTIC at .1

Since that Time, I'd say that business travel, while still relatively inelastic, is more elastic than before, while the opposite is true for leisure travel because of previously cited reasons (much lower fares, much higher incomes, more expensive alternatives). The study I cited is the most current I can find.

Don't confure my contentions concerning INDUSTRY wide elasticities vs the price taking/making bahaviors of individual companies. That goes to game theory, and one of these days I'll explain why the legacy airlines acted rationally and against their best interests at the same time. But that involves some game theory.

 

[funguy2]

The 2.4 elasticity number is from prior to 1997 and applies to ONLY the "cheap seats".
the same studies found last minute traffic (business, funerals and such) to be highly INELASTIC at .1

Since that Time, I'd say that business travel, while still relatively inelastic, is more elastic than before, while the opposite is true for leisure travel because of previously cited reasons (much lower fares, much higher incomes, more expensive alternatives). The study I cited is the most current I can find.

Neither of these points is covered in the study you sited.

Second, if the PE of D since 9/11/01 is <1, it would hold true that lowering fares would not increase total revenue, but that is exactly what the airlines have attempted to do (America West says it has worked for them, I haven't heard how successful "simpliFares" have been for DAL, and LUV has always worked on the low-fares basis).

The game thoery would be interesting. I've never heard of it.

 

[whlinder]

I love me some game theory, but it has been a while....

 

[usair_begins_with_u]

FG2 & Bsdrv,

If you guys have the means, I highly reccomend this book...

The Evolution of the US Airline Industry by Eldad Ben-Yosef
ISBN: 0-387-24213-9

Im sure you'd both enjoy it.

 

[twoturnin]

someone told me we're paying around 2.80 per gal in Cancun---YIKES average here in states is around 1.82

 

[Busdrvr]

Neither of these points is covered in the study you sited.

Second, if the PE of D since 9/11/01 is <1, it would hold true that lowering fares would not increase total revenue, but that is exactly what the airlines have attempted to do (America West says it has worked for them, I haven't heard how successful "simpliFares" have been for DAL, and LUV has always worked on the low-fares basis).

The game thoery would be interesting. I've never heard of it.

[post="274846"][/post]​

Some of us think on our own and don't base everything on what we think we heard on the jumpseat..... (not so subtle slam on that other guy. ).

Now back to the PED of low cost tickets.
SWA is the supposed "king" of low fare air. they also have among the lowest loadfactors in the industry. they have mucho room for more pax at VERY low cost due to that low load factor. Therefore, either SWA is a bunch of fricken idiots for not lowering Fares from the current level, or they consider the PED for their pax to be at or near 1. Considering most other airlines have ADVANCE PURCHASE tickts near or lower than SWA's, then I'd assume they are seeing the same market forces.