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The Economics of Flying

October 17, 2009

Sometimes market actors make you wonder about the truth provided by economic theory and if it really applies to the real life market. One would think that firms competing for customers should do what they can (actually, all that they can) to provide better service at lower prices – and protect their customers from disturbances, problems, and delays.

But that does not apply to the airline industry.

They obviously have something else in mind than offering customers something of value. Not only are their flights seldom on time and their personnel, at least the people working in the gates, rude – they seem to favor anything that makes your flight a worse experience.

Not too recently the airlines cut down on service on board while they obviously let prices stay basically the same. And while in the air you can get a 12-oz can of beer for $5.00. (But it is still served cold, I grant that.)

And then the safety mania with the utterly incompetent Transportation Security Agency hit us with full force. The essence of the TSA seems to be to put rude people in costumes, earning their salary by making sure to add as much hassle and discomfort as possible to your trip, between you and your trip. And the airlines whole-heartedly supported it.

As the authorities add to their “safety” measures, which make flying oh so more annoying and time consuming, the airlines either applaud the development or refrain from comment. While you, the consumer and their customer, have to buy new bags because the old ones have the wrong size – and have to stand in line because everybody have to unpack their carry-ons and take off their clothes (at least jackets, belts, shoes, and anything containing metal) before walking through the X-ray.

Next came the special X-ray that takes pictures of all passengers naked. And then the authorities will use border controls to protect intellectual property. How? Through arbitrarily stealing people’s computers and digital music players when they pass the security checkpoint – just in case.

And the airlines still don’t mind their customers being severely harassed by government agencies. In fact, their response to the TSA confiscating computers from travelers passing security checkpoints seems to be to offer in-flight wireless internet. I fail to see why customers would want to pay extra for in-flight internet access if they cannot be sure they get to board the plane still carrying their laptops. Maybe airline executives see something I’m missing, but I wouldn’t rely on their judgment. After all, they are the ones who obviously don’t consider stealing customers’ computers a problem for business.

And today, to top it all off, I received this e-mail from American Airlines frequent flier program AAdvantage:

Dear Per Bylund,

The Transportation Security Administration (TSA) recently introduced a new program called Secure Flight, which is designed to enhance the security of domestic and international commercial air travel.

How will this affect you?

When you purchase a ticket on AA.com or through an American Airlines Representative, you will be asked to provide the following information: full name (as it appears on your government-issued photo ID that you will use when traveling), date of birth, gender and redress number* (if applicable).

Update your AAdvantage® account profile

To save you time and make your future travel easier, additional fields have been added to your AAdvantage account profile on AA.com so you can store this new information. Then, every time you make a reservation with us, we will automatically add your Secure Flight Passenger Data.

So they do not mind my being harassed, searched, and offended. They don’t mind that my property is being stolen. And they aren’t too bothered when they don’t manage to get me where I want when I expect to (which, one would think, should be their business). But they pride themselves with offering to help me automatically report personal information to the TSA? Have they no shame?

What does economics say about this wicked scenario? Well, I’m pretty sure economic theory would claim an airline competing for customers would probably not do any of the above. If they want to make a profit, they should offer customers extra value – not extra cost. So sound economics, we can conclude, cannot explain this behavior.

But we are making a Krugmanian mistake: we’re seeing what isn’t there and not seeing what is there. Just like Krugman blames “capitalism” for the problems with high health care costs and claims markets is exactly what we don’t need. He fails to realize that there is not much capitalism in the health care industry: it is regulated to death by the Food and Drug Administration (FDA) along with the enforcement of intellectual property instruments like patents.

The same is true with the air passenger transportation industry. The assumption that there is a market and that airlines compete for customers like market actors is false. American Airlines and the other airlines are not market actors but to a large part political creations – they live in symbiosis with the government. This is why they don’t care about their customers; customers are unimportant when the market is regulated and “protected” from competition. We’re at their mercy, whereas in a market they would be at ours.

As long as this is the case we should expect longer lines and higher prices. And products and services of deteriorating quality.

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