March 25, 2011
Just when it looked like the U.S. airline industry was on the road to recovery, rising fuel prices and the recent earthquake in Japan have spurred some carriers, including US Airways and Delta Air Lines, to cut capacity. See Karen Jacobs, U.S. Airlines Cut Capacity to Battle Fuel Costs, Reuters, Mar. 23, 2011 (available here). Additionally, airline analysts are encouraging the cuts, though some have criticized American Airlines for not being more aggressive with theirs. See Terry Maxon, Wall Street Talks Smack About American Airlines' Capacity Plans, Airline Biz Blog, Mar. 23, 2011 (available here).
As the various stories concerning the capacity cuts point out, flight reductions will likely mean higher prices for consumers in the coming months, particularly on international routes. Whether these moves will be enough to keep the struggling airline industry profitable remains to be seen. Domestic carriers like Southwest currently have no plans to reduce capacity, though even their consumer base may have to endure a price spike if fuel prices continue to rise or Southwest's main competitors scale back their service offerings.
Barriers to Entry in the Airline Industry
Blog readers may be interested in reviewing Jonathan W. Williams & Connan Andrew Snider's recent working paper, Barriers to Entry: An Analysis of the Wendell H. Ford Aviation Investment and Reform Act (Working Paper, Mar. 3, 2011) (available from SSRN here). From the abstract:
In the airline industry, passengers pay higher fares at airports where a single carrier controls a high fraction of traffic. The economics of the industry suggests an inherent tradeoff between product quality and carrier size and concentration, making the welfare implications of these premia ambiguous. In this paper, we investigate the success of Congressional mandates aimed at increasing competition at highly concentrated major US airports. The mandates required airports above certain concentration thresholds to take concrete steps to ease and encourage new entry and expansion by smaller airlines, primarily by increasing access to airport facilities. We exploit a sharp discontinuity in the laws implementation to identify the effects of the law. In so doing we shed light on the nature of high fares at these concentrated airports. We find a statistically and economically significant decrease in fares resulting from an airport's coverage by the legislation. More specifically, we find that in markets where one (two) of the market's endpoints was (were) covered, fares dropped by 10% (18%). Moreover, most of this decrease has come from decreases in dominant carriersfares. We also find that approximately half of this decline in fares is driven by the entry of low-cost carriers into new markets. We find little evidence that the fare declines have been accompanied by decreases in quality measures, with the exception of congestion-related delays, suggesting the legislation has been welfare improving for consumers.
China Challenges EU ETS
China's three major international airlines, acting under the auspices of the China Air Transport Association, plan to challenge the legality of the European Union's plans to bring aviation under its Emissions Trading Scheme in 2012. See China Airlines to Challenge EU Carbon Tax: Report, AFP, Mar. 24, 2011 (available here). If the suit goes forward, it will be the second such challenge to the ETS. U.S. air carriers, acting through the Air Transport Association of America, filed suit in the United Kingdom last year.