I was recently pricing out airfare because my husband and I are thinking of traveling to Europe. As I was doing so I was thinking: "I am so happy that Airfare has not increased in lockstep with inflation."
What? I'm so happy that airfare is so cheap? Absolutely.
Airline ticket prices have not been moving relative to inflation; “in constant year 2000 dollars (in "real" terms), the average round-trip domestic fare fell from $441.69 in 1979 to $267.74 in 2012” (Airlines For America). By looking at 1990, the average price was $500.00, which adjusted for inflation would be $888.00 in 2013 (Bureau of Labor Statistics BLS.gov).
The average airline price in 2012 was $375.00 so the prices could double and still be less than inflation projections from 1990 (RITA).This is certainly not evidence that consumers have had enough surplus and now it is time for producer surplus, but it indicates a slowly decreasing profitability of the industry because costs are moving relative to inflation; the gap between price and cost has dwindled.
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What? I'm so happy that airfare is so cheap? Absolutely.
Airline ticket prices have not been moving relative to inflation; “in constant year 2000 dollars (in "real" terms), the average round-trip domestic fare fell from $441.69 in 1979 to $267.74 in 2012” (Airlines For America). By looking at 1990, the average price was $500.00, which adjusted for inflation would be $888.00 in 2013 (Bureau of Labor Statistics BLS.gov).
The average airline price in 2012 was $375.00 so the prices could double and still be less than inflation projections from 1990 (RITA).This is certainly not evidence that consumers have had enough surplus and now it is time for producer surplus, but it indicates a slowly decreasing profitability of the industry because costs are moving relative to inflation; the gap between price and cost has dwindled.
Click To Read more ---------------------------------------->
Taking one look at this graph can make us appreciate everything that we can afford now. It's incredible actually.
I have actually researched quite a bit about the airline industry recently. I was specifically interested in the merger between US Airways and American. I wanted to get a sense of what the real debate here is so I took a special interest in the The House Committee on Judiciary Regulatory Reform, Commercial and Antitrust Law: American Airlines-US Airways Merger Hearing. That's a mouthful; from here on out I will call it H. Commit. Watching the H. Commit. showed me that the issue that matters the most to this sample of people is the possible price increases.
Let's say the price does increase a bit... Is that a huge problem? It's the low prices that have made airlines historically lose money.
The most important issue to me is the increase in the HHI in the areas of overlapping service between the two companies. The H. Commit. had a strange perspective on this issue.
By looking at the overlap routes of US and American; “in four markets involving hub-to-hub routes, the transaction would result in a monopoly... In all 22 cases, changes in market concentration and post-merger concentration exceed the thresholds specified in the guidelines and would be presumed to lead to adverse competitive effects” (Mitchell 2012, 16).
The Merger Guidelines are not serving their intended purpose if the FTC and the DOJ do not utilize these ranges of numbers when evaluating mergers. When Mitchell brings this data up in the House Committee Hearing, he receives the general answer that this merger has less overlap than any in recent years (H.Commit.).
Rep. Spencer Bachus stated in his testimony, “I can't recall an airline merger that had fewer duplications than this... you could have stopped those mergers before... but you created other airlines with a distinct advantage if you don't let these two airlines merge” (H. Commit.).This argument based on precedent from the Big 3 mergers is one that many critics fear and proponents embrace (Mitchell 2012, 1). Rep. Bachus is right, this merger is nothing compared to the overlapping service routes in the previous three but regulatory agencies should not be judging their acceptance of mergers based on the relative size of those accepted in the past. Each should be evaluated individually because market conditions change, allowing different situations and industry shortcomings from year to year.
By the way:
FTC is Federal Trade Commission and DOJ is the Department of Justice. The FTC is the regulatory agency responsible for overseeing issues like mergers in the Airline Industry. The DOJ will release reports and research, but the decision is ultimately in the hands of the FTC and then in the Supreme Court if it is appealed. The Supreme Court generally sticks with the FTC, especially in recent years because of their expertise.
The Horizontal Merger Guidelines are literal guidelines written by the DOJ which are to serve as a sort of standardization so that firms do not have to take on all the costs of merging if they're likely to be blocked later on. Merging and then un-merging could potentially be very expensive. So it details how much the concentration in overlapping areas can increase and be okay, and what is definitely bad.
More to come on this subject: I have written a twenty page research paper about the topic of the merger and the industry as a whole... I'm reluctant to post it because of how detailed and full of jargon it can be.
I am also working on a post about the Financial Crisis and why people are so angry at financiers right now. That's a huge, multi-faceted issue so it may take a while. I want to think through all the aspects and avoid ranting.
Let's say the price does increase a bit... Is that a huge problem? It's the low prices that have made airlines historically lose money.
The most important issue to me is the increase in the HHI in the areas of overlapping service between the two companies. The H. Commit. had a strange perspective on this issue.
By looking at the overlap routes of US and American; “in four markets involving hub-to-hub routes, the transaction would result in a monopoly... In all 22 cases, changes in market concentration and post-merger concentration exceed the thresholds specified in the guidelines and would be presumed to lead to adverse competitive effects” (Mitchell 2012, 16).
The Merger Guidelines are not serving their intended purpose if the FTC and the DOJ do not utilize these ranges of numbers when evaluating mergers. When Mitchell brings this data up in the House Committee Hearing, he receives the general answer that this merger has less overlap than any in recent years (H.Commit.).
Rep. Spencer Bachus stated in his testimony, “I can't recall an airline merger that had fewer duplications than this... you could have stopped those mergers before... but you created other airlines with a distinct advantage if you don't let these two airlines merge” (H. Commit.).This argument based on precedent from the Big 3 mergers is one that many critics fear and proponents embrace (Mitchell 2012, 1). Rep. Bachus is right, this merger is nothing compared to the overlapping service routes in the previous three but regulatory agencies should not be judging their acceptance of mergers based on the relative size of those accepted in the past. Each should be evaluated individually because market conditions change, allowing different situations and industry shortcomings from year to year.
By the way:
FTC is Federal Trade Commission and DOJ is the Department of Justice. The FTC is the regulatory agency responsible for overseeing issues like mergers in the Airline Industry. The DOJ will release reports and research, but the decision is ultimately in the hands of the FTC and then in the Supreme Court if it is appealed. The Supreme Court generally sticks with the FTC, especially in recent years because of their expertise.
The Horizontal Merger Guidelines are literal guidelines written by the DOJ which are to serve as a sort of standardization so that firms do not have to take on all the costs of merging if they're likely to be blocked later on. Merging and then un-merging could potentially be very expensive. So it details how much the concentration in overlapping areas can increase and be okay, and what is definitely bad.
More to come on this subject: I have written a twenty page research paper about the topic of the merger and the industry as a whole... I'm reluctant to post it because of how detailed and full of jargon it can be.
I am also working on a post about the Financial Crisis and why people are so angry at financiers right now. That's a huge, multi-faceted issue so it may take a while. I want to think through all the aspects and avoid ranting.