United Airlines may ground up to 100 planes

United Airlines may ground up to 100 planes to save money on fuel expenses as other major carriers including American Airlines and Northwest Airlines also consider grounding aircraft.

This comes as two US senators asked aviation officials to look into a report that carriers may have cut back on fuel reserves to reduce expenses, possibly violating safety regulations. Carriers are scrambling to meet demand and maintain their profit momentum after a successful summer travel season amid pressure from high energy prices.

So it goes. Much like the fishmermen of Europe, if we envision a currently profitable airline:

Airlines

Leaving out Average Total Cost – i.e. assuming (a) the industry is profitable, and (b) the market is perfectly competitive. The latter is off, obviously, for the likes of air travel – with few firms and significant barriers to entry. They are, however, reasonably competitive in the domestic market (I believe). The illustrations serve the purpose, at least.

Jack up fuel costs, and you increase the marginal costs of providing flights. Assuming P* holds, fewer flights are supplied. Shift the MC curve and you shift the Supply curve (not shown, but, again, the same as for the fishmermen of Europe). Ceterus paribus, we get higher airfares and fewer bought and sold at equilibrium. Along the way, planes are grounded, mechanics are laid off (or their hours are cut), same for stewards/stewardesses, sales people, etc. Everyone, I would imagine, but the Executives.

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