Why Is Airline Service So Bad? Posner

Airline delay has increased in the last five years, and the statistics understate the amount of delay because airlines have increased scheduled flight times--the flight from Chicago to Washington used to be scheduled for an hour and a half; now it is scheduled for two hours. Flights are horribly crowded, food and beverage service has deteriorated in first class and virtually disappeared in coach, and the incidence of mislaid baggage has increased. Delay is the main problem, and the one that I shall focus on. Many culprits have been named--high fuel costs that have contributed to deferred maintenance that results in cancellations, the failure of the Federal Aviation Administration to upgrade the air traffic control system so that it can handle more traffic with less spacing between aircraft, more turbulent weather perhaps due to global warming, and crowded aircraft that result in delays in boarding and hence in departure. But all these seem to me to miss the point. Persistent delay is usually the result of a failure to use price to equate demand and supply. When demand increases in advance of an increase in supply, failure to raise price results in buyers' incurring cost in the form of delay rather than in the form of a higher price. The cost of delay is a deadweight loss, whereas a higher price would be merely a wealth transfer to the sellers and would finance an increase in supply. Some delay in the provision of services is unavoidable because of fluctuations in demand; it usually is wasteful to increase supply to the point at which every spike in demand can be accommodated without rationing (i.e., queuing, delay). But the persistent delays that airline passengers have been encountering for many years now cannot be explained by demand uncertainty. The delays impose enormous costs, particularly but not only on business travelers. The value of Americans' time is high. So why are airline prices so low? The answer may lie in the lumpiness of airline service. (This was pointed out many years ago by the Chicago economist Lester Telser, and was repeated last week by Holman Jenkins in the Wall Street Journal.) The fixed costs of modern passenger aircraft are very high, but the marginal costs--the costs of carrying one more passenger if the plane is not full--are very low. At any price above marginal cost, the airline is better off selling a ticket than flying with the seat empty. Competition between airlines will therefore exert strong downward pressure on price. Prices tend to be pushed down to a level at which the airlines find it difficult to finance the purchase of new planes. As the existing planes age, equipment failures become more frequent, contributing to delays and cancellations. Airlines prefer delays to cancellations, because they get to keep the fares, and they resist raising prices to reduce congestion because that will make it more difficult to fill the planes, and an empty seat is, as explained, very costly in revenue forgone. Furthermore, airline service is quite uniform across airlines, which makes travelers more sensitive to airline prices than, say, to hotel prices, since hotels compete in many other dimensions besides price. Another aspect of lumpiness that should be noted is the difficulty of adjusting prices to different passenger time costs. Business travelers have higher time costs than leisure travelers, but there are not enough business travelers to fill a plane of efficient size, and even if there were, no one airline could significantly reduce the problem of delay, just as no one driver can affect traffic congestion by reducing the number of his trips. I am not aware that the delay costs of airline service, and the costs of the other disamenities (the very crowded airplanes and slow boarding and deplaning in coach) in the current market, have been quantified, but assuming that they are, as I suspect, very substantial, the question arises what if anything should be done to alleviate the problem. One possibility would be to allow the airlines to agree on minimum prices: in other words, to exempt the airlines from section 1 of the Sherman Act, which forbids competitors to agree on prices. The problem is that the airlines would fix a profit-maximizing minimum price, and it probably would exceed the price necessary to reduce congestion to the optimal level. Moreover, any increase in the price level would attract inefficient entry. Another possibility would be to return to the regulatory system administered by the Civil Aeronautics Board before the deregulation of the airline industry in 1978. The CAB did not regulate rates, but it controlled entry into city pairs and used that control to limit entry to the point that flights were frequent and uncrowded. If a flight was canceled or delayed, it was usually easy to get a seat on another flight leaving soon. But with entry tightly limited, prices were above the competitive level; planes were not just uncrowded, they flew nearly empty. Prices have fallen sharply since deregulation. Competition has also led the airlines to adopt a variety of cost-saving measures. Pilots' wages are now much lower. Before deregulation, the powerful pilots' union (powerful because of the enormous costs of a work stoppage to a company that cannot produce for inventory and thus make up some of the revenue that it loses from a strike) was able to extract some of the airlines' regulation-enabled cartel profits, in the form of supracompetitive wages for pilots. Another option would be to encourage, or at least place no antitrust or other obstacles in the way of, mergers between airlines. If there were only two airlines on every route, tacit collusion between them would probably keep prices high but not so high as if there were a single airline or an explicit price-fixing agreement. But any increase in prices would attract entry, pushing prices back down. Moreover, mergers often result in higher rather than lower costs. A better alternative than any I have discussed thus far would be a heavy tax on airline transportation, with the tax rate varying according to the contribution of a particular route, time, or type of plane to congestion (for example, in general large planes would be taxed less heavily per passenger than small ones, because for a given number of passengers there are fewer big planes to clog the airways and runways than there would be small ones). To the extent effective, the tax would eliminate the deadweight cost of congestion.

