Data Shows Large Decline in Domestic Airfares

In a recent Wall Street Journal article, Susan Carey discusses the steady decline in domestic airfares over the last several decades and the implications for the airline industry. According to the Transportation Department, domestic airfares (adjusted for inflation) have fallen 16% since 1995. AMR Corp.'s American Airlines, which Casey refers to as "the weakest of the major airlines," is in the most financial peril with its stock price having collapsed Monday. Carey blames the 33% loss in value to investor fears that the company might soon have to file for bankruptcy-court protection. She also discusses the general difficulties plaguing the airline industry as a whole, including enormous expenses and external shocks from "terrorism, oil-price spikes, waning consumer confidence and high taxes." Airlines have attempted to compensate for the declining airfares and rising costs by increasing fees for amenities such as in-flight food and checked luggage. However, as the graph below shows, airfares have declined despite these new fees. The graph, based on data from the Air Transport Association, shows a sharp decline over the last 30 years in average round-trip amount for domestic flights and includes reservation change fees or baggage fees in addition to the fare (in 2010 inflation adjusted dollars). Rather than create new fees to help cover costs in the face of declining prices, Jeff Smisek, the chief executive of United Continental, believes that "professional management, as opposed to more charismatic, cowboy management" may be the answer.
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