Gouging the Friendly Skies

 

A month ago, I flew to Austin to give a brief talk at the Texas Public Policy Foundation. When I contacted the folks at TPPF to make travel arrangements, I suggested direct flights on Delta from the Detroit airport to Austin and back, and they got back to me a day later to say that the cost was excessive. So, being accommodating, I flew down via Houston on one airline (I forget which) and back on Delta through Atlanta.

There was one problem — the weather — and it was compounded by the need to change planes in Atlanta. I finally got home at 4:30 a.m. — which reminded me why I prefer direct flights.

I thought little about this episode until yesterday. I am slated to give a talk at Villanova University on Constitution Day in mid-September. I went to Orbitz to check out the flights and found that the American, US Airways, and Delta are all charging $1204. For $1300, I learned, I could fly first class.

Of course, if I was willing to go through Chicago or Atlanta, the price would be $350-$500. If I could figure out how to get to O’Hare by car, it would be $119-$134. From South Bend through Detroit, it would be $357.70. Think about that one. It shows that the issue is not a lack of seats on flights running from Detroit to Philadelphia.

Eventually, I got in touch with the folks at Villanova, and I bought a ticket on Frontier from Detroit to Trenton, New Jersey for $144. The driver they send to pick me up will have to go an extra 20 miles, and the airfare for which they will have to reimburse me will go down by $1060.

This got me to thinking, “What is going on?” So I looked into direct flights in mid-September to Austin. From Detroit? $1102. From O’Hare? $199-$353. From South Bend through Detroit on Delta? $714. From South Bend on another carrier through Chicago, $528.

There is a pattern here that would bear further exploration. Something there is that does not like eastern Michigan.

If I were Governor of Michigan or a Senator from Michigan, I would make a stink. US Airways and American are, for all intents and purposes, one airline. Before long their merger will be complete, and US Airways will disappear.

The real question is whether there is collusion between American and Delta to gouge passengers flying out of Detroit.

Am I missing something? Is there another explanation? Is this sort of thing going on elsewhere? Is this what airline consolidation will bring throughout the country?

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  1. Douglas Inactive
    Douglas
    @Douglas

    Your first mistake was trying to see reason in any kind of airline pricing. There isn’t. I work in civil aviation, and with airlines. Trust me, no one understands why they do things the way they do. We’re talking about an industry that in the modern era has had major bankruptcies more often than not. Considering their cost structure… a new 747 is now $375 million dollars apiece… if America ever nationalizes an industry, airlines are a pretty good candidate for it to happen. The next bankruptcy is always around the corner.

    And while I understand that you want to help groups like TPPF out, if they’re not willing to pay what it costs to get you there and back in a timely manner, tell ’em to find another speaker.

    • #1
  2. Yeah...ok. Inactive
    Yeah...ok.
    @Yeahok

    My first guess would lay the blame on DTW. The extra cost to house a crew, pay ground support, ransom stolen luggage…

    The price of things carry a lot of information.

    • #2
  3. PHCheese Inactive
    PHCheese
    @PHCheese

    Paul maybe you could hitch a ride on MS Rodham’s Lear?

    • #3
  4. AIG Inactive
    AIG
    @AIG

    Paul A. Rahe: Am I missing something? Is there another explanation?

    Yes, and yes.

    Airplanes don’t fly 1 route. They fly to one airport, then fly to another, then another. Hence, the arrangement of flights that produces the most profitable day’s worth of flights is one flying between major high-demand airports, so that the airplane isn’t flying nearly empty to some no-where destination.

    What they’re doing is optimization.

    Flights are always much more expensive at smaller and less frequented airports for this reason, unless it happens to be a good layover towards another high-demand destination.

    “Price gouging” is a silly word that simply means “it’s going to cost you more if you really want something when you want it”

    Douglas: Trust me, no one understands why they do things the way they do.

    Of course not. They have multi-billion dollars investments in optimizing their flight plans, with data that they collect over years.

    Why would you think any external observer would be able to understand it?

    Douglas: if America ever nationalizes an industry, airlines are a pretty good candidate for it to happen

    Right. Because that works wonders.

    Douglas: The next bankruptcy is always around the corner

    So what? Loser airlines get broken up by winners. Market working as it’s supposed to.

    Paul A. Rahe: If I were Governor of Michigan or a Senator from Michigan, I would make a stink.

    And hence the problem with politicians.

    • #4
  5. Sabrdance Member
    Sabrdance
    @Sabrdance

    The key factor in airline prices is how full the liner is.  On days when lots of people want to fly, prices are high.  On days when people don’t want to fly, prices are high.  In the first case, because demand is high, in the second because fixed costs are high.  The sweet spot is the slightly under-full airplane where seat prices drop because if you can just get a couple more people into the aircraft to cover the marginal cost of the flight, it can be very profitable.

