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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?
Published in Culture
Wait until “disparate impact” kicks in. My head is spinning with how many new variables will be factored in to our economics discussions.
Hello insanity.
This is, of course, quite so. Many studies have shown that prices from dominant hubs (airports with one big carrier handling 40%+ of the flights) are MUCH higher.
Living in a hub city is more expensive – but the flights are more convenient.
Airlines “wink and nod” collude all the time. The solution is found with more competition – Frontier/Spirit/Jetblue/Virgin America, etc.
In Europe the competition is MUCH fiercer, and prices are lower. Here is the data.
This all sounds right to me. If there is further consolidation, the competitive world described in many of the posts above will disappear, and the gouging will begin . . . as it has on selected routes from DTW.
The real problem is that the costs of market entry are so high, and the airports can handle only so many planes.
Trenton is, I suspect, underserved, and Frontier is taking advantage of that.
The key issue here is that these Southwest flights are not direct, nonstop flights. I can find plenty of one-stop flights (generally requiring that I change planes) at reasonable prices. But, as I said in the post, one pays for these in another way — time in every case, fairly often with serious delays and missed connections. I do not mind paying a bit more for a direct flight, but $1204 for a fairly short hop? That is highway robbery. Some will call it “optimization”; I call it gouging. We both mean the same thing — in the absence of real competition, the market fails to deliver the goods at a reasonable price.
Oddly enough, this is not really so.
Here is an example: Gatwick airport, with a single runway, serves 38 million passengers a year. The busiest US airport with only one runway? San Diego, at half that number.
There is room. And competition will cycle the monopolies away. It always does, as long as the government does not step in to support the more powerful airlines.
But that is the beauty of gouging! It attracts competition, which is precisely the cure for the diseases. Price fixing, by contrast, just limits supply.
Your faith in pure markets triumphing over government power and human nature is amusing.
That’s the point: looking at one flight on one day, and then seeing something “nefarious” about it.
You got to look at the big picture. And no, I’m no saying stock prices. They tell you nothing. I’m saying you got to look at how this industry competes and operates to see why there’s nothing “nefarious” about it.
You don’t have to understand why they’re doing what they’re doing on that 1 instance. Because you can’t. But that doesn’t mean “gouging” or “collusion”.
Only in Obama’s America!
Whenever monopolies have existed in history, they have been part of a cycle – they always cease, unless and until the government enshrines them in law or regulation.
This is not faith. It is simple analysis of history.
I was at an industry event where the CEO of Norwegian said, effectively, “If fuel prices go down, I think airlines will have the self restraint to hold prices steady.”
A Ryanair Executive on the panel answered: “If fuel prices go down, there will be a bloodbath, because we are going to lower prices right along with it.”
Airline executives want to limit capacity growth in the US, and they are doing it OK right now. But already some are “cheating” – and the industry will, over the next few years, return to break-even status.
For what it is worth, I think that iWe has it more or less right. Collusion does exist; monopolies and duopolies do appear. Price-gouging does take place. But where market entry is relatively easy, the gouging does not last very long.
I hope that the last bit is correct, anyway. For the situation of those of us who do brief trips away from home, using Detroit as our main airport has become unpleasant, and there is a clear correlation between high prices on certain routes and a decline in competition on those same routes. USAir — not my favorite airline — used to provide a certain discipline to the market by undercutting the fares offered by its rivals. American’s purchase of USAir seems to have changed the rules of the game.
It would be a fine thing if Frontier were to expand its offerings. I would look to Southwest were it not for the fact that its business model these days resembles that of Delta, United, and American.
Frontier, Virgin America, JetBlue, Allegiant and Spirit are the comparative upstarts that will pressure or crack the majors. On competitive routes, prices equilibrate to what is basically a break-even posture.
I’d be careful about “in-house” staff being always more expensive than getting a vendor (BTW, Southwest is known for being the most unionized airline in the country). There’s been a decent amount of research the last few years which suggest that the cost differences between vendor and in-house have gone down precipitously. Frontier Communications, for example, famously brought all its customer service in-house in 2012, and have not seen any appreciable increases in cost.
Denver, Phoenix, and Dallas-Ft Worth greatly beg to differ with the last sentence. Of course, it helps (in all three areas) to be a hub/focus city for multiple airlines.
So…no collusion.
“Collusion” where the next alternative is 10 times cheaper, as you yourself found…is hardly “collusion”.
Price gouging is a pejorative for “profits”.
The airline business is a bit different. In a hub, the differences don’t have to be significant. In fact, the greater in-house control can give you a competitive advantage. But with out-stations you might find in-house people not working enough to make competitive sense. There, a third-party or two which service multiple airlines can provide real advantages.
I’d be curious if Detroit doesn’t have other specialized issues. There are a lot of government and giant corporate flights there. Non-stop might be a standard requirement for people above a certain level, but first class might be verboten for those same folks. I could imagine this sort of requirement really messing with pricing.
To expand. Generally having few customers means the customers have more power. But in Detroit’s case, the customers are special. They actually are buyers who are directed by third-party users who actually hold quite a bit of market power – and little price sensitivity. A bit like employer health insurance. This might end up benefiting the sellers of services (like airlines) in quite a rich way.
Here is a concrete example: When Southwest bought Airtran, they abandoned a number of destinations (like Pensacola) where they had only one or two flights a day.
Why? Because the union contracts required only Southwest labor – and it was not cost-effective to pay a ground crew for a full 8 hour shift when they only handled one flight.
Airtran had simply used contract labor, so they could support such thin routes.
Apologies if someone else has posted this here and I’ve missed it:
Washington Post – Justice Dept. investigating potential airline price collusion