The Decline of Airline Service-Becker

The increase in flight delays is just one aspect of a general decline in airline service. A few prominent examples of this decline are the elimination of meals in economy on domestic flights, more lost baggage, and dirtier seats and toilets. Posner gives several reasons why service has declined, with concentration on flight delays. I will add one reason to those he mentions that has been very important but is usually overlooked; namely, that the decline in service is an integral part of the substantial fall in the cost of airline travel after the airline industry was deregulated. The crucial point is that the lower income and leisure flyers, and families with children that now make up the vast majority of customers on domestic routes, and a substantial fraction on international flights, prefer lower prices to better quality service and higher prices. On this interpretation it is no surprise that Southwest Airlines achieved remarkable success by offering low prices with no meals, and only non-reserved economy seats. The revealed preference of the majority of flyers has been that they prefer lower prices to meals and many other amenities that were once standard on flights in the United States. American Airlines and other more traditional airlines have been forced to react to the competition from the no frills airlines by, for example, eliminating meals, and sometimes eliminating first class seats and even reserved seats, so that they too can offer lower prices. The same considerations explain the greater crowding on flights since airlines can offer much cheaper seats with average loads of 80 percent rather than say 50 percent. The reason is that the cost of handling the additional 30 percent of passengers is very low compared to the high cost of owning and operating planes, and compared even to the reduced revenue they receive from these passengers. Most persons who now fly prefer lower prices with more crowded planes and greater delays in boarding to the high prices and low occupancy rates that prevailed prior to deregulation. The same trade off between price and service applies to the flight delays discussed by Posner. These delays are stochastic in that they vary from day to day according to different probability distributions of delay times. When delays persist, airlines are forced by the regulatory authorities to increase their scheduled flight times to recognize that typical travel times are longer. Airlines can cut down their delays by having greater amounts of deicing equipment during winter in the event of unexpected icing of planes, greater reserves of crews in case some crew members call in sick or get stranded, a larger number of backup aircraft in case some aircraft develop mechanical problems, and so on for other determinants of delays. I am arguing that many passengers prefer the combination of low fares and greater delays on average to higher fares and fewer delays because it is cheaper to operate planes when inventories of people and equipment are smaller. Consider as an analogy a clothing store that has a large inventory of merchandise. It charges customers a lot for the suits and dresses it sells partly to help finance the convenience to customers of having many types of clothing to choose from. More generally, sellers often offer customers goods that have at least two dimensions: price and size of inventories. Prices generally are higher when inventories are greater so that delays in buying particular merchandise due to unexpected surges in demand are shorter because of the greater inventory of goods. Of course, not all passengers are identical, and some of them prefer shorter delays and higher prices to the present situation. A number of airlines have been started in order to cater to these customers by providing exclusively first class or business class seats. These airlines have generally not been successful, probably because there are not enough of these customers to support commercial airlines that only offer first class service. Instead more affluent flyers have opted to buy shares in or outright ownership of private planes where service is far better and delays are much shorter. Private planes even have shorter delays from air traffic congestion because they frequently use less crowded airports. Air traffic delays at major airports can be reduced through varying pricing of take offs and landings with time of day and the density of traffic, as discussed by Posner. Implementation of such sophisticated pricing is always difficult with publicly owned resources like airports and roads. So the privatization of airports could make possible greater flexibility in pricing the use of airports to take account of congestion. The high fixed cost and low variable cost of airlines do not imply that airlines must be unprofitable in a competitive environment. Southwest and Jet Blue are two examples of airlines that have done quite well by offering low prices and limited service. Airlines made considerable profits in the latter part of the 1990s, but then the industry was hit first by 9/11, and then by the sharp run up in the cost of their fuel. Fuel costs have become more important to airlines than labor costs. The hotel industry offers insights into the airline industry. This industry is more competitive than the airline industry since entry into the hotel industry is even easier than into the airline industry, and hotels also have high fixed costs of operations and relatively low variable cost of servicing individuals who occupy their rooms. Hotel prices adjust in the short run to the level of demand, but there are times when it is hard to get rooms, and people with reservations are denied rooms because of overbooking. Yet hotels have on average been quite profitable, which has stimulated various booms in the building of new hotels. To be sure, airlines have been exposed to major shocks, such as deregulation, terrorism attacks, and expensive fuel, but there is no intrinsic structural reason why the airline industry should be less profitable than the hotel industry.

