Sometimes market actors make you wonder about the truth provided by economic theory and if it really applies to the real life market. One would think that firms competing for customers should do what they can (actually, all that they can) to provide better service at lower prices – and protect their customers from disturbances, problems, and delays.
But that does not apply to the airline industry.
They obviously have something else in mind than offering customers something of value. Not only are their flights seldom on time and their personnel, at least the people working in the gates, rude – they seem to favor anything that makes your flight a worse experience.
Not too recently the airlines cut down on service on board while they obviously let prices stay basically the same. And while in the air you can get a 12-oz can of beer for $5.00. (But it is still served cold, I grant that.)
And then the safety mania with the utterly incompetent Transportation Security Agency hit us with full force. The essence of the TSA seems to be to put rude people in costumes, earning their salary by making sure to add as much hassle and discomfort as possible to your trip, between you and your trip. And the airlines whole-heartedly supported it.
As the authorities add to their “safety” measures, which make flying oh so more annoying and time consuming, the airlines either applaud the development or refrain from comment. While you, the consumer and their customer, have to buy new bags because the old ones have the wrong size – and have to stand in line because everybody have to unpack their carry-ons and take off their clothes (at least jackets, belts, shoes, and anything containing metal) before walking through the X-ray.
Next came the special X-ray that takes pictures of all passengers naked. And then the authorities will use border controls to protect intellectual property. How? Through arbitrarily stealing people’s computers and digital music players when they pass the security checkpoint – just in case.
And the airlines still don’t mind their customers being severely harassed by government agencies. In fact, their response to the TSA confiscating computers from travelers passing security checkpoints seems to be to offer in-flight wireless internet. I fail to see why customers would want to pay extra for in-flight internet access if they cannot be sure they get to board the plane still carrying their laptops. Maybe airline executives see something I’m missing, but I wouldn’t rely on their judgment. After all, they are the ones who obviously don’t consider stealing customers’ computers a problem for business.
And today, to top it all off, I received this e-mail from American Airlines frequent flier program AAdvantage:
Dear Per Bylund,
The Transportation Security Administration (TSA) recently introduced a new program called Secure Flight, which is designed to enhance the security of domestic and international commercial air travel.
How will this affect you?
When you purchase a ticket on AA.com or through an American Airlines Representative, you will be asked to provide the following information: full name (as it appears on your government-issued photo ID that you will use when traveling), date of birth, gender and redress number* (if applicable).
Update your AAdvantage® account profile
To save you time and make your future travel easier, additional fields have been added to your AAdvantage account profile on AA.com so you can store this new information. Then, every time you make a reservation with us, we will automatically add your Secure Flight Passenger Data.
So they do not mind my being harassed, searched, and offended. They don’t mind that my property is being stolen. And they aren’t too bothered when they don’t manage to get me where I want when I expect to (which, one would think, should be their business). But they pride themselves with offering to help me automatically report personal information to the TSA? Have they no shame?
What does economics say about this wicked scenario? Well, I’m pretty sure economic theory would claim an airline competing for customers would probably not do any of the above. If they want to make a profit, they should offer customers extra value – not extra cost. So sound economics, we can conclude, cannot explain this behavior.
But we are making a Krugmanian mistake: we’re seeing what isn’t there and not seeing what is there. Just like Krugman blames “capitalism” for the problems with high health care costs and claims markets is exactly what we don’t need. He fails to realize that there is not much capitalism in the health care industry: it is regulated to death by the Food and Drug Administration (FDA) along with the enforcement of intellectual property instruments like patents.
The same is true with the air passenger transportation industry. The assumption that there is a market and that airlines compete for customers like market actors is false. American Airlines and the other airlines are not market actors but to a large part political creations – they live in symbiosis with the government. This is why they don’t care about their customers; customers are unimportant when the market is regulated and “protected” from competition. We’re at their mercy, whereas in a market they would be at ours.
As long as this is the case we should expect longer lines and higher prices. And products and services of deteriorating quality.
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This isn’t the fault of the airlines, this is the government / TSA. My mom works for American Airlines and believe me, they don’t like the TSA anymore then we do – it’s just about putting the industry out of business!
Let me illustrate with one story. My mom witnessed a pilot have his nail clippers confiscated by the TSA, he commented, “you know, I do have an axe in the cockpit if I wanted to do something.. haha”
The TSA agent was not amused, a little while later the TSA went to the pilot’s gate, entered his airplane, and lead him out in handcuffs. They arrested the pilot for that comment.
It applies to all employees of the airlines, they are terrified of the TSA. None of this is their idea, it’s being pushed down their throats, whether they like it or not.
Also – I fly every week and get the same request from Secure Flight – they ask you for that information, but you don’t have to give it. I have never submitted that information, and so far I have not been stopped, searched, or treated differently for not volunteering the additional information.
