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It is always interesting to see economic theories play out in real time. We know that airlines are struggling due to COVID-related travel restrictions and the fast shift in business culture away from traveling and towards video conferencing. Even before COVID, airline fares in the US had been on a near steady drop since 2014 (see the chart directly below). The much smaller number of business travelers is particularly painful because the often rushed, last-minute nature of much business travel has historically produced a nice profit margin for the airlines.

The drop in airline passengers has been steep on a year-over-year (YOY) basis. Travel numbers are still down -70% YOY according to the Transportation Security Administration (TSA). There was a short-lived spike corresponding to Labor Day, but even that spike failed to get above -60% YOY declines (see the chart directly below).

This is bad for an industry that was already suffering a lack of pricing power. They have had to cut prices nearly -24% this year just to entice roughly 30% of their prior year's passengers to take a trip. That is not a sustainable business model, and we have seen massive layoff plans make their way through the airline industry. You could point to the recent -50% decline in the cost of jet fuel as the reason for the current drop in ticket prices, but fuel prices rose from 12/2016 – 12/2019 while ticket prices dropped.

We have also seen that restaurants have been slow to open fully. According to online restaurant-reservation service company Open Table, the YOY decline in seating at full service restaurants remains at -40% (see the chart directly below). This is not good for the bottom line. However, it is interesting that according to the U.S. Bureau of Labor Statistics (BLS), inflation at these restaurants is +2.8% YOY. This means that despite a precipitous drop in traffic, restaurants have been able to pass along some of the price increase that we all have seen in food since the lockdown began. They have pricing power.

This is bad for an industry that was already suffering a lack of pricing power. They have had to cut prices nearly -24% this year just to entice roughly 30% of their prior year's passengers to take a trip. That is not a sustainable business model, and we have seen massive layoff plans make their way through the airline industry. You could point to the recent -50% decline in the cost of jet fuel as the reason for the current drop in ticket prices, but fuel prices rose from 12/2016 – 12/2019 while ticket prices dropped.

We have also seen that restaurants have been slow to open fully. According to online restaurant-reservation service company Open Table, the YOY decline in seating at full service restaurants remains at -40% (see the chart directly below). This is not good for the bottom line. However, it is interesting that according to the U.S. Bureau of Labor Statistics (BLS), inflation at these restaurants is +2.8% YOY. This means that despite a precipitous drop in traffic, restaurants have been able to pass along some of the price increase that we all have seen in food since the lockdown began. They have pricing power.

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