Comments

[John Campbell]

I don't think the high-fixed cost nature of the business can possibly explain the decline in service over the last 5 years. The airline business has been a high fixed cost - low variable cost business since its inception. The internet accounts for the vast majority of the decline in service. Online booking has commoditized the industry. Every website sorts the tickets by price because that is what customers prefer. When an industry enters commodity hell, the low-cost producer has the advantage and all of the airlines have been racing to out cost cut their rivals.

Of course airlines could compete on service, but that is a risky proposition. No airline exec can be sure it will work, and it requires huge short-term marketing costs -- the airline can provide the services at a loss hoping for future customer loyalty, or they can advertise better service. Either way it is expensive and risky.

The hotel industry is different. Observe that when booking a hotel online, the websites are loaded with reviews, photos, ratings, listings of amenities, etc.

You may prefer to go back to the days when the airline you flew was determined by how large a kickback your travel agent received, but I'll continue to shop at Walmart, swerve six lanes to save a penny a gallon on gas, and buy the cheapest ticket I can find.

[Michael Martin]

"To be sure, airlines have been exposed to major shocks, such as deregulation, terrorism attacks, and expensive fuel, but there is no intrinsic structural reason why the airline industry should be less profitable than the hotel industry."

You've stacked the deck here. Seriously -- terrorism and regulation could be exogenous shocks to the hotel industry too; but fuel prices will only ever be an issue for airlines.

So long as land is relatively plentiful compared to fuel, I know which industry will be more profitable over the long haul. The airline industry might as well start investing in alternative energy sources; that's about their only hope.

Another Southwest innovation was to be long oil. Over the last few years especially, that's probably contributed more to their relatively good performance than their cost-cutting.

[University of California Professor]

I submit that air travel has improved as a result of the low-cost carriers, which actually provide a superior travel experience. Low cost carriers offer frequent (often hourly) flights between major city pairs so that securing a convenient connection is now far easier than in the past. Because of the high frequency of flights, if a delay occurs (which in my experience is rare with the low-cost carriers), it is usually possible to catch the next departing flight, resulting in minimal inconvenience. Low cost carriers are able to reduce delays because they utilize a single aircraft model, which is highly reliable and for which spare parts are always on hand. This also increases safety, as pilots become very familiar with the operation of these planes. Airline cuisine has always been unpalatable, even in business class. With the introduction of a diversity of restaurants in airports, passengers can bring their preferred meals on board. The quality of the cooking in certain of these restaurants is far superior to the old airline cuisine. Freshly made sandwiches and pasta dishes are available, as are fresh fruits, vegetables and baked goods. The absence of video screens on some low-cost carriers eliminates a major distraction to reading, resting, computer work or personal electronic entertainment. The elimination of assigned seating allows passengers to dynamically position themselves to avoid undesirable seat partners or within earshot of babies or young children. Surprisingly, the low fares have not caused deterioration in the flying experience. To the contrary, flying on the low-cost carriers is now more convenient and less stressful. A major factor enhancing the flying experience is the availability of personal digital music players. Tight fitting ear phones effectively block out engine drone, markedly reducing the stress of travel. In addition, relaxing music further decreases the stress of travel or one can select from a huge number of audio books or podcasts so that boredom is eliminated and time in the air can be highly productive.

[Jim]

At less than 350 miles, drive for seven hours (or less), arrive at the same time as air transport more comfortably for less (35 gallons round trip @ $4/Gal.) based on a 2 hour airport wait, 2 hours of ground transport, one hour for luggage and waiting and a 1 hour flight. Go when you wish, stop when you wish, eat when you wish, do not deal with the noise, crowds and other annoyances associated with modern air travel which has a disturbing similarity to Greyhound bus travel

[Jeff]

Suprised they can't do a better job of having High end service and cheap bad service in the same plane and same airline. If you are frequent flyer or pay big to be member you get great lounge, great seats, great meals, you rphone calls get answered etc. If you want the discount service then that's in back of the plane and it's cheap. The big benefit of both services in same plane is you can have more flights per day which is huge advantage for everyone especially for the business people. They try to offer the spectrum but doesn't really work. I don;t find even the cheap seats all that bad. Should serve ramen style noodles in economy. Gives the experience 0f a hot meal but costs just pennies.