I’d point out that airlines are being squeezed another way. With fares and schedules easily searchable and transparent on the internet, and with travelers who make decisions largely based upon the fare/schedule and NOT on the airline, you see them do everything they can to get the published cost down as low as possible.
If that means they’re cutting out unnecessary value like sodas, food, etc to get their published fare down another $3, they’ll do it. If that means they need to go bare-bones at the ticket counter and gate, with employees who are a bit surly (largely from idiots blaming them for things like weather delays/etc), overworked, and overstressed to get the fare down another $2, they’ll do it. If that means they have to piss off customers by charging them for checked bags at the gate to keep that cost off the “published” fare online, they’ll do it. You know why? Because if American’s published fare for route X is $2 higher than United’s, the average mouse jockey buying their flight on travelocity will fly United.
There’s a corollary to this rant, too. I fly quite frequently and hold elite status with American and Southwest (to the extent they have “elite”). Flash the card and you find their demeanor opens up quite quickly. And it was the airlines that pushed for “elite” flyer security lines and it’s the airlines that let their elite frequent flyers board the airplane first. And you simply don’t pay for checked bags. Why? Because they know these flyers will take airline club membership into account when it comes to purchasing decisions! I’ll pay a few bucks extra, within reason, to fly AA or SWA. They know that I am willing to make a flight decision based upon their level of service and how they treat me as a flyer, so they actually put forth effort to do so.
We are, of course, in perfect agreement on the nightmare that is TSA. For all the hassle, anyone with multiple brain cells realizes that it’s pure security theatre and does very little to make us more safe. And yes, the airlines are more than willing to get that off their books, because they can simply charge a flat “security fee” equal to that all other airlines must charge, and they don’t have to monitor this or be liable for it any more.
“They arrested the pilot for that comment.”
They arrested him for exposing them for the fools that they are. Can’t have that.
The airline industry has some similarities to the coal industry. Both rely on a huge capital investment that pays off a small return over a long lifetime. These sorts of industries are vulnerable to changes in the market climate, whether they be new government regulations or price increases in the factors of production (fuel, for one).
When the financial calculation begins to tip toward negative returns, the airline is forced to cut costs at the margins, having little or no room elsewhere.
The solution, of course, is for the airlines to increase prices. Yet, this is difficult when the consumers make price their primary criterion for choosing an airline.
I’ll grant that the airlines suffer from their fair share of mismanagement and government regulation, but I imagine that even if those disappeared, the industry might still be in the same situation because, at the end of the day, the consumer wants a cheap flight, and doesn’t much care about the service.
A Krugmanian mistake is to see what isn’t there and not what is. The mistake of seeing something wrong with poor-quality service in the airline industry is that one sees what is there, and not what isn’t: consumer demand for higher quality at higher prices.
I feel horrible for the airlines, personally. Inflation causes huge fluctuations and speculation in oil prices, which is a big input for them. Moreover, they operate out of state owned and regulated airports, which have always seemed the height of waste and ineptitude. State owned airports obviously constrain the supply of things like landing spots.
My dad works for the airlines and he often tells me stories about how his airline has to jump through hoops to secure spots.
Still, I’ve been traveling since smoking was still legal on planes and it has gotten progressively worse every year.
On a somewhat related note:
Last week, I read the paper that Krugman referenced in his blog post that you linked. Predictably, the author (Arrow) was obsessed with “market failure”, and at one point used the term “collective monopoly”.
Wow, what an oxymoron!
It won’t be long now before major commercial entities begin to openly flout govt regulators.
There used to be a benefit to the airlines in going along with the govt in maintaining a monopoly privilege, but what good is a monopoly if you can’t profit from it? They will soon realize that they are better off being seen (from the govt POV) as “outlaws” and meeting consumer demands than by being compliant and losing money and face.
“It won’t be long now before major commercial entities begin to openly flout govt regulators.”
I wouldn’t hold your breath. I think it’s far more likely that most of the major airlines would scream that they’re too big to fail and demand their bailouts. And they’d fully support gov’t crack-downs on any of their smaller, leaner competitors who might be more willing to skirt the regs, claiming their never-ending concern for “public safety” as their righteous pretext.
What you suggest sounds more like a plot line from “Atlas Shrugged” than reality.
Well, a lot of airlines _are_ indeed paying the price for neglecting passengers, in the sense that many of them are constantly battling to stay alive. On a free market this would result in bankruptcy (which is exactly what happens to heaps of smaller arilines today, who tend to enter and leave the industry like revolving doors).
The same doesn’t apply to the really big airlines however, since governments around the world keep bailing them out whenever their cash flow dries up. This doesn’t just apply to quasi-government-owned flag carriers in Europe, but to private ones in countries like the U.S. too. Since airlines can rely on government bailouts whenever managment screws up, they have little incentive to please customers and help protect passengers from bad government regulation. After all, if airlines began protesting government regulations they might miss out on the next bailout!
So, yet again, markets behave the way they should, just as long as governments aren’t distorting them…
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