Madness!

[Ch. 12]

Demand elasticity is directly related to competition, not from other carriers but from other modes of transportation. In the US, there is no competition from other modes. Greyhound is not trying to lower it's fares to grab more of the transcon market.

Sounds impressive as well, but wrong. First off, there are two demand elasticities to consider. The first is the industry as you mention and the second is within the industry (carrier to carrier).

The former (industry) decides whether or not a passenger is going to fly at all. You are grossly errant on your statement that there is no competition from other modes. First off, the industry demand (whether or not to fly) is seriously affected by competition from driving and alternatives to travel (teleconferencing or not to travel at all which is currently a popular decision among both families and businesses). Therefore, the industry fares dictate whether one flies or chooses an alternative. This is a fairly high elasticity of demand to consider and tells us that if ALL airlines would come along with a fare increase, that doesn't mean there will be more profits. The exodus of passengers may more than outweigh the higher yields.

The latter (carrier to carrier) has an even higher elasticity as there is so much competition now and passengers are extremely price sensitive that a carrier can lose chunks of market share in a single day of highly increased fares. Also, as has been mentioned earlier in this thread, different route structures and market strengths make it impossible for all carriers to increase fares at the same rate. Some, like NW, don't battle as much against WN b/c they have protection in MSP, etc. They can more readily increase fares than U who faces immense pressure from the LCCs in nearly all of its major markets.

So your statements about elasticity within the airline industry are full of simplified assumptions that are highly inaccurate. And the point is that U is not trying to create the deluge for itself by backing out of the "fare increases" by the legacies a few weeks ago. It is all a demand function that cannot be won with fare increases.

 

[jimntx]

Demand elasticity is directly related to competition, not from other carriers but from other modes of transportation. In the US, there is no competition from other modes. Greyhound is not trying to lower it's fares to grab more of the transcon market.

Greyhound is not a good example of lack of competition = reduction in price elasticity. Another issue with price elasticity is consumer desire for your product. The truth is that in this day and age most people who travel on Greyhound do so because they have no other choice.

The reason Greyhound is not lowering prices has nothing to do with lack of competition. The reason is that lowering prices would just increase their losses. Greyhound had a net loss of $111.6 million in 2002 and a net loss of $28.9 million in 2003. A big contributor to the reduction in the net loss 2003 over 2002 was a 9.6% reduction in employee headcount.

US Airways has an enviable position in many smaller markets where they don't face direct competition with LCC's. As far as I know SWA hasn't announced service to Dubois or Erie or Harrisburg. Exploit your strengths before being hobbled by your weaknesses.

This optimism may be premature. With JetBlue ordering smaller a/c and SWA "thinking about it", I wouldn't bet that they will "never" serve Dubois or Erie or Harrisburg. I remember a time when the Conventional Wisdom was that Southwest would never serve stations like BHM. Well, not only does SWA now serve BHM, they even offer a non-stop from BHM to LAS--from the Buckle of the Bible Belt to Sin City, who'd a thunk it!

 

[luvn737s]

Greyhound is the closest thing the airlines have to competition (aside from teleconferencing). So instead of promoting a superior product at a nominal premium in price (thus adding value) they provide equally lousy service for almost exactly the same price. The real madness is that while they're all losing money, the major airlines are willing to bet that thr competition's pockets aren't as deep as theirs. To the winner of this insane race to the bottom will go the spoils: a credit rating that makes investment in new equipment and technology prohibitively expensive and a customer base who isn't willing to pay a fare sufficient for the airline to make a profit. Thus the industry churns...


Hello, Air Transport Association? You have no competition and the federal government (at this time) could care less about anti-trust issues (it's cheaper to turn a blind eye than bail out the industry). So take back your fare info off the internet and if you're going to be an oligopoly anyhow, at least be one that can generate profits!