Monday, 19 May 2008!
HandWritten on; 14:31
Inspired by our econs drq test I went to read up on the American airline industry.
So this article is about how, forced by rising oil prices and costs of production leading to the decline in airline profits, the airlines are making use of their oligopolistic power and engaging in an across-the-board increase in airfares. However, to make sure that they don’t lose their competitive edge among the few dominant airlines, the article also explains that they have to “see if competitors will match. If one or more major network carries don’t go along, other carriers roll back prices”
So there is this interdependency among the airlines, due to the very high and positive cross elasticity value as a result of their closeness of the products, which restricts the airlines from abusing their oligopolistic power too much.
Happy reading!
Most Big Airlines Match Price HikesOf Late Last Week By Scott McCartney 10/11/1999 The Wall Street Journal Page B14 (Copyright (c) 1999, Dow Jones & Company, Inc.)
An across-the-board increase in airfares was matched by most major carriers, but the price rise remained in flux over the weekend and could fall apart today, carriers said.
Late last week, Continental Airlines increased its fares by $10 for all categories of one-way trips over 500 miles, and $5 for all categories of one-way flights less than 500 miles. Northwest Airlines was a lone holdout in not matching the price hike for restricted leisure fares. The increase in unrestricted business travel prices received less support: UAL Corp.'s United Airlines, US Airways Group Inc. and America West Airlines hadn't raised their prices as of late yesterday.
Typically, airlines post price rises over the weekend, when ticket sales are slow, to see if competitors will match. If one or more major network carriers don't go along, other carriers roll back prices.
In his weekly message to employees, Continental Chairman and Chief Executive Gordon M. Bethune said the fare hike was essentially a "fuel surcharge." Higher oil prices have cut into airline profitability, and contributed to a swoon in airline stocks.
Along with oil woes, airline unit revenues have been down from last year's record levels as well, and profits for the industry have been lower this year. Last week, Donald J. Carty, chairman and CEO of American Airlines and its parent, AMR Corp., blasted industry rivals for rushing to increase capacity, then cutting fares to fill empty seats. The strategy, Mr. Carty complained to a meeting of Wall Street analysts, was hurting the profitability of the industry.
United Airlines last week launched one move to increase earnings by cutting travel-agent commissions to 5% from 8%. American quickly matched, and others are expected to follow suit.
A spokesman for Continental said its price-increase initiative was unrelated to Mr. Carty's comments.
Jiamin
