End of air fares as we know it?

NYTimes.com: Continental Cuts 3,000 Jobs as It Grounds Planes

Continental Airlines said Thursday that it would cut 3,000 jobs and retire 67 Boeing aircraft from its fleet, becoming the latest airline to announce capacity reductions in the face of high prices for jet fuel.

Today, it’s Continental.  Yesterday, United.  Other airlines have gone bankrupt.  Airlines are trying to curb losses by cutting back on employees and reducing size of their fleets.   Airline troubles are being blamed on rising fuel costs and a slowing economy.

Can the airline industry recover from this latest challenge?  It seems to me that this time things may be spiraling out of control.  Lower capacity and higher fuel costs means higher fares for passengers.  Higher fares cause a decrease in demand as passengers seek alternatives or reduce travel.  Lower demand means excess capacity.  Airlines cut capacity, causing the cycle to continue.

At some point an equilibrium will be reached with fewer airlines, fewer cities served, and higher costs.  With fuel costs high it may be prohibitively expensive for new startup airlines to emerge in the future to service routes that have been dropped by the existing airlines.  Perhaps this is the breaking point for the airline industry.

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  • Reply Dale June 5, 2008 at 6:44 pm

    Well at some point, they will cut capacity so much that there’s an unmet demand out there and newer airlines will start up that actually make money?
    Or maybe Southwest can expand. Or maybe they should start letting foreign airlines compete.

  • Reply MT June 6, 2008 at 12:13 pm

    The theory is that when unmet demand occurs, startups should occur to fill the void, but does the high fuel costs make it too risky an environment for it to take place?
    The fuel situation is interesting. On the car front, there’s work on hybrid and electric cars. But what can be done to make planes more fuel efficient? I don’t think we’ll be talking plug-in airplanes anytime soon!

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