Yesterday's Revelations and Regulations

Aviation experts are wondering what effect yesterday's terrorism scare and its ensuing security tightening will have upon the US's financially beleaguered, but recently recovering, airlines. The good news is that the summer season, travel's busiest time, is almost over, and the airlines have reaped surprising rewards. By cutting their capacity and raising prices, some--like United--have managed to make a profit for the first time in 10 years. As Fall travel sales begin, however (if you plan on traveling in the fall, you should really set up a Travelocity Fare Watcher, as your desired route might go on sale at any moment), one wonders if the jitters induced by yesterday's activities will exacerbate the travel fall-off and lead to empty planes in October and November. If so, we might see a repeat of bankrupty proceedings and strike threats, and no one wants that.

I doubt seriously that the new security restrictions will drive passengers away. Sure, it's inconvenient not to be able to bring beverages, gels, lotions and other liquids onto the plane, but is it inconvenient enough to prevent a passenger from traveling altogether? And although the complexity, shrewdness and advanced-stage of this most recent terror plot strikes fear in the hearts of all those who fly the now un-friendly skies, the fact that intelligence foiled the plot and that the fallout has now made flying even safer must provide some consolation. Over time, as people adjust to the new regulations and lighten their carry-on loads, the security lines will speed up and yesterday's 4 hour waits will disappear.

One interesting note from yesterday: some analysts predicted that the Dow Jones would plummet in the wake of the terror scare. And, indeed, airline stocks suffered--as well as others. But in fact the Dow ended the day up. Why?--Our economist readers should be either scratching or nodding their heads right now--Because the interpretation that the terror scare would frighten off airline passengers led to the further conclusion that the airlines would reduce their capacity, thereby cutting their fuel consumption--thereby reducing the demand for fuel. And as demand decreases, supply increases, and prices go down. So...the stock market surged on the expectation of lower fuel prices. That's your economics lesson for the day.