Airline consolidation, prices, and elasticity of demand

Airline Consolidation Hits Smaller Cities Hardest 
by: Jack Nicas
Sep 11, 2015
Click here to view the full article on WSJ.com

TOPICS: Oligopoly

SUMMARY: Airline mergers over the past seven years have had an uneven effect on travelers. While airline service has changed little at the nation's major gateways, carriers have cut flights and raised fares at smaller airports. "From 2007 to 2014, domestic airfares at the nation's 10 busiest airports, including Atlanta, Dallas and Denver, increased less than 1% on average, while the combined number of domestic seats fell 1.6%. But at the 90 next-biggest airports-including Detroit, Honolulu and Birmingham, Ala.-airlines cut their total domestic seats by 14.5% and raised fares by 6.4%. All airfare figures are adjusted for inflation."

CLASSROOM APPLICATION: Students can evaluate the effect of a change in airline strategy toward larger aircraft and increased service at major airports and decreased service at smaller airports on seat prices.

QUESTIONS: 
1. (Introductory) From 2007 to 2014, during the most recent wave of airline consolidation, the average round-trip domestic flight, including fees, increased nearly 16% and airlines cut domestic seats by 10%. Assume that the cut in domestic seats is due to a decrease in supply. What is the price elasticity of demand?

2. (Advanced) Why have Cleveland airfares risen while Cincinnati and Memphis, Tenn. airfares remained flat or fallen slightly?

3. (Advanced) What will be the effect of shift toward larger jets and a pilot shortage on flights to and from regional airports?

Reviewed By: James Dearden, Lehigh University