Many times this can lead to "cutthroat competition". This practice is the result of airlines trying to "under price" each other in order to attract more customers. This leads to shrinking profits and in many instances, red ink. Obviously, a business will cease if they continually lose money. Congress realized that many airlines would fail unless some regulation was enacted, prompting the creation of the Civil Aeronautics Act in 1938. .
Another building block concerning the elasticity of demand for the industry must also be addressed. The airline industry has an overall elastic flavor to it. However, the elasticity cannot be considered to be perfect because there are two main factions that have to be considered: the business customer versus the non-business customer. With regard to the non-business customer, the demand is quite elastic. This statement is true because when ticket prices increase, the number of tickets purchased decrease. The overall elasticity decreases when the business customers are added to the equation. The basic concept is that when someone must fly for business reasons, they will not cancel the ticket if the price is too high. The demand for this faction is inelastic because when the price of the ticket increases, the demand will be constant. They will fly even if the price is relatively high, therefore adding an inelastic flare to the mix. A significant reason that a business will almost always disregard the price is because it can be written-off for tax purposes (which contributes to inelasticity). This whole idea of elasticity of demand is very important because it leads to the aforementioned "cutthroat competition" situation. If the airline industry were composed solely of business customers (suggesting inelastic demand), the ideal of "cutthroat competition" would be a non-factor. The basic premise behind this is that even if an airline lowered its ticket price, it would not attract more customers.