    So my first two guesses are that something about Detroit’s airport is expensive, jacking up the overhead on every aircraft that has to stop there for any period of time.  My second guess is that very few people travel through Eastern Michigan on these domestic flights, so those people who do pay the premium for it, but those flying from Chicago and South Bend are more frequent and have other options, which means the flights are both more likely to be full, and also more likely to have the price bid down by competitors.

    But those are just guesses.  Everything I’ve read about airlines indicates they are so ruthlessly competitive that basically none of them make money.

    • #5
  6. Basil Fawlty Member
    Basil Fawlty
    @BasilFawlty

    I’d be willing to pay almost anything to get out of Detroit.

    • #6
  7. AIG Inactive
    AIG
    @AIG

    anonymous: I regularly see consecutive flights between Geneva and London City Airport on the same airline, the same day, the same airplane (it just flies back and forth between the two airports), which differ by almost a factor of two in seat price.  And neither of them are the first nor last flights of the day (for which there might be a premium due to demand).

    Well, demand changes by time, and the first and last flight of the plane might not be the “first” or “last” flight of the plane for that day, just between those two destinations. And demand isn’t the same flying back or forth. And other airlines also offer flights at similar times from those destinations, hence if you want to fill your plane you better lower the cost because at that specific time you’re competing with someone else.

    There could be 3 dozen other variables to consider too. That’s why they pay big bucks to operations researchers at these places to figure this stuff out.

    But if one thinks airlines are “gouging”, then look at their profit margins. About the worst industry in the world to be in is airlines. If anything, the consumers are getting away with murder when it comes to airlines…

    • #7
  8. Basil Fawlty Member
    Basil Fawlty
    @BasilFawlty

    I wonder if supply and demand might have an effect here.

    • #8
  9. Misthiocracy Member
    Misthiocracy
    @Misthiocracy

    Paul A. Rahe: If I were Governor of Michigan or a Senator from Michigan, I would make a stink.

    Do we know that the State of Michigan and/or the City of Detroit and/or Wayne County do not impose costs on carriers at Detroit International that are not imposed on carriers at O’Hare International?

    • #9
  10. Misthiocracy Member
    Misthiocracy
    @Misthiocracy

    Basil Fawlty:I’d be willing to pay almost anything to get out of Detroit.

    The Detroit skyline is quite pretty from the Windsor side.

    ;-)

    • #10
  11. AIG Inactive
    AIG
    @AIG

    Basil Fawlty:I wonder if supply and demand might have an effect here.

    Supply and demand don’t work in Detroit.

    • #11
  12. Basil Fawlty Member
    Basil Fawlty
    @BasilFawlty

    AIG:

    Basil Fawlty:I wonder if supply and demand might have an effect here.

    Supply and demand don’t work in Detroit.

    Sorry.  In Detroit, it’s demand and supply.

    • #12
  13. Paul A. Rahe Member
    Paul A. Rahe
    @PaulARahe

    Yeah…ok.:My first guess would lay the blame on DTW. The extra cost to house a crew, pay ground support, ransom stolen luggage…

    The price of things carry a lot of information.

    I have been flying with great frequency out of DTW for nearly nine years now, and I have not until now found that the prices were out of line. Yes, of course, if I need a ticket at the last minute, it will cost me a bit. But not like this — and not when I seek a ticket two months ahead.

    Keep in mind that, if I go to South Bend and get a Delta flight, I will go first to Detroit and get on the flight to Austin or Philadelphia that I would have paid through the nose to take directly from Detroit.

    • #13
  14. Mendel Inactive
    Mendel
    @Mendel

    Paul A. Rahe:
    The real question is whether there is collusion between American and Delta to gouge passengers flying out of Detroit.

    If professors at Hillsdale College immediately suspect conspiracy when they don’t understand free market pricing, it’s no wonder that we have things like Obamacare.

    Airline pricing is notoriously opaque and confusing, yet it is also a topic which has been studied endlessly and found to be rational, profit-based, and not nefarious.

    The phenomenon that a flight from A>B is more expensive than A>B>C (or C>A>B) is a daily occurrence throughout America. In fact, the airlines monitor for people trying to game the pricing system (for instance those who book an A>B>C itinerary but just get off at city B) and often punish them if they catch them.

    As for Detroit suddenly becoming more expensive, there are a million legitimate explanations. Perhaps the downturn of the Detroit economy has led the majors to switch in smaller-capacity airplanes for flights into and out of Detroit. Yet since Detroit is still something of a hub, they might be pricing direct flights prohibitively expensive so as to keep seats free for the South Bend-Detroit-Newark types of connections.

