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Travel Industry Travails
Subject Comparative Statics
Topic Equilibrium
Key Words Industry, Economy, Recession, Prices, Cost, Rates, Recovery
News Story

The events of September 11 have caused turmoil in the travel industry. What is in store for 2002 is uncertain, particularly because of the economy, but a dozen travel industry gurus have made their predictions for flying, cruising and lodging.

Air travel is predicted by some to decrease because of the recession and scares about security. Business people may take charters, or use email. Prices may also rise due to the cost of new security measures and the cutbacks in flights by the airlines. Alternatively, prices may remain low if business travel does not bounce back.

Cruises prices are significantly lower than a year earlier. Some people fear that they would be floating targets for terrorists. Others are afraid to fly to the ports of departure. The addition of 16 ships in 2001 and a further 13 in 2002 is likely to exacerbate the problem. In response, the cruise lines are moving more ships from Europe to the U.S. so that consumers can drive to their ports of departure. They are also likely to improve the cruise experience by offering flexible dining times, linked cabins for families, more sophisticated entertainment for aging baby-boomers, and magnificent spas. In addition, they hope for a cold winter in the U.S.!

Lodging predictions vary. Some see the recession and fears of flying resulting in lower hotel rates, especially in upscale hotels and large cities. Others see a minor recovery after the winter.

(Updated January 15, 2002)

Questions
1.

Draw a supply and demand diagram of the air travel market. Mark the initial equilibrium price and quantity.
a) Show the effect of the following and explain why you have moved the curves you have:
· the recession
· scares about security
· increases in airport security costs
· cutbacks in flights by airlines
b) Do you expect airfares to be lower or higher as a result? On what does your answer depend?

2. Draw a supply and demand diagram of the market for cruises. Show the initial equilibrium price and quantity.
a) Demonstrate what happens in the market for cruises as a resulting of the following and explain why you have moved the curves you have:
· Fear of terrorism
· Additions to cruise ship fleets
· Moving ships from Europe to the U.S.
· Improved cruise experiences
· Poor weather in the U.S.
b) What will happen in the market for European cruises? Why? Illustrate your answer.
3. Why do you suppose lodging rates expected to decrease in large cities and upscale hotels more than in other places and hotels? Use economics to formulate your answer.
Source Jane Engle, "Travel experts foresee some rare deals in 2002," The Miami Herald, January 7, 2002.

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