ECON 1B Requirement

The Economics of Low-Cost Airline Travel

Maria Reylan M. Garcia

JD 3
University of St. La Salle College of Law

I. Introduction and Problem Identification:

The 1950s and the 1960s comprised the Golden Age of Flying 1. Back then air
travel is a luxury. The aerial experience is nearly exclusive to the well-off. Airline tickets
costs 40% more than their counterparts today2. To the middle and low-income earners,
saving for an airplane ticket takes at least a year of tightening belts and would probably
take out at least 5% of their annual income3.

But the paradigm was shifted when the Airline Deregulation Act was enacted in
the United States Congress in 19784. Government control over fares, routes and
markets of entry were removed. This gave more liberty to commercial aviation.
Henceforth, the concept of providing low-cost airfares to consumers was entertained.

It is the American domestic carrier Southwest Airlines that pioneered the selling
of cheaper airline tickets5. The public patronized the idea. Flagship and legacy airline
competitors began to lose significant revenues to the newly conceptualized budget
airlines. Nevertheless, the steep decline in airline ticket rates cannot be a lone
phenomenon. The airline industry is, at the same time, confronted as to how they will be
able to maintain services and features that were initially considered in the unadjusted
ticket prices.

Thus, it is anticipated that lower fares would result to fewer amenities. Leg rooms
are getting narrower to make room for additional seats and ultimately passengers.

Delawares JetBlue is further adapting. Recently, they have terminated the first bag free
policy and would rather charge for the first bag instead. The seats appear to have been
shrunk to more than inch of its initial size. The more popular Spirit Airlines has even
exaggerated the reduction of legroom from 32 to 36 inches in the mid-1980s to the now
crammed 28 inches.6

Within the decade, figures reflect that ultra-low-cost airlines like Spirit have had
their revenues domineering the market charts. Those airlines that advertise a more
convenient but pricier experience has expectedly performed poorly.

The advent of customer feedback and its growing importance to marketing has
set an uncanny situation. The criticism of consumers with the amenities of budget
airlines has been consistently unfriendly. Passengers report a general dissatisfaction to
the want or misdelivery of services accompanying budget cost air travel. More
interesting is, despite their clamors, they are not willing to pay premiums to upgrade
their budgeted amenities and services.

This is a nipping absurdity in budget airline operation. Although not an emergent

problem, but why is it air travelers unceasingly and prodigiously patronize low-cost air
travel despite the fact that they are dissatisfied with their flying experience?

II. Application of Microeconomics and/or Macroeconomics concept/s

It is submitted that the Law of Demand applies to elucidate the abovementioned

problem. The Law of Demand states that:

The quantity of a specific good or service that people are willing and able to
purchase decreases as the price increases, and increases as the price
decreases, as long as the price is the only thing that changes. 7

Price and quantity demand of any good or service is inversely related to one
another. The Law of Demand explains consumer behavior when faced with a change in
the price of commodities. Hence, when the price of a commodity increases, the quantity
demand of such decrease there is a fall on the demand. However, when the price of a
commodity decreases, the quantity demand of the same increases there is a rise on
the demand. This is with a cetris peribus proviso.

In the case of budget airline operations, the decrease in the cost of airline tickets
has catapulted the increase of demand for the same. Following the deregulation of air
travel, airline companies relied on the alluring effect of lower prices to the consuming
public. For several years air travel has been almost exclusive to the financially elite that
the lesser income earners must have been night and day dreaming about how it would
be to ride an airplane. Thus, the decrease of airline ticket rates has sparked excitement
making air travel a true blue public commodity.

This is how the law of demand comes into play. It is seen in the most trivial
such as a buy one take one promo of some boxes of toothpaste. And, it is seen in the
not so trifling such as a luxury airline rebranding itself to a low-cost and budget carrier.

Price, however, is not the only determinant of demand. Other determinants

include consumer income, consumer tastes, the prices of complements, the prices of
substitutes, consumer expectations, and the number of potential buyers. However, it
appears that price remains the most influential as reflected in the problem at hand.

Despite the dissatisfied ratings of low-cost airline passengers as to their services

and amenities, the lower price keeps them booking and paying for yet another ticket.
Consumer taste seems to favor what the higher quality luxury airlines offer. Still, this
determinant cannot solely reverse the effect a lower price has on the demand for lowcost air travel.

III. Conclusion / Insight

The paradox in budget airline operation is not as paradoxical as initially

perceived since the law of demand fits squarely in application. The reason why low
budget airlines rise triumphant in air industry charts is because consumers are most
likely to favor the less costly than the admittedly better quality amenities offered by
luxury airlines.

It is also noteworthy that aside from the lowering of rates for airline tickets, the
rapid economic growth, urbanization, and a swelling middle class in emerging
economies are themselves demanding for air travel. Asia Pacific airlines alone will need
almost 13,000 more airplanes worth $1.9 trillion over the next two decades. Estimates
predict that by 2032 the total number of Asian carriers will reach 14,750, up from 5,090
in 20128.

The 1950s and the 1960s may have been the Golden Age for Flying, but the
2010s may soon be the Golden Age for Flying on a Budget.

Footnotes:
1
What It Was Really Like To Fly During The Golden Age Of Travel
http://www.fastcodesign.com/3022215/terminal-velocity/what-it-was-really-like-to-flyduring-the-golden-age-of-travel, last accessed July 16, 2015
2
Ibid
3
Ibid
4
Smith, L. and Cox, B., Airling Deregulation,
http://econlib.org/library/Enc/AirlineDeregulation.html, last accessed July 16, 2015
5
Low Cost Airlines: A Brief History, The Current State and The Future, http://
http://aviationknowledge.wikidot.com/aviation:low-cost-airlines:a-brief-history-thecurrent-state, last accessed July 16, 2015
6
Frequent Criers,
http://www.slate.com/articles/business/moneybox/2014/12/chea_airlines_why_american
s_wills_suffer_war_service_on_flights_in_order_single.html, last accessed July 16, 2015
7
Definition of Law of Demand, Economic Times,
http://economictimes.indiatimes.com/definition/law-of-demand, last accessed July 16,
2015
8
Brandon, J. Economic Growth in ASEAN Drives Demand for Low-Cost Air Carriers
http://asiafoundation.org/in-asia/2014/02/26/economic-growth-in-asean-drives-demandfor-low-cost-air-carriers/, last accessed July 16, 2015