Case Analysis: “No Frills” Air Fares
Distinguish between the demand curves for National Airlines, Eastern Airlines and the Airlines industry.
The above analysis requires an understanding of:
(i) Why is the demand curve downward sloping?
(ii) Can price have the same effect on the demand between the firms and at industry level?
(iii) What would be the effect of changes in income and other prices on the demand curve of a firm?
(iv) Calculate the price elasticity of demand for National and Eastern Airlines. (v) Which elasticity measurement (Point vs. Arc) is appropriate for National and Eastern Airline? Explain
“No Frills” Air Fares
As the 1974-1975 recession made inroads into passenger traffic loads of the major airlines, National Airlines persuaded the Civil Aeronautics Board (CAB) to let it try an experiment with a discount of as much as 35 % from normal coach fares on certain of its regularly scheduled routes. National, in an effort to build up its load factor, tied its discount fare proposal to the offering of “no frills” service during the flight, including doing away with complimentary meals, snacks, soft drinks, and coffee so as to reduce costs and partially offset the lower-priced fares. However, passengers using the “no frills” plan could selectively purchase these items in-flight if they wished. The no frills fares were offered only Mondays through Thursdays. The CAB gave the go-ahead to National to experiment with the no frills fare, with the proviso that National study the plan and report back at a later date. Eastern Airlines and Delta Airlines, both competitors of National on some of the routes where National proposed to implement no frills fares, were also permitted to use the discount fares for a trial period. In its report to the CAB on the results of the no frills approach, National maintained that 56 % of the 133,000 passengers who used its no frills fare from mid- April through June 30, 1975, were enticed to travel by...