    • #14
  15. AIG Inactive
    AIG
    @AIG

    Paul A. Rahe: Keep in mind that, if I go to South Bend and get a Delta flight, I will go first to Detroit and get on the flight to Austin or Philadelphia that I would have paid through the nose to take directly from Detroit.

    Right now, leaving in 2 days, US Airways has Detroit-Austin at $471. Or you can fly for $3,400 with Frontier ;)

    In one month, it’s $250.

    So there may be a lot of reasons why the price you first saw was so high. Very idiosyncratic reasons.

    • #15
  16. Douglas Inactive
    Douglas
    @Douglas

    AIG: – Of course not. They have multi-billion dollars investments in optimizing their flight plans, with data that they collect over years.

    Why would you think any external observer would be able to understand it?

    I talk to people that work for airlines all the time and don’t understand it.  Much of it is just plain ole’ price gouging when they can get away with it.

    Right. Because that works wonders.

    I didn’t say I advocated it, just that it could happen. Didn’t say that it would be pleasant, or make for better service. it won’t.

    So what? Loser airlines get broken up by winners. Market working as it’s supposed to.

    They’re all “loser airlines” if they’re primarily in the passenger business. See the “frequent bankruptcy” part. The constant mergers are a failing survival strategy. Costs keep going up. Only cargo is continuously profitable and has rates that are logical and market oriented. Long after American passenger carriers become Air Amtrak one day, cargo will still be private as it’s market driven, and not subject to pressures like “Senator So and So wants more flights at his airport or you can kiss that bill goodbye”. Things like SCASDP warp the cost structure of fares. There are plenty of political pressures on routes. It ain’t all just markets at work here.

    • #16
  17. Mendel Inactive
    Mendel
    @Mendel

    Douglas:

    I talk to people that work for airlines all the time and don’t understand it. Much of it is just plain ole’ price gouging when they can get away with it.

    What is “gouging”, anyway?

    Are airlines charging much more than their cost for certain flights when they know that customers will pay for it? Probably – but every industry does this. Why does it cost me an extra $1.00 at Starbucks to get a $0.02 shot of syrup in my coffee? Same principle – customers who are much less price-conscious and a strong desire for that specific product.

    What Prof. Rahe is accusing the industry of doing is collusion to punish a specific marketplace. That is a different beast.

    • #17
  18. Yeah...ok. Inactive
    Yeah...ok.
    @Yeahok

    Misthiocracy:

    Basil Fawlty:I’d be willing to pay almost anything to get out of Detroit.

    The Detroit skyline is quite pretty from the Windsor side.

    ;-)

    Also a beautiful site in the rear-view mirror.

    • #18
  19. Fred Williams Inactive
    Fred Williams
    @FredWilliams

    I compliment Villanova for inviting you.  My sense is you will find it an intellectually hospitable place.

    • #19
  20. Paul A. Rahe Member
    Paul A. Rahe
    @PaulARahe

    Mendel:

    Douglas:

    I talk to people that work for airlines all the time and don’t understand it. Much of it is just plain ole’ price gouging when they can get away with it.

    What is “gouging”, anyway?

    Are airlines charging much more than their cost for certain flights when they know that customers will pay for it? Probably – but every industry does this. Why does it cost me an extra $1.00 at Starbucks to get a $0.02 shot of syrup in my coffee? Same principle.

    What Prof. Rahe is accusing the industry of doing is collusion to punish a specific marketplace. That is a different beast.

    It is passing strange that, two months out, every direct flight from Detroit to Philly is priced at $1204.

    Had I seen this before, I would not have sounded an alarm. Something is amiss — and I raise the question of collusion because this is a major route: from the hub of one airline to that of another. Look at the prices from Chicago. Consider the price from South Bend. That is a tiny airport with very few flights. Detroit is a major hub.

    • #20
  21. AIG Inactive
    AIG
    @AIG

    Mendel: What is “gouging”, anyway?

    Exactly. Price gouging is often defined as simply “making a profit”.

    Douglas: I talk to people that work for airlines all the time and don’t understand it.

    No one outside of their operations research department is going to get it.

    Douglas: They’re all “loser airlines” if they’re primarily in the passenger business.

    If they’re all losers, where do they get the market power to “gouge” customers?

    Besides, they are not all losers.

    southwest

    This is Southwest’s stock performance vs the other airlines. You can’t see the others, but they’re there, if you squint hard enough ;)

    But Southwest operates specifically on a “lowest cost” strategy.

    Douglas: Costs keep going up.

    Costs keep going down

    air12

    • #21
  22. Paul A. Rahe Member
    Paul A. Rahe
    @PaulARahe

    Mendel:What Prof. Rahe is accusing the industry of doing is collusion to punish a specific marketplace. That is a different beast.

