Air travel in the US is one of the miserable experiences that most of passengers have to put with. Today fellow blogger and Founder and chief investment officer Barry Ritholtz of Ritholtz Wealth Management posted a link to an interesting article in The New Yorker that discussed why and how airlines make their customers suffer. From the article titled “Why airlines want you to suffer” by Tim Wu and published in December, 2014:
It seems that the money was just too good to resist. In 2013, the major airlines combined made about $31.5 billion in income from fees, as well as other ancillaries, such as redeeming credit-card points. United pulled in more than $5.7 billion in fees and other ancillary income in 2013, while Delta scored more than $2.5 billion. That’s income derived in large part from services, such as baggage carriage, that were once included in ticket prices. Today, as anyone who travels knows well, you can pay fees ranging from forty dollars to three hundred dollars for things like boarding in a “fast lane,” sitting in slightly better economy-class seats, bringing along the family dog, or sending an unaccompanied minor on a plane. Loyal fliers, or people willing to pay a giant annual fee, can avoid some of these charges; others are unavoidable.
The fees have proved a boon to the U.S. airlines, which will post a projected twenty-billion-dollar profit in 2014. To be fair, airlines are not just profiting because of fee income. Reduced competition, thanks to mergers, helps. There is also the plummet in the price of oil, which the airlines seem to have collectively agreed is no reason to reduce fares or even remove “fuel surcharges.” But for the past decade it is fees that have been the fastest-growing source of income for the main airlines, having increased by twelve hundred per cent since 2007.
If fees are great for airlines, what about for us? Does it make any difference if an airline collects its cash in fees as opposed to through ticket sales? The airlines, and some economists, argue that the rise of the fee model is good for travellers. You only pay for what you want, and you can therefore save money if you, for instance, don’t mind sitting in middle seats in the back, waiting in line to board, or bringing your own food. That’s why American Airlines calls its fees program “Your Choice” and suggests that it makes the “travel experience even more convenient, cost-effective, flexible and personalized.”
But the fee model comes with systematic costs that are not immediately obvious. Here’s the thing: in order for fees to work, there needs be something worth paying to avoid. That necessitates, at some level, a strategy that can be described as “calculated misery.” Basic service, without fees, must be sufficiently degraded in order to make people want to pay to escape it. And that’s where the suffering begins.
The necessity of degrading basic service provides a partial explanation for the fact that, in the past decade, the major airlines have done what they can to make flying basic economy, particularly on longer flights, an intolerable experience. For one thing, as the Wall Street Journal has documented, airlines have crammed more seats into the basic economy section of the airplane, even on long-haul flights. The seats, meanwhile, have gotten smaller—they are narrower and set closer together. Bill McGee, a contributing editor to Consumer Reports who worked in the airline industry for many years, studied seat sizes and summarized his findings this way: “The roomiest economy seats you can book on the nation’s four largest airlines are narrower than the tightest economy seats offered in the 1990s.”
The full article is worth a read.
There are many reasons why US airlines are able to what can be called as daylight robbery and still get away with it. Listed below are four of the reasons:
- The airline industry is an oligopoly with a handful of companies dominating the market. Just four airlines – Delta (DAL), United-Continental (UAL), Southwest (LUV) and American (AAL) – control the majority of the market share. I have written articles before about the industry’s oligopoly structure which you can find here and here.
- Since the industry is an oligopoly and not a monopoly, the state cannot prevent airlines from all the things they do. So laws like The Sherman Anti-Trust Act of 1890 that makes monopoly illegal do not apply.
- As airlines are allowed by the state to merge with one another, competition is eliminated. Lack of competition is one of the main reasons why air travelers are forced to endure misery at the hands of the airlines.
- Unlike in other countries, alternative forms of transportation is practically non-existent in the US. The airlines know this simple fact and take advantage of it. For instance, an American trying to go from New York to LA on the west coast has to travel by airlines. There is no direct high-speed train service between these cities that this passenger can take and avoid all the airlines. Hence unlike Japanese or an European, we are held “hostage” by the airline industry in our own country without us realizing it. This is sad since the US is technically a free market economy where competition among companies and industries is supposed to be exist. As a result everyone including Nobel prize winners, educated professionals, free-market believers, world-class doctors, media pundits, legal scholars, regulators, politicians, corporate lobbyists, etc. have to fly in one of the airlines when travelling from point A to point B quickly.
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Disclosure: No Positions