Private planes are overrated and have alot of the same problems as commercial. If you decide you want to leave 5 hours later your pilot may not have had enough sleep or if netjets may need to get to the next customer. If you have 2 pilots then you are using just one hell of a lot of resources and should feel ashamed. So on many routes commmercial offers more flexibility than private. Private planes breakdown too and wait in line for take off. Even a $25MM private plane not as nice as first class in a widebody. Unless you are a celebrity private planes have less privacy. In private plane you have the stewardess just focused on you which is not want you want. In commercial first no one pays any attention to you so you actually have mre privacy. Private is obscene waste of money and resources for most flights

[Jason]

You post fails to mention the most glaring issue with respect to customer service. Because of senority and union contracts, the people who provide the most visible "service" (the flight attendants) are usually people who don't really want to be there, but have little other employment options (most of them older than 40). They are under-paid, according to them, and under-appreciated, whatever that means. Many of them have been called on to work more hours than they want, in order to maintain their benefits. Flight Attendants sole responsbility seems to be to pop in a video tape of the safety lecture and give out some soft drinks. You are lucky to get a smile or any realy empathy that you have previos two flights have been cancelled and you will likely miss your connecting flight. I can't blame them - most probably joined their airline with the thought of flying from NY to Paris and not the back and forth between Oklahoma City and Dallas 4 or 5 times a day. Until airlines can weed out the people who don't want to be there, service will continue to decline.

[Wes]

The way I see it, the airlines have only themselves to blame for their problems. For years they have been using secrecy to try to trick people into paying unfairly high prices. You don't have to do much air travel before you find yourself sitting next to a guy who paid hundreds of dollars less for his ticket but is getting exactly the same service.If restaurants charged different customers vastly different prices for exactly the same food then you can bet that the customers would start obsessing about the restaurant prices. Imagine how you would feel if you paid $20 for your plate of spaghetti only to find out that the guy at the table next to you got exactly the same plate of spaghetti for $5. You would feel like a total chump. It would ruin your meal and probably even your whole evening.Well, that's been going on for years in the airline industry - except that, instead of having an evening ruined, people have been having entire vacations ruined. You're sitting on the beach trying to enjoy yourself but in the back of your mind is the knowledge that the guy down the beach paid hundreds less for exactly the same vacation.There is some satisfaction to be gained in knowing that this whole scheme has blown up in the airlines' faces. With the power of the internet, people now aggressively search for the cheapest fare - not because they really care about the extra few dollars but because they are sick to the teeth of being taken for chumps. The second an airline raises it's prices, it loses all it's customers and goes out of business. For what it's worth, the airlines deserve much worse than going out of business for their little scheme but you have to settle for what little revenge you can get in life.So anyway, what's the solution to this whole mess? The solution is an open market where airline tickets can be publicly traded. Think E-Trade for airline tickets. Instead of going to Travelocity.com to just buy airline tickets, a customer could also go to Travelocity.com to sell their tickets. Basically, an airline could release tickets onto the open market whenever the airline thought it was most profitable. For example, an airline might release a block of 1000 tickets early in the season at an average price and then if the market looked hungry for more tickets the airline could release more at higher prices or if the market looked weak then the airline could hold some tickets back. If the market looked very weak in one area but very strong in another area then the airlines could even shift some airplanes around to accomodate the variation in demand.There would need to be some standardization so that a customer could look at the going rate for, say, a 22" wide seat with 12" of leg room and a cold snack from LAX to Denver on the 12th of June. The upside, though, would be that airline customers could start taking other factors into account besides the price - and airlines could compete on something other than price (which would mean higher profit margins for the airlines).

[Jack]

Wes you're onto something! At one time there were a number of us who "made a market" in airline "bump tickets" and other semi? transferable tickets and there are still a few trading in mileage.

Even were there not to be a formal market as you suggest I think the whole contract between the airlines and the public should be up for revue. At LEAST a one way ticket ought to be less than two thirds of a round trip, or one should be able to transfer the unused return and the time for a ticket to "expire" should be fairly long.

Especially today as security dictates that "who goes down the ramp" is much better known that in the past, a ticket should be like a movie ticket, good for anyone, until check in time (of if for security reasons, a "precheck-in" a few days before flying)

The practice of not only charging high fees to change a return but telling the traveler that "the fare is no longer available" seems a criminal rip off...... I've seen these be hundreds of dollars for a change of a day or so. Often the only way to get around it is some guessing game of "well how about Sunday morn?" "Oh, Tuesday?"

