Falling Demand in the Great Recession forces Southwest to Raise their Ticket Prices

Posted by PITHOCRATES - July 28th, 2012

Week in Review

Typically prices rise during good economic times.  And fall during bad.  Because demand rises during good economic times and falls during bad times.  And prices typically follow demand.  As businesses can raise prices when the demand for their goods or services rises.  But rising prices don’t always indicate good economic times (see Southwest joins as airlines raise fares on most U.S. routes by Nancy Trejos posted 7/24/2012 on USA Today).

A three-month break from airfare increases has ended, with Southwest Airlines raising fares by $4 to $10 round trip on most routes inside the U.S…

Kevin Schorr of Campbell-Hill Aviation Group, a Virginia consulting firm, says airlines haven’t been able to raise fares in recent months because of the economic uncertainty surrounding the presidential election and Europe.

He says airlines are cutting the number of flights they’re making available. “By doing that, they’re able to raise fares if there’s less supply,” he says…

Paul Flaningan, a spokesman for Southwest, says the airline raised fares on non-sale tickets and excluded routes shorter than 500 miles.

Southwest, on the other hand, is raising prices because of falling demand.  Fewer people are flying because of the bad economy.  Leaving some planes to fly with empty seats.  Of course, a plane flying with empty seats makes it harder for that plane to cover its flying costs.  So they pulled some planes out of service.  Because a plane sitting on the tarmac is not burning jet fuel.  And planes sitting on the tarmac helps them fill the seats on the planes remaining in service.  Allowing those planes to fly profitably.

Then there are overhead costs.  With fewer ticket sales there’s less money coming in to pay their overhead costs.  This is an example of economies of scales in reverse.  With fewer unit sales (i.e., ticket sales) they have to recover their overhead costs on fewer tickets sold by increasing the price of each ticket.

So the airlines are not raising their ticket prices because they are greedy.  They are raising them because the economy is so bad that fewer people are flying.  Forcing them to raise ticket prices on the remaining few who are still flying.  Just another indicator of how long and deep the Great Recession has been.  And continues to be.

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