Saturday, September 4, 2010

After Bargains of Recession, Air Fares Soar

New York Times article "After Bargains of Recession, Air Fares Soar" (September 4th, 2010) ignores the global phenomenon in air fares to concentrate on the recent.
The increase in fares is the result of a remarkable discipline shown by the airlines, which have generally not added more flights this year even as the economy has improved and demand has picked up. For the airlines, flying fewer and fuller planes has paid off.
Passengers are paying the price. For leisure travelers, domestic fares have increased by more than 20 percent in the second quarter compared with a year earlier, according to data compiled by the travel Web site Orbitz.
Steven Berry and Panle Jia examine the changes in air fare demand between 1999 and 2006, finding in their recent article "Tracing the Woes: An Empirical Analysis of the Airline Industry" in American Economic Journal: Microeconomics (ungated working paper) (gated published), that, quoting their abstract:
Compared with 1999, we find that, in 2006, air-travel demand was 8 percent more price sensitive, passengers displayed a stronger preference for nonstop flights, and changes in marginal cost significantly favored nonstop flights. Together with the expansion of low-cost carriers, they explain more than 80 percent of legacy carriers' variable profit reduction.
This analysis (identified with BLP assumptions) occurred on a span of time before the recession pushed down further prices. As its its wont as the flagship of the left, the New York Times then turns around as soon as prices rise after declining for a dozen years and uses weasel words to describe Airline executives: "Airline executives have since been preaching the need to reduce the number of seats they offer."

It rather seems a joke, considering airline companies costs have gone down, low-cost carriers have become more prevalent, tickets have become competitive due to the internet, nonstop tickets are more common. When efficiency rises, marginal costs go down, quantity rises, and profits fall, it's difficult for consumers not to be massively better off (consumers that aren't New York Times consumers should be neutral when it comes to competitive profits--the reason they're relevant here is because when efficiency rises, overall surplus increases--if profits haven't risen, we know consumers have received all of the increased surplus).

Below, Corrections graphs out a way to indicate three stylized facts from Berry and Jia: prices fall, elasticity of demand increases, supply increases, and quantity supplied increases (click to enlarge). This is not the only way to depict these facts, and these are not the only facts from the paper, but they are suggestive enough that a first pass analysis seems to completely identify the direction of consumer surplus (coloring from blue to red, it unambiguously increases).

1 comment:

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