Comments

[Michael Martin]

Here's another simpler explanation: rising oil prices keep wiping out any capital gains for investors in airlines. Nobody wants to finance a losing company.

Some form of collusion or concentration in the industry is probably necessary to solve the problems given the congestion externalities.

But why not issue tradeable permits for certain flight routes rather than taxing them?

[Jack]

Ha!! Doncha just luv it when these outspoken advocates of "the market" solving most problems begin whining because "the market" is not willing to pay for the "business class" service preferred by those typically traveling on someone else's dime while gathering miles for their personal travel? (A practice I consider to be a kickback that was once illegal in our country.)

Posner mentions the low marginal cost of "one more passenger" but overlooks the elasticity of demand -- the pleasure travelers mentioned are quite price sensitive -- and were they to raise prices ridership would fall so they'd have little chance of covering the fixed costs of gates and management overhead.

Planes? many are leased and others could be sold to lower "fixed costs" so they are not truly "fixed costs" at all.

Posner uses the term "deregulated" that we all use since Pres. Carter signed the dereg plan. But what was not "deregulated" was airports. So Posner laments the FAA not being able to cram more flights into the popular hours at the busiest airports. But there is a "market based" solution to that problem; dereg the airports and let them charge more for the time slots popular with road warriors, and let the pleasure traveler pay a bit less for off-peak hours........... "the market" let it work!

Perhaps it's time to discuss one of the root causes of airline congestion and I'd put forth that much of it is due to the US being tragically behind on building fast passenger trains in our most crowded corridors. Full trains will move a passenger 600 miles on a single gallon of diesel. But it's not likely that "the market" will begin to build a network of rails without a decision of the people and incentives from their government.

I don't know how the airline industry can make a buck. Lately I've wondered whether it can survive $100 oil at all as the system requires a LOT of travelers, and raising prices to what they'd need to be would mean far fewer passengers and a death spiral of fewer passengers and higher prices.

[n]

One thing that is not clear to me is the impact of "hedonics" on calculation of inflation (see article at http://moneycentral.msn.com/content/P72746.asp). Is it possible that inflation at airlines may be understated?

As far as use of time, technology and airlines have done what they can to help people use delays productively (flight lounges, cell phones and laptops, etc). And you got people with extremely valuable time opting for private jets.

Do you have perspective on the potential Peotone airport in Illinois? It seems to me that building one more airport is a lot more complicated than building one more hotel or one more travel internet site.

[Anonymous]

Warren Buffett has observed that the cumulative profits earned by the airline industry since the Wright brothers does not approach zero, from negative territory.

Sometimes, unfettered markets are not an ideal to aim for.

[Thomason]

Nowhere in the analysis is what factors would drive the airlines to operate more efficiently, and so, presumably, more profitably. Providing more, or no less, efficient service for the same cost should raise profitability and incentivize the operators. But, when airlines are subject to delaying forces beyond their control, then that negates the incentives that normally improve efficiency.
In the present air traffic control system, what oversight is there over traffic flows to and from each airport? It can be sunny at your points of departure and destination, and ATC at one or the other airport can make judgments that create widespread logjams. There are no super-controllers over the system, and so, each airport's controllers do as they will.
Similarly, an airline could close the cabin door on time, or wait for (and force the rest of us to wait for) some of its connecting passengers. That delay is not likely to happen on most European train systems. If you're late, the train doesn't wait. As you note, airline would prefer to wait (and keep your fare) than switch you over to another airline's later flight. Next, the airlines don't enforce the carry-on baggage rules. Passengers, who realize the glacial pace for checked baggage, can't be blamed - they carry on trying to minimize their delay. Also, a plane cannot leave until the ground crew gets around to loading the checked bags. How little would it cost for the airline to allow bags to be gate-checked on large airliners?