    Less punish than exploit. Airlines merge to eliminate competition, and we have witnessed a lot of mergers. Sooner or later what is left at any given airport or on any given route is a monopoly or a duopoly . . . and then it is not foolish to wonder whether there is collusion going on.

    It is difficult for a multiplicity of rivals to collude. It is not difficult for two rivals to do so.

    As I have said before, I have not witnessed anything this dramatic before — $144 to Trenton, $1204 to Philly — two months out.

    And do I trust the market? Yes, when there is genuine competition . . . as there is, for example, in the market for used books. Plug in any item you want in http://www.bookfinder.com, and you will see what I mean.

    • #22
  23. AIG Inactive
    AIG
    @AIG

    Paul A. Rahe: It is passing strange that, two months out, every direct flight from Detroit to Philly is priced at $1204. Had I seen this before, I would not have sounded an alarm. Something is amiss — and I raise the question of collusion because this is a major route: from the hub of one airline to that of another. Look at the prices from Chicago. Consider the price from South Bend. That is a tiny airport with very few flights. Detroit is a major hub.

    Go grab someone from your econ or business department. Quick!

    They’ll tell you why this is all wrong.

    • #23
  24. Nick Stuart Inactive
    Nick Stuart
    @NickStuart

    Prof Rahe, this is wildly off topic [but at least it isn’t shifting the discussion to the topic that shall not be mentioned].

    What would be the one modern English translation of Chaucer’s Canterbury Tales that you would recommend? There are quite a few and the several I’ve tried are tough going (although sothly to telle the Middle English is pretty interesting when I can figure it out).

    • #24
  25. AIG Inactive
    AIG
    @AIG

    Paul A. Rahe: Airlines merge to eliminate competition

    No, airlines merge to ensure survival. It’s such a dismally unprofitable business and cut-throat competitive market, that alone they can’t survive without adequate economies of scale.

    There’s a mountain of literature on the airline industry, consolidations, competition, routing, pricing etc…and if there’s one place that you’ll see market efficiency at work, it’s here.

    • #25
  26. Paul A. Rahe Member
    Paul A. Rahe
    @PaulARahe

    Nick Stuart:Prof Rahe, this is wildly off topic [but at least it isn’t shifting the discussion to the topic that shall not be mentioned].

    What would be the one modern English translation of Chaucer’s Canterbury Tales that you would recommend? There are quite a few and the several I’ve tried are tough going (although sothly to telle the Middle English is pretty interesting when I can figure it out).

    Alas, I know more about economics (which I am not as ignorant of as some of the commenters think) than I know about Chaucer translations. My own experience is that, if one sounds out the Middle English, it is lovely. A lot of help I am.

    • #26
  27. Paul A. Rahe Member
    Paul A. Rahe
    @PaulARahe

    AIG:

    Paul A. Rahe: Airlines merge to eliminate competition

    No, airlines merge to ensure survival. It’s such a dismally unprofitable business and cut-throat competitive market, that alone they can’t survive without adequate economies of scale.

    There’s a mountain of literature on the airline industry, consolidations, competition, routing, pricing etc…and if there’s one place that you’ll see market efficiency at work, it’s here.

    This I do not doubt. And eliminating the competition may be the only road to survival. But I have flown these routes in the past, and I have never seen prices — two months out — that come anywhere close.

    You are looking at the big picture. I am looking at a specific series of routes — where competition may have been reduced to something “manageable” and the results are quite striking.

    • #27
  28. Paul A. Rahe Member
    Paul A. Rahe
    @PaulARahe

    PHCheese:Paul maybe you could hitch a ride on MS Rodham’s Lear?

    But what would I have to do for the old sot to pay her back?

    • #28
  29. Douglas Inactive
    Douglas
    @Douglas

    AIG:

     If anything, the consumers are getting away with murder when it comes to airlines…

    I had to blink twice to confirm that someone would actually write that.

    • #29
  30. AIG Inactive
    AIG
    @AIG

    Paul A. Rahe: This I do not doubt. And eliminating the competition may be the only road to survival. But I have flown these routes in the past, and I have never seen prices — two months out — that come anywhere close. You are looking at the big picture. I am looking at a specific series of routes — where competition may have been reduced to something “manageable” and the results are quite striking.

    Looking at specific routes at a specific point in time is precisely the problem: unless you know all the things that influence prices…and have no doubt that you don’t (no one does, other than the people in the multi-billion dollar OR departments in those airlines)…there’s not much to be said about it.

    It’s like looking at the stock market for 30 seconds and trying to extrapolate 10 year trends on it.

    It’s a random walk with drift.

    There’s 1,000 reasons why those prices at that time were they way they were. But there’s no reason to assume nefarious collusion.

    As I said in an earlier post, if you look at prices there now, they are way lower.

    • #30
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