I like your market idea...... living in Alaska for a long time we're constantly dealing with air tickets.... weeks or months (MORE if a teacher or family wants to travel during school breaks) and then something comes up that forces a schedule change. Your idea would let us supply a last minute ticket to someone in a hurry, while we'd 'ebay'for a later date. Truth is it sounds like a hassle, and something the airlines could do interanally, with less hassle if they so desired.

One thing I liked of the old pre-dereg days was that of it being easier to switch carriers to avoid a delay, or at times even to get out earlier than expected by switching airlines. It would seem that with computers they could bring back that feature by accurately pricing the sales cost to the seat cost coupled with "sometime you win, sometimes lose" but it would average out to the benefit of the traveling public, and I suspect more seat miles for them.

[Floccina]

Everyone that I know always buys the cheapest flight that they can get, so I conclude the service is still better than it needs to be.

[n]

What is the status of U.S. rules on foreign ownership of U.S. airlines? How has this changed over the years, and how does it figure into this situation? (if at all)

Also, it would be interesting to know your perspective on the airport situation in Illlinois - O'Hare, Midway, and possibly Peotone.

[n]

What is the status of U.S. rules on foreign ownership of U.S. airlines? How has this changed over the years, and how does it figure into this situation? (if at all)

Also, it would be interesting to know your perspective on the airport situation in Illlinois - O'Hare, Midway, and possibly Peotone.

[Wes]

Floccina: "Everyone that I know always buys the cheapest flight that they can get, so I conclude the service is still better than it needs to be."Either that or they conclude (mostly correctly) that paying more won't get them better service. When you go to a site like travelocity.com, there is typically a range of fares. The general expectation (which happens to be correct), is that, unless you pay through the nose for first class, buying a slightly more expensive ticket won't get you slightly better service.Why don't people upgrade to first class? For the same reason that people don't buy premium gasoline: the additional price is greater than additional value. In both the case of premium gas and the case of first class tickets, the premium service is used to extract every last penny from the customer (much like grocery coupons) rather than to provide a fair value.

[Jack]

Wes....... agreed. And perhaps it's the nature of the beast that first class will be too costly. On many planes, I see two seats to the side in First while coach has three to the side. So a $600 coach fare becomes $900 on seat cost alone, then perhaps $25? for drinks, and perhaps landing fees are per plane so fewer passengers would have a higher cost.

As you point out, most of us traveling on our own dime only rarely find it worth paying $400 to avoid a few hours of discomfort.

The worrisome thing is that the huge run-up in fuel costs is likely to make coach tickets cost what FC costs today, and that they'll price themselves out of reach for millions of their customers, making it even tougher to cover fixed costs from fewer passengers.

Delta and NW are up before Congress pleading their merger case which seems a mixed bag. The merger might have some cost cutting aspects, but I'd guess that their combined market clout would mean the public would see lower fares except where they are challenged by the low cost carriers.

Trains are looking better all the time, but the initial costs of building and upgrading track are so high it will take some time to develop trains as the alternative they should be on many routes.

[neilehat]

Jack, don't look to rail service as the panacea for passenger service. They found out years ago that passenger service is not profitable by any measure and got out of the business. Why should they go back and redevelop systems that were more than problematic in the first place? Even if they did, the rolling stock industry (car manufacturers and locomotives) would have to be rebuilt from the ground up. The majority are now empty brownfields growing weeds.

[Jeffrey Miller]

"These airlines have generally not been successful, probably because there are not enough of these customers to support commercial airlines that only offer first class service."

Successful compared with what? The rest of the airline industry with its perpetual dance of bankruptcies and mergers?

[Jack]

Neil..... what you say is accurate, but I something of either a futurist or ....... dreamer!

One whole discussion might center around the social equation (GM's?) between car and buses vs both passenger and cargo carriers.

In one sense, I suppose the gas taxes are user fees for our preferred means of travel. But in another sense the same taxes insure that there's always money for roads and rarely money for rails. Then we all move "further out" (white flight?) and demand roads to our new homes and to (attempt?) to remedy the predictable congestion in our (dying?) cities where road building is costly, and creates its own problems.

I suppose in terms of "the market" there is the problem of how is a commercial signal given that a city or region is beyond being served by more roads and that it is high time for subways? When not one more car can be fitted into, say, Manhattan?