All together, the airports, the airport workers, each airport's traffic control, the airlines, are all working independently and at their own chosen pace. If the industry was more integrated, or financially interdependent, then all could work together to operate more efficiently.

[Jan]

It looks like auctioning landing and take-off rights on most airports would solve some of the problems, if not all. Congested airport would become expensive, nudging companies to be more efficient and to bigger airplanes etc.

[Saint Darwin Assissi's cat]

Thanks Judge Posner -- interesting, topical! Transportation in the sky is a tough industry -- just like transportation on the ground via taxi, bus, bicycle --- the airline industry involves the human element -- unpredictable and irascible (you can't squeeze Aunt Emma or Terrorist Tim into the box and put the duck tape on) -- these qualities coupled with outrageous fuel costs do not produce a stable income/dividend.

[Tucker]

See this really just looks like an imperfect information problem. The information on delays and time costs are not well known, not easy to find, and not very good. Further it is often difficult to determine the cause of the costs, from the airline or the airport. People have a much harder time choosing a different airport than a different airline. If there was good, easy to find, and up to date information about the costs and who was at fault consumers would be able to choose better. Also Virgin America is running all business class flights, theoretically they should have better service if business class flyers have higher time value. If instead the time costs are because of publicly run airports the time costs couldn't be much lower.

[neilehat]

I really don't understand why everyone is moaning and crying about the shoddy service the airlines are supplying the consumer these days. Weren't they the very ones that demanded cheaper fares and so the industry was deregulated? Pan-Am and Eastern saw the handwriting on the wall and got out when the getting was good. All of this just proves the old aphorism, "buy cheap - get cheap". We all got what we wanted, so swallow the pill, bitter as it may be.

Putting humor aside for the moment, there is an aspect of this problem that seems to have been overlooked and impacts the supply/demand equation. As for the supply side I've already addressed that. For the demand side, this country used to have four basic modes of transport for the public, trains, planes, buses, and automobiles. Of these four, two have essentially dropped out of the passenger service business. Those being trains and buses. These two probably carried sixty to seventy percent of the passenger transport traffic in its day. So where did that traffic go? Where else, automobiles and planes. Increasing the demand on a service which was in no position to pickup the slack and since we wanted cheap ... Oh well, smell ya at the airport later.

[Larry Bernstein]

Airports treat landing rights like a public good. Everyone wants to fly at peak times and this causes the delay. As someone mentions above, if the times were auctioned off, then market prices would eliminate delays. This seems like a much better tax than a fixed percentage of ticket prices. The public auction would allow via market forces to price the benefit of flying at the optimal/peak time.

I don't understand how Judge Posner could conclude that a failure in public regulation requires even more regulation, which we know from historical precedent failed as well.

One last point, Judge Posner suggests that high fuel prices reduces the maintenace budget. This logic is faulty. The economics of maintenance does not have oil in the equation. Airlines maintain aircraft to maximize their time in the air relative to incremental maintainance expense.

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[neilehat]

Bernie, Face the facts, airline deregulation has been a dismal failure. Not withstanding your great hopes for ideological economics. As for the maintenance issue, I wonder how much you understand the maintenance variable in business operations. From my experience, when ever a business gets in trouble financially, one of the first things that gets cut is the maintenance budget. Which impacts, available personnel, hours worked, and the number of items in the preventative/predictive maintenance schedules. Which in turn impacts systems reliability/availability and the company's ability to provide a service to its consumer base. This applies to any industry.

