Although price of oil saw a steep decline recently, it had
little impact on the plane ticket price in United States. It might come down to
the fact that there is not much competition left in the US airline industry.
Over the last few decades, the industry witnessed a few mergers between different
airlines (eg. Delta and Northwest, United and Continental, etc.) reducing the
likelihood of airlines to undercut one another on price. There is also an
overlap in ownership of airlines which, according to Jose Azer, a senior
associate at the consultancy Charles River Associates, causes tickets to be
about 10 percent higher than they otherwise would be. The Department of Justice
is on investigation of whether there is a collusion behind pricing. The article
states that federal prosecutors are more likely to find noncompetitive industry
as the contributing factor rather than coordination between airlines.
http://www.businessinsider.com/heres-why-flying-is-still-so-expensive-2016-3
http://www.businessinsider.com/heres-why-flying-is-still-so-expensive-2016-3
This article points to several aspects of the airline industry that I didn't know. To me it seems foolish that the airlines aren't competing aggressively but when no company lowers prices no others have to. The ability of one airline to be able to monopolize certain airports and thus control certain direct routes, seems illegal. It prevents every airline the opportunity to have business in every port; but, how can they change it, when there is only so many slots for planes. I think airlines need to rethink their pricing, some locations are too far to make by car but with such low gas prices, more travelers might opt to drive rather than fly.
ReplyDeleteI agree with Elise, and I think the business model of these airlines require a rethink on the various obstacles they face in terms of attracting customers. Some newer airlines have entered the industry recently such as Spirit Airlines which offers really cheap tickets perhaps some the cheapest tickets in the industry which hurts the business of some of the giants of the airline industry. Along this a price reform, airlines need to offer other incentives to build up long term loyalty with customers and generally show they care enough about the customer to offer benefits they couldn't get say from other airlines or from choosing not to fly at all.
ReplyDeleteMy hunch is that they might get caught for collusion. It is actually possible to pin companies for collusion even if they are not actively negotiating. First the court system has to prove that there is a price competition going between the different firms and then decided if negligence to price change is determinate of collusion means or by external means. As we discussed in Game Theory this particular industry runs on continuous strategy with known punishments. Henceforth, the individual firms cost of cheating (dropping price) outweighs its benefit of remaining at the give price. Which consequentially leads them to be operating in non-negotiating collusion of prices.
ReplyDeleteThis article is every 'eyebrow' raising to me as well. Unfortunately, I would not be surprised if there is collusion in the airline industry. I have heard and read of countless articles of large companies fixing prices only to benefit themselves. This is unfortunate because the number of people using airlines as their means of travel this year is expected to be increase.
ReplyDeleteI really don't like how flights have not changed their prices. It has really annoyed me as im sure it has annoyed many others but people need to fly to get around to work. Prices have not decreased because people do not decrease their flying with prices not changing. So it makes sense that they have not decreased prices but maybe in the future if they decrease them there will be a correlation with an increase in people flying.
ReplyDeleteI would also state that this article is overlooking that fact that we have healthy domestic economy and there are a lot of people that are demanding airfare. When was the last time you boarded a plane that had many empty seats? There is a high demand for tickets, so like anything else, prices are subject to supply and demand.
ReplyDeleteAdditionally, the Wall Street Journal reports that fuel is only 30-40% of ticket costs. While we may be witnessing lower unleaded prices at the pumps, Diesel and Jetfuel are not as volatile as they have a more fixed demand. Yes, the price of jetfuel has dropped but it would not contribute directly to a drop in ticket prices.
Many people expected a drop in fuel to be good for rail transporters - and it is not. Even though diesel is one of their inputs, they rely on it to be high so that people flee from their competition - van transport. A train operates on a frictionless surface, so it is the most energy efficient way to move goods across land. Inputs include maintaining the rails as well as locomotives which can cost 10's of millions. Low oil prices have driven their business into the hands of van transporters that are subject to oil as a key input. Their equipment and labor is cheaper, so oil is a bigger part of their business. Even though low oil is not bad for the airline industry, many people fail to consider that there are many other inputs.
I would also disagree that there is collusion. According to my friends at the Navigation Group at Morgan Stanley (advisory for retiring AA pilots with stock compensation), there is one thing that airlines do to keep you on their planes as opposed to the competition: complementary snacks.
In recent weeks, I have boarded many planes with empty seats, primarily from Columbus to JFK (NYC) or Newark (NYC Area). This is a relatively short flight, with many time options available which might cause empty seats. I think there is high demand for flights between big metropolises, but there are many flights that don't have every seat full. This alone might be why ticket prices are high, because many flights still fly without full capacity.
DeleteI think that another interesting point is that the airlines rewards programs also allow them to not have to compete with other airlines as much which hurts consumers because more competition would cause a decrease in prices. More people are willing to fly their main airline even if there flight is more expensive because they are trying to accumulate as many reward points as possible. However the reward points they receive do not outweigh the money they would have saved if the programs didn't exist and airlines had to compete for ticket prices more.
ReplyDeleteI find the comments on this article very interesting because there seems to be a contrast in opinions when it comes to collusion of airports. It does seems odd to me that prices from different airport companies for the same product are often very close. However I agree with Anthony that the prices are probably higher because of demand, and that is the reason they will not see a decrease because of oil. I don't expect an investigation on collusion to lead to lower prices.
ReplyDeleteThis article definitely raises eyebrows due to the fact that The Department of Justice is investigating if there is a collusion behind pricing. Both cases, collusion or a non-competitive market, make sense regarding the stand still prices after the decrease price of oil. As I read more and more about this topic, chances of an oligopoly being present gets higher and higher, so it will be interesting what the prosecutors end up discovering.
ReplyDeleteOne of the reasons why I think the price of flying is still so expensive is the fact that it is almost an oligopoly. As of 2014, five major airline carriers earned 70% of the industries revenues. In addition the barriers to entry for new companies is very difficult. While the price of oil is low, it does not effect the price of flying because firms have the ability to charge higher rates.
ReplyDeleteThis is really interesting to point out because it is true, oil prices have decrease. However, flight tickets have not decreased in price and I know this because I have to fly home every so often. I would think that tickets would be cheaper since oil price is cheaper. But I do agree with the above comments about this being an oligopoly. These industries will not lower their prices even if oil is cheaper.
ReplyDelete