Airlines
Airlines are a classic case of free market versus regulation, competition versus monopoly, and consumers versus business. Thursday's Senate Judiciary hearing on the pending United-Continental merger laid out the issues. Airline executives touted lower costs, better travel options under "an unparalleled global network," and more stable employment for its workers. The Consumers Union charged consumers would face less choice and fewer flights, loss of service to smaller cities, higher fares, reduced quality of service, and the creation of another "too big to fail" corporation. My recent travel experiences -- fewer available and more costly seats plus annoying extra charges for my first bag, for poor food, and for an Internet connection -- support charges of growing monopoly power for the four major U.S. carriers that would remain if this merger goes through. We're awaiting a Justice Department decision.
Today, the Senate turned to the Federal Aviation Administration authorization, H.R.1586. The last four-year authorization expired September 30, 2007. What caused this 2½ year delay? Congress couldn't agree on how to apportion the excise and ticket taxes to pay for a desperately needed modernization of the air traffic control system. Your car has GPS. Your phone has GPS. Commercial airliners have GPS, but the air traffic control system still relies on radar and radio position reports. That costs billions of dollars in extra miles traveled every year. The airlines correctly believe they pay more than their fair share of the costs, but private pilots (I used to be one.) have more political clout and refuse to share more costs. Then there's the problem of Memphis, TN-based Fedex's avoidance of a union for its workers, which puts it at an advantage over its main competitor, unionized United Parcel Service. The House version of H.R.1586 would apply existing labor laws equally to both companies, but that prompted Tennessee Senators Lamar Alexander (R-TN) and Bob Corker (R-TN) to hold up the bill.
Donald Marron hits upon one of my pet issues: fees for checking bags on airlines. A year ago, I concluded:
Airlines can charge all they want for a checked bag that is too big to carry on. They should not charge to check a bag that is small enough to carry on. This would avoid giving incentives to passengers to carry bags on, where the external costs in terms of delays and crowding are high.
I think that strikes the right balance. In other posts, I declared American Airlines a "Microeconomics-free zone" and linked to a pretty smart analysis that suggests that bag fees may not yield any additional revenue for the airlines.
I wish I had the answer to the big problems we are facing in the financial markets. Since I don't, I'll take aim at a smaller one. With a few months of experience, I think we have enough information to go on to resolve the "should the airlines charge for checked baggage?" argument. (See an earlier installment here.)
The answer: airlines can charge all they want for a checked bag that is too big to carry on. They should not charge to check a bag that is small enough to carry on. This would avoid giving incentives to passengers to carry bags on, where the external costs in terms of delays and crowding are high. These costs were particularly evident on some flights I took a week ago.
That is all. Back to your regularly scheduled financial market meltdown.
Combined with all the travel I've been doing lately (see my post above on "Democracy in America"), this article by Ron Lieber in yesterday's New York Times got my juices flowing about a subject that I'm close to irrational about to begin with: frequent flier programs.
With the exception of one mid-day, mid-week trip between DC and New York, I haven't been on one flight in the past six months that hasn't been close to or completely full. Many of these flights were oversold. Cancelled afternoon flights meant that passengers had to wait until the next day because there were no other flights to the same destination that day or, if there were, no seats were available.
Yes, I know the summer is a heavy travel season. But I also know that the airlines are planning substantial cutbacks in the number of flights starting in September and that the number of seats will be reduced at the same time that demand is falling.
So...
It seems like I'm not the only one talking about carbon emissions from air travel. The New York Times reports today on the challenges of reducing emissions from low-cost airlines even as fuel prices rise.
The growth in emissions from air travel had “far exceeded growth by any other mode,” a European Environment Agency report issued this year said. Between 1990 and 2005, the last full year from which data were available, total carbon dioxide emissions from aviation in the European Union grew by 73 percent.
“This could threaten the ability of the E.U. to meet increasingly ambitious emission reduction targets,” the report’s authors said.
When it announced its new $15 fee for the first checked bag, I declared American Airlines to be a "Microeconomics Free Zone." Its transgression, I thought, was not considering the external, but in my view largely non-pecuniary, costs of doing this. Joe Brancatelli's indispensable "Seat 2B" column at Portfolio.com does me one better. He runs the numbers and wonders if American will net any revenue from this at all.
Andrew...oh guru of airline economics gurus...riddle me this:
US Airways is about to start charging a few dollars for soft drinks. In a normal economic environment this would spur those of us who still fly to buy a can or two of Diet Coke at Cosco at 50 cents per can and bring it on the plane. But this isn't a market in any sense of the word because TSA reguations prohibit anyone from bringing any container with more than a few ounces of liquid...including a sealed soda can...through security.
So doesn't that make any airline selling soda or juice for $2/can (at least I assume you get the whole can) a government sanctioned monopoly?
But wait, there's more.
If US Airways is charging $2/can, shouldn't we expect that the one alternative passengers have to buy water and soda --the concessionaires at the airport -- to compete by selling the same thing for, say, $1.75?
If that's the case, shouldn't we look at the stock of companies with airport concessions as a good buy right now?
Stan, so sorry for your travel woes. It is tempting to describe your flight delays as a tragedy of the commons, but Austan Goolsbee set the record straight on this one three years ago with this great column, "Tragedy of the Airport," in Slate. Here is the key excerpt:
At first glance, this seems crazy. The common explanation given for flight delays is that too many people are flying: The more air traffic, the more delays. That's what most economists say, too. This view of airport congestion makes it seem just like highway congestion. Each time an airline schedules a flight, it doesn't take into account the backups it causes by crowding the airspace. The dynamic generates a tragedy of the commons, in which each of the companies vying for runway slots has an incentive to overschedule.
Andrew...you're our economics-of-the-airline-industry maven so this question is for you.
I just returned from three of the toughest travel days I can remember: every flight was delayed. One, from LA to San Francisco, was delayed for more than three hours.
Some of the delays were weather related and, as much as I'd like to blame the industry, I know that responsibility lies elsewhere.
Most of the delays seemed to be the result of air traffic, especially jammed schedules that had too many plans scheduled to depart at the same time from the same airport.
That's what prompts this question. Is there a silver lining to the reduced schedules the airlines seem to puuting in place for economic reasons? Is it possible that (putting weather problems aside) flights will leave and arrive on time more often if there are fewer of them? Or should we assume that the FAA will reduce the number of controllers to match the schedule leaving us all right where we started?