[aph]

Another factor in delays that you overlook is runway capacity. Airports are limited to having one airplane using a runway at a time, for either take-off or landing. In optimal conditions, it takes approximately 1 minute per flight/runway. At some popular 'hub' airports (e.g. ORD, CLT, DEN), airlines have scheduled significantly more flights per hour during peak times than the concrete on the ground can handle safely. When the supply of runway time exceeds demand for takeoffs/landings, delays inevitably occur.

This can be fixed for some airports at significant cost and possible downtime by expanding and adding runways, but for some airports, there is no space for them to put additional concrete.

It can also be fixed by spreading out flight times to non-peak landing/takeoff times, but consumers tend to pick the times convenient to them (though price is most often a bigger factor for non-business travelers).

Increasing fees for runway usage at peak hours would be another method. Auctioning or locally-set variable pricing for usage could reduce demand at peak times.

[Bruce de la Vega]

Deregulation of airlines, and hence increasing the market incentives, should be tried some day. We might start by getting regional, state, and local governments out of the airport business.

For info on this field, I'd look to Robert Poole, jr., of Reason. He's been tracking and studying it since at least the early 1970s. For instance, both regulators and airline executives have resisted time of day pricing on use of runways, ATC, etc., which would better balance supply and demand. Then, the "business", or any other sub-categories of air travelers would also pay in the ticket market accordingly. (Extraneous tidbit: The same hardware/software systems that evolved into today's on-line travel ticket sites also developed into the systems used to manage state lotteries and concert ticket sites, and the electricity transmission/wholesale semi-market systems were developed completely separately by some of the same firms.)

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[Robert]

The old joke is true: How do you become a millionaire? Start with a billion dollars and get into the airline industry.

[Ken Nickless]

I think it all stems from these organizations chasing the almighty dollar, to keep their shareholders happy in the first instance at the expense of the paying public.

[Keith Lax]

I don't think would be such a bad ideal, considering the increased safety standards that we demand with terrorism. With terrorism more and more targeting U.S. and allies especially on airplanes these increased taxes would hopefully lead to safer modes of transportation and peace of mind for the business as well as the leisure traveller, which I'm sure anyone wouldn't mind paying a little extra for.

[Keith Lax]

I don't think would be such a bad ideal, considering the increased safety standards that we demand with terrorism. With terrorism more and more targeting U.S. and allies especially on airplanes these increased taxes would hopefully lead to safer modes of transportation and peace of mind for the business as well as the leisure traveller, which I'm sure anyone wouldn't mind paying a little extra for.

[Dan Kasper]

The increase in airline delays has little to do with lumpiness in investment, low fares or aging aircraft. Rather, it is due to fact that two scarce resources critical to the production of air transportation--runway space at busy airports and "air space" in busy air traffic corridors--are operated like old English commons. And like Hardin's famous commons, they are being overused. The consequences of treating these scarce resources as commons were masked for many years because there was substantial excess airport and air space capacity in all but the busiest of locations. But the continued growth in air travel combined with the inability of the government-owned air traffic control system and airports to expand capacity in the face of growing demand has led to the exhaustion of surplus capacity in and around approximately a dozen key airports. The resulting delays have then rippled throughout the system.

Part of the problem is due to the well-documented inability of the FAA to manage the design, acquisition and implementation of a modernized air traffic control (ATC) system--demonstrating once again how difficult it is for a government agency to operate what is, in reality, a 24/7 high tech business that literally controls the airline industry's production line. At least 3 national commissions have recommended privatizing or corporatizing the ATC system in order to strengthen -- and depoliticize -- its managment and investment decisions. Unfortunately, Congress has been unwilling to give up the substantial control it exercises over FAA funding and operations.

Interestingly, the governmnet's initial approach to the problem of delays caused by runway congestion --i.e., imposing limits on the number of flights per hour at four congested airports in 1969--worked reasonably well, particularly after airlines were permitted to buy and sell slots. The combination of slot controls and the right to buy/sell those slots effectively eliminated the commons problem by "privatizing" the commons. As a result, airlines serving slot constrained airports have spent nundreds of millions of dollars to acquire those runway access rights. But political meddling by Congress led to the (temporary) elimination of slot controls at LaGuardia in 2000, which was quickly followed a a huge increase in both flights and delays and to the reimposition of slot controls by the FAA.

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