Two articles this week on price discrimination by airlines, both written in the context of how crummy the low-priced options are.
Slate’s Alison Griswold writes:
In a paper published last summer on strategic consumer behavior, a pair of researchers found that advance, online purchases of discounted airline tickets were disproportionately made on higher-cost carriers. The finding, they wrote, “suggests that fares at the lowest percentiles are often sufficiently low regardless of the presence of strategic consumers, and that increased strategic consumer behavior has a limited effect.” In other words, lower the sticker price to a certain point, and consumers become less shrewd about their purchases.
That kind of complacency might explain why people keep flocking to ultra-low-cost airlines, in spite of their often-subpar service. For all the complaints that companies like Spirit get—and there are complaints galore—the market indicates that customers care more about cheap prices than anything else. Both Allegiant and Spirit say routine surveys of their riders support this conclusion. When passengers are asked how important they consider various aspects of airline service on their own, such as price, timeliness, and other factors, Allegiant’s Davis says they all score “pretty high.” When the options are pitted against one another, though—framed in terms of tradeoffs—price overwhelmingly wins. “The greatest service we can provide to them is keeping the fares low,” Davis says.
Jammed on board an ultra-low-cost aircraft with knees grinding against a seatback, you might not be inclined to agree. But then again, you bought the ticket, so that’s on you.
And at the New Yorker, Tim Wu:
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.”
A few thoughts:
First, the price of airline travel remains pretty good. The Bureau of Transportation Statistics reports that the average nominal price of domestic flights increased by 27.7% from 1995 to 2011 (that’s before the big drop in fuel prices this year). The CPI over the same period increased by 46.5%. I just booked a cross-country flight, splurging for ‘economy plus’, which raised my ticket price by about 25%, so in ballpark terms the total real price for my enhanced ticket is around what I would have paid 20 years ago for an ‘ordinary’ ticket.
As for ‘calculated misery’, yes, that is a consequence of price discrimination based on quality of good or experience. But before artsjournal.com readers start getting angry at the airlines, remember this strategy is used in the arts all the time. Cheap day-of-show tickets are inconvenient to acquire on purpose. Readers who are only willing to pay for paperbacks are forced to wait about a year after the hardback has been released (for this book on the information economy, for example). That’s a deliberate way to make the paperback ‘worse’, in order to encourage hardcover sales. But we are not all worse off as a result – cheap day-of-show tickets and paperback books are a better option than not being able to afford theatre tickets or books at all. And anyone who has flown for a few decades I think will agree to the scene we see in airports: air travel has gradually been democratized through lower prices. (In 1975, 197 million passengers boarded planes at US airports; in 2012 it was 685 million).
That’s not a defense of everything airlines do. I find the pricing policy regarding stowed luggage and carry-on mystifying, given that for any given case the weight is the same regardless of how it is stowed but the externalities on passengers are not. (Carry-on luggage also drives the problem of how to board the plane; if every passenger has only a small item to carry with them, boarding order matters a lot less).
In the end though I think Alison Griswold nails it: we have lots of low-price low-quality options because there is so much revealed demand for it. Better options are there if you are willing to pay.
[…] Price discrimination in the air AJBlog: For What it’s WorthPublished 2014-12-26 […]