Concerned about the price of your next airline ticket? Then make like an economist—consider supply and demand.
In this case, supply is the number of flights operated by the airlines and available to travelers for booking. And demand is a measure of consumer interest in purchasing seats on those flights, at the prices currently in effect.
How the airlines manage the balance between supply and demand has real world implications. If demand falls faster than flights can be cut, the airlines will find themselves with a surfeit of empty seats and be forced to discount ticket prices to attract a shrinking pool of increasingly price-conscious travelers.
Alternatively, if the airlines can reduce capacity more or less in lockstep with slowing demand, they will be able to maintain full planes and higher prices, even as the number of flyers declines.
We can reasonably expect consumer demand to fall off significantly in the coming months, as the worldwide financial meltdown forces them to think twice about such discretionary purchases as travel. And we know that the airlines are in the process of reducing the number of flights they operate. The question is, how much will demand and capacity fall?
A newly released report from OAG provides detailed insight into the extent to which the airlines are cutting back.
According to OAG, "Continuing problems within the U.S. economy are impacting airline operations with worse than expected declines in airline capacity this winter, as the number of domestic flights is set to fall by almost 11 percent and capacity by 9 percent in the 4th quarter of 2008 compared to a year ago."
That translates into 21.4 million fewer seats, and 265,000 fewer flights, over the three-month period. Worldwide, OAG reports that airlines will operate 451,000 fewer flights, representing 46.3 million seats.
Those are sobering numbers, to be sure. But they're only meaningful in predicting ticket prices when viewed in the context of consumer demand. Is demand for travel falling faster than the airlines can reduce their flying?
It's too soon to predict that with any confidence, but we are seeing some signs of discounting for holiday travel. That could signal that the airlines' advance bookings are weak enough to push them, reluctantly, into widespread discounting.
While low airfares would be bad news for the airlines, it would bring holiday cheer to many would-be travelers waiting to see which way airfares are headed.