Airfares up
Last week, my friend Michael Donnelly, editor of the CEO Economic Update, asked why American Airlines had announced that it was cutting flights, with no mention of raising fares. Given the fact that airplanes are fuller than ever, why couldn't American make fare boosts and be sure to be followed by the few other US air companies.
As he put it "The free market answer would be to first increase your load capacity, but ultimately raise prices in line with your costs. Obviously demand will fall, but you can't sell a seat for less than it costs to get there. Case in point: Oil prices goes up, Gas stations raise prices, demand falls. What gas station has kept prices low and instead closed down pumps or 12% of its stations? None, it makes no sense."
He challenged Oligopoly Watch to come up with a reason why American was not behaving like the leader in an oligopoly, namely "signal[ing] to its cartel partners that it was about to raise prices, and it was willing to cut flights to maintain those prices."
I'll admit I was somewhat puzzled, but I did point out that American had used the tactic that many oligopolies prefer over raising prices, that is, cutting costs. They have squeezed their workers with threats of layoff; they had gotten rid of all amenities for flyers; and they had been adding annoying fees, capped off with the recent announcements of charging for any check luggage.
But no sooner had Donnelly asked his question than United responded, raising fees on many round trip routes by $60. And of course, the signaling worked to perfection, with American and Delta on board, and Northwest "considering" the move. The $60 raises, interestingly, do not apply on routes that have competition form Southwest Airlines. AirTran also announced more modest raises (up to $25).
Now, the airlines are treading a fine line. They obviously need the money and airlines tickets are underpriced, given the spike in fuel costs, On the other hand, with summer coming on, a serious rise in prices may well cut discretionary travel faster than the airlines want, The idea is to tread the fine line between flying full flights with too low ticket prices and flying half-full flights at a higher ticket prices. That's why the stealth fee rises, which are less likely to be taken into account when planning a trip, have been the preferred tactic. The fear is that raising prices will accelerate the bleeding, not staunch it.
4:00:12 PM 
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