A Self-Correcting Market?

Everyone who has ever studied economics, at whatever level, is already aware of the concept of a self-correcting market; one where any excessive advantage will be removed by other people (or firms) entering the market to exploit those advantages. You can’t sell gasoline for $10 per gallon in 2011, because if there are any other gasoline retailers in your market they can sell gas $5 and appropriate all of your customers (and profits); and if there isn’t already another gasoline retailer in your market, there soon will be. It’s sometimes associated with Adam Smith’s “Invisible Hand” concept – in this case, new retailers would arise to sell gas at half the price, not because they are good or noble, but rather because they can make a huge amount of money by doing so. It’s almost as if an “invisible hand” – which in this case represents their own self-interest – is guiding them toward an action that will ultimately benefit everyone in the community (except for whoever used to have the $10 monopoly of gasoline). Unfortunately, it doesn’t appear that US Airways has ever studied economics…

According to a story that popped up on the Pittsburgh Post-Gazette website this week, starting in January US Air will be the only airline flying between Philadelphia and Pittsburgh, since Southwest has not been able to make a profit flying that route and is dropping it. Southwest had been offering comparable airfares, but US Air was offering assigned seats and frequent-flyer miles that could be used on other airlines through the Star Alliance system, and that gave US Air enough of an edge to make the route unprofitable for Southwest. Under the circumstances, you might expect US Air to raise fares on that route a bit, in order to raise profits as well as to give themselves something they can “slash” later in order to offer “special discount fares” without actually making less money. You probably wouldn’t expect an increase of nearly 600% (from $118 to $698), however…

Now, it’s possible that US Air anticipates that someone else was going to come into the Philadelphia to Pittsburgh run in a few months, and is trying to squeeze some money out of the route while they have an exclusive hold on it; it’s also possible that they believe that their entrenched position, first-mover advantage and goodwill combined with issues in the local economy will make the route too unattractive for anyone to want to start flying it. What they don’t appear to grasp is that even if nobody wanted to get in on the Philadelphia to Pittsburgh run before, they will now – because someone could charge four or five times the previous standard fare for this flight, and yet still undercut the US Air ticket by more than $100. And that doesn’t even consider transportation options which do not involve airliners…

Depending on your exact destination, the two cities are roughly 300 miles apart along Interstate 76. This implies a five-hour trip at moderate speeds, but when we consider that most travelers have to get to the airport two hours before departure, then spend an hour or so in the air, and then wait to deplane and reclaim their baggage, the time differential is only an hour or so. If you need to rent a car at your destination city, this may completely eliminate any time advantage, and even allowing for 31 cents per mile for the trip, you’d still save $500 easily on the round trip. If you’re travelling on business with a four-person team, you could save $2,000 if you drive, and your time differential will still be negligible…

Bus and train travel will remain problematic for business travelers and some other customers, but it seems likely that some additional commuter service will arise between the two cities – because the margin we’re talking about here is rather extreme. All you need to do in order to be competitive in the current market conditions is transport one person round-trip from Pittsburg to Philadelphia and back for less than $698 and less than 5 hours. The problem, of course, is that once a cheaper (and less obnoxious) way of getting from Philadelphia to Pittsburg and back is in place, it’s not just going to go away again once US Air lowers ticket prices to try to compete. Without really meaning to, US Air may just have given birth to entire new industries of competitors…

I don’t own stock in US Air, but if I did, I think I’d see about having an invisible hand (or even a visible one) slap whoever made this particular business mistake upside the head – while I still could…