Leisure Travel Demands & Revenue

Although airlines have cut economy tickets by as much as 19 percent since the September 11 attacks, several airlines--including KLM and British Airways--actually increased their business fares. This at first seems counterproductive given microeconomic theory, which holds that when the demand curve moves to the left (that is, when demand lessens), fewer tickets are sold at the same prices than previously, and even fewer are sold at higher prices.

However, demand for business travel is more inelastic than demand for leisure travel. This is because business travelers often have to travel regardless of the inconvenience, and many are unable to make their plans far enough in advance to take advantage of the special restrictions that many airlines impose. Thus business fares can be adjusted upward even in the light of the events of September 11 with little effect on the number of business travelers.

Although airlines have more flexibility with regard to business pricing, they should be careful not to exploit the situa

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whose travel budgets were previously seen as too small to warrant them. While the discounts they have been getting are generally less spectacular, companies with existing deals have also been able to secure better rates. Some industry observers suspect that if there are no further terrorist incidents to deter travellers, the huge capacity cuts made by airlines in September may prove to have been overzealously draconian. If they are right, and demand for premium class seats begins to match or even exceed supply on some routes sooner than the pessimists expect, rates across the board will harden. In the longer term, while the increased cost of security and higher premiums faced by carriers for insurance against third party liability may add to upward pressure on fares, their impact should be slight. Many have already imposed small security surcharges, typically up to around Dollars 5, and the International Air Transport Association calculates that, before September 11, insurance represented less than 1 per cent of airline operating costs. Only a huge rise in premiums would justify significant fare increases. Jeff Campbell, vice-president in Europe for American Airlines, takes an optimistic view: "While the long-
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Approximate Word count = 2905
Approximate Pages = 12 (250 words per page)

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