Friday, August 29, 2008

Southwest Airlines Reducing Supply

Southwest Airlines has announced they will be cutting 196 flights and only adding six new flights at the beginning of next year. Since fuel (i.e. input or resource) prices have been increasing airlines have an incentive to produce less, which shifts the supply of air transportation to the left.

Airlines facing higher fuel costs are either making less profit (or greater losses) on their existing flights, so one way to lower costs is for those airline to supply fewer flights. This increases the percentage of travelers on each of the remaining flights, which makes each flight more profitable.

Additionally, higher fuel costs are partially passed on to air passengers in higher ticket prices. Here the law of demand comes into play. As prices go up, people on average buy less - so with higher airline prices, some travelers are choosing not to book flights that they would have booked at lower prices. This re-inforces the incentive for airlines to reduce supply when fuel prices increase.

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