Thursday, July 24, 2008


Supply and demand has never been as simple as it was in those micro/macro economics classes in college. It is true that for the most part supply follows demand.

But there are instances where small shifts in demand follow changes in supply. I don’t mean the inscrutable world of oil prices right now where the principles of supply and demand and price seem disconnected.

I’m also not referring to the overly simplistic “build it and they will come” crowd responsible for so much overbuilding and churn.

I’m talking more about what I learned years ago when airlines were regulated. People in my position worked with airlines and community leaders to secure new routes between city pairs from the Federal Government. I learned something then from an airline executive that I assume is true.

When a new carrier is added to a city pair, even though the existing carrier may be flying that route at far less than capacity, there will be a small increase in the number of people flying the route, regardless of fare changes.

Still, it’s a little puzzling that additional people would jump on a plane at the same fare, just because more seats were available. Some of it brand related, e.g. airline preferences. Some related to more exposure to the fact the route existed at all which includes destination marketing, etc.

Now friend and fellow blogger Bill Geist reports on a PKF analysis that predicts that if the 10% announced reduction in airline seats becomes a reality, it will also cause a 3.9% decrease in hotel occupancies. I haven’t read the report but I can imagine it is due to more sell outs, the hassles that come with a full flight, higher fares as seats because scarce and a shift of leisure travelers in particular to other forms of transportation.

As Bill notes, we’re in for a bumpy ride when it will seem as it does with the price of oil, that no one is piloting the plane.

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