Putting the CON in Economics

My degree's in economics, but that doesn't mean that I necessarily get it, when it comes to understanding or supporting economic theory. Take this quote, from an article on the Knowledge@Wharton site about the current problems in airline capacity:

From a business perspective, reducing capacity is exactly what the airlines should be doing, says Wharton transportation professor W. Bruce Allen.

Flights this summer are booked at historic high levels of nearly 90%. Before the industry was deregulated in 1978, flights typically ran 55% full. "If something happened back then, the airline could easily put you on the next flight because that flight was only half-full, too." He points out that an airline seat is not like canned soup or any other tangible product that can be shelved and sold later if demand is slow. As a result, airlines have honed operations to squeeze the most cash out of every seat they fly, including overbooking to make sure each seat has at least one customer. If airline operations "are running full-cylinder, then it's the most beautiful symphony you've ever heard," Allen notes. "The problem is it's scheduled so tightly that the minute something does go wrong -- wow!"

So, from an economic perspective, if you run an airline (or anything) at maximum output -- every seat full, every flight -- you're generating maximum revenue. If you were to reduce the number of flights, then demand would support raising fares on the remaining flights, so that you would earn more on each of those flights while your costs stayed constant (not allowing for any residual costs from the flights you cancelled). Granted, now people have to accept higher fares, longer waits to get a plane, and equal or greater probability of an unsatisfactory flight -- but from the economic perspective, whats not to like?