Depending on how it affects the purchase behavior of other (earlier-booking) customers, it can be optimal for an airline to fill up a not-sold-out airplane using cheap last-minute ticket offers. Since the plane is flying anyway, the airline may on the margin be better off selling a few more 200 dollar tickets even if the per-seat cost of operating the flight is higher. If the number of tickets sold in that manner becomes too high, the entire flight becomes unprofitable, even though it may be full. Cutting back the flight schedule involves serious fix costs. Technically, it's the exercise of an abandonment option, which one optimally exercises only when it is already quite a bit in the money - i.e., only for flights that have lost quite a bit of money for quite some time. Figuring out what exactly "quite" means isn't easy.

Stan, Re: "If an airline doesn't make any money when a flight is completely full, shouldn't it RAISE ITS PRICES?" Not necessarily. It depends on what you mean by "make any money". If you mean that the variable (marginal) cost exceeds the marginal revenue, then that flight does indeed reduce company profit, at least in terms of immediate effect (as opposed to indirect or longer-term effects such as those involving brand equity and customer relationships on the revenue side, or experience curve and economies of scale effects on the cost side). In that scenario, if the goal is/were solely immediate profit-maximization, the average price would have to go up, variable costs would have to go down, or the flight should be cancelled. But if the marginal revenue for that flight exceed the marginal cost, profit is improved by that flight even if the company "loses" money after fixed costs are allocated for some accounting purposes. Re: "If an airline doesn't want to raise it's prices, why should anyone invest in it or lend it money?" Because of the possibility that long-term profitability will be better, due to improvement on the cost and/or revenue sides.

After years of government bailouts (pre and post 9/11) the airline industry has finally reached the day of reckoning. They've used up their political collateral. Taxpayers are tired of funding Northworst and getting nothing but more layoffs and pay cuts for it. http://citypages.com/databank/26/1272/article13199.asp

The reality is less about any government bailouts or some trickle-up theory about tax dollars than the fact that airlines are repeatedly permitted to go bankrupt, reorganize, emerge from bankruptcy, and jump right back into the fare war they started in the first place and running unprofitable routes to keep "buying share." Of course, this means that carriers that might otherwise be responsible when it comes to pricing get their revenues pressed down and before you know it the pricing environment is so competitive that some gal from McKinsey is telling them that they can save $750,000 per year by taking one olive out of each salad. As for quality of service, I am unsympathetic. Particularly in the United States consumers have shown the industry time and time again that they will pick the lowest cost provider (even by a few dollars for the same basic itinerary) and will spend a great deal of effort to wrest everything they can out of every penny. There are entire messages boards hosting groups dedicated to calculating the most frequent flier miles that can be obtained for the least money. There is a non-trivial population of people who embark on three-day flying binges for no other purpose than to maximize their frequent flier miles for the least cost and maintain their "free" status. The flying public has zero interest in premium service, and therefore is unlikely to get it. Only business travelers (who aren't typically paying for their flight) and the wealthy seem willing to pay for anything other than a chair and an air-sickness bag. Is it any wonder the airlines spend very little money on customer service and the like? Until you (and a substantial number of your peers) can answer the question "Would you pay $50 more on a $250 ticket for premium service?" in the affirmative, service will not change. In fact, given the state of fuel costs, I suspect even more cost cutting is on the horizon. Some of these carriers must be forced to liquidate. I'm not holding my breath.