You're right that nearly all of the passenger infrastructure has been demolished or left to erode. But then, LA, at great cost is building a line that roughly parallels the old "Red Car line" that you'll see mentioned in articles about how GM created a world set up for buses and cars... ONLY. They are likely doing this just in time, as the fast moving freeways of my youth are virtually maxxed out today and become parking lots if there's an accident that ties up even one lane. There is NO possibility of making them wider to handle the demand. Dead end.

Perhaps it's better to begin from scratch as did Europe and Japan after the war. A full subway train moves a passenger at over 500 mpg, but perhaps we need to rethink that even for the short distances and provide say, twice as much space per passenger so "subway" travel would be more like sitting in Starbucks having coffee, a snack and room to read the paper or use a laptop.

For longer distances the energy efficiency of the steel wheel (or maglev?) would offer exactly what the airlines could not and at higher fuel prices can never offer; comfortable seating with a table, continuous cell phone and broadband connections et al.

For say a 1,000 mile trip of ten or 12 hours the road warrior might step on at 9 pm or so, get a nite's sleep, a morning shower and perhaps make a quick transfer to the intown line that would take him rested and fresh to a downtown meeting at 9 w/o catching a plane at 5 am which leaves him at some distant airport.

Several cars could be devoted to carrying light "Fed-Ex" cargo to help with pay the bills. I'd think the new cars would draw upon aviation tech and be far lighter than passengers cars that look like they were mounted on box car chassis. Power? locomotives are already "hybrids" so it seems only a small step to power trains in the wind regions with wind generated electricity.

So far those "selling" mass transit have focused too heavily on the "mass" and made it a second rate, or worse, means of commuting or traveling; when the next Richard Branson comes along, my guess is he'll strive to make public transportation a better alternative to the car.. and in many cases, the airplane.

[Tom Selling (author of The Accounting Onion)]

There are important difference between hotels and airlines that could make hotels more profitable. First, government regulation and inefficiency may be contributing to the problem of airport and air traffic congestion. Hotels do not face similar government interference.

Second, as Posner implies, hotels compete on quality, so the rules of monopolistic competition apply. This should drive down long-run profits, but it may also reduce the variability of short-run profits. Airline routes, on the other hand, are a form of oligopoly, where it is difficult to raise prices even when there are cost increases. Thus, variability of short-run profits is higher. Who knows whether an large airline can be profitable in the long run?

In answering that last question, I am not sure that the case of Southwest is much more than an anecdote, as many other low-cost airlines have failed. Southwest Airlines has profited significantly from financial speculation, and not necessarily by its purported operational advantages and product differentiation. They bought fuel forward via long-term contracts, and were fortunate to have done so while fuel prices increased. Now that these forward contracts have expired, it will be interesting to see if Southwest can remain profitable at the prices that they helped to drive down.

[shamu]

One important difference between hotels and flights is flights usually only lasts a few hours. Even if the service is bad, and the flight gets delayed, for a leisure traveller or even a business traveller who has a limited budget, how bad can it be? It can never compare to a bad night's sleep in a hotel--even for leisure travellers going on vacation, a good hotel is almost always preferred. In other words, people's willingness to pay for good service and on-time performance in a flight is significantly lower than their willingness to pay for a good hotel stay.
Perhaps more importantly, their willingness-to-pay is even lower when they book the flight, when they tend to think they will be the lucky ones that will not experience a delay.

[Jack]

I don't think we can learn too much by comparing hotels to airlines. Consider, if both run on thin or no margins for 20 years the hotel and real estate is likely to have doubled in value while the airline will be scrapping its aging fleet and taking on debt for their new planes.

A hotel in Anchorage built about 1970 with rooms "commanding" $35 at the time now rent for $300 plus in peak and $150 off-peak and have had only the routine light "remodel" of replacing carpet, paint and furnishings.

Over that same time flights from Alaska have only doubled or at most tripled in absolute terms despite the soaring cost of fuel --- not much of a factor in the hotel biz.

[Anonymous]

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[Anonymous]

thanks
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[Anonymous]

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[Anonymous]

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[Anonymous]

I will put some into my telephone. So far I am listening to "I Will Touch The Sky".
I am from Chile and too bad know English, give true I wrote the following sentence: "Whichever fuel source is chosen, small absorption refrigerators are generally unable to small refrigerator rcw eg cf electrolux luxembourg"

Waiting for a reply :p, Brenda.