Monday, August 9, 2010

Air Fares - A better deal?

This post springs out of a comment war from some time back between our favorite antagonist and the editors. The New York Times has this article out today talking about airfare prices over time. From the article, two things are clear:

1) Generally speaking air travel is getting more expensive.
2) Airlines are failing to report full fee collection data, essentially hiding the true cost of a ticket today as compared to historic ticket prices. We're trying to compare apples to oranges.

This lack of reporting leads to a higher level of imperfect information, creating a market inefficiency. A consumer does not know clearly what the cost of the trip is. This is compounded by the purchasing patterns in air travel where baggage needs of the traveler can change between the time of purchase of the actual ticket and the levying of fees at check-in.

Again, all we're saying is the customer experience has not improved and the price has increased. Those two facts would seem indicate that deregulation is not a Godsend.

8 comments:

Colin said...

Generally speaking air travel is getting more expensive.

The NYT story is looking at an 8 month trend. Taking the long view we still see the following:

http://3.bp.blogspot.com/_otfwl2zc6Qc/TF9xuD6hiGI/AAAAAAAAOJk/J9uWe4FsoGg/s1600/airfare.jpg

Further, the NYT story notes that the recent increase in prices is a result of increased costs, and absolutely nothing to do with deregulation -- which of course took place 30 years ago:

“Airlines have been in a race to the bottom in terms of pricing,” said [Henry H. Harteveldt, a travel analyst with Forrester Research]. “Unfortunately, fuel is not back at 1999 levels, labor costs are not back at 1999 levels. There are a lot of other things that cost the airlines more now.”

A la carte pricing is a great win for the consumer, who now gets to pay only for what they want.

But let's go back to before the advent of a la carte pricing and look at the impact of deregulation for a more apples to apples comparison:

http://www.centennialofflight.gov/essay/Commercial_Aviation/Dereg/Tran8.htm

The average airfare, for example, dropped by more than one-third between 1977 and 1992 (adjusting for inflation). It is estimated that ticket buyers saved as much as $100 billion on fares alone. Deregulation also allowed the proliferation of smaller airlines that took over the shorter routes that were no longer profitable for the big carriers. In sum, the major airlines probably suffered the negative consequences of deregulation the most. New smaller airlines and the millions of passengers flying gained the most.

Deregulation -- good for consumers and the little guy, bad for the big corporations.

Oh, and let's also take a look at Europe, which has deregulated its airlines to a greater extent than the US:

http://reason.com/archives/2005/01/01/fly-the-frugal-skies/print

From 1998 to 2003, thanks in part to RyanAir and easyJet, low-cost air traffic grew by 600 percent in Europe, compared to just 10 percent growth for full-service airlines, according to Tourism News. Forty new airlines have debuted since the September 11 massacre alone. (More than 100 have been launched in the last decade, but many of those have disappeared.) Europeans who not long ago used airplanes only to cross the ocean are now taking them to visit girlfriends, scope out real estate, and turn the E.U.'s theoretical freedom of movement into a reality.

The article also points out that accident rates have been cut in half in the US since deregulation.

The closer one studies this issue the more one sees what a massive success deregulation has been. The main problem with airlines is just how much regulation remains (a point I would venture that Ben agrees with, given that in our last exchange he agreed with me on the need to open the US market to more foreign competition).

Colin said...

Was the comment I left here yesterday deleted? If not, and it is a victim of blogger, I am happy to repost.

Ben said...

Of course it wasn't deleted!

Colin said...

Generally speaking air travel is getting more expensive.

Only if one looks at the last eight months rather than the long-term trend. Indeed, the long-term shows a sustained decline in prices.

Further, the NYT article suggests that -- as I have argued before -- any price increase reflect a change in the cost structure faced by airlines, not greed on their part:

“Airlines have been in a race to the bottom in terms of pricing,” said [Henry Harteveldt, an analyst at Forrester Research]. “Unfortunately, fuel is not back at 1999 levels, labor costs are not back at 1999 levels. There are a lot of other things that cost the airlines more now.”

There is absolutely nothing here that suggests deregulation is at all to blame for the recent price increase. Indeed, only the most ideologically rigid among us would blame an 8 month trend in 2010 on something which took place 32 years ago.

But it is true that a la carte pricing -- which is a great win for the consumer, and it allows them to only pay for those items they want -- confuses the airfare issues. So let's look back at before the advent of such pricing to allow for a more apples-to-apples comparison.:

The average airfare, for example, dropped by more than one-third between 1977 and 1992 (adjusting for inflation). It is estimated that ticket buyers saved as much as $100 billion on fares alone. Deregulation also allowed the proliferation of smaller airlines that took over the shorter routes that were no longer profitable for the big carriers. In sum, the major airlines probably suffered the negative consequences of deregulation the most. New smaller airlines and the millions of passengers flying gained the most.

In other words, consumers and small enterprises benefitted while the big corporations lost out -- another win for deregulation.

Let's also look at Europe, which deregulated their own airline industry during the 1990s to a greater extent than the US. As this article states.:

From 1998 to 2003, thanks in part to RyanAir and easyJet, low-cost air traffic grew by 600 percent in Europe, compared to just 10 percent growth for full-service airlines, according to Tourism News. Forty new airlines have debuted since the September 11 massacre alone. (More than 100 have been launched in the last decade, but many of those have disappeared.) Europeans who not long ago used airplanes only to cross the ocean are now taking them to visit girlfriends, scope out real estate, and turn the E.U.'s theoretical freedom of movement into a reality.

The article also notes that accident rates in the US have been cut in half since our own deregulation.

The fact remains that the more closely one studies airline deregulation the more apparent what a massive success it has been. Indeed, it is notable that Ben himself supported my call for further deregulation by abolishing limits on foreign competition on domestic US routes and declined to endorse a repeal of the 1978 Airline Deregulation Act.

Ben said...

Indeed, it is notable that Ben himself supported my call for further deregulation by abolishing limits on foreign competition on domestic US routes and declined to endorse a repeal of the 1978 Airline Deregulation Act.

It is only notable if you believe that the choice is between regulation and no regulation. As I've said before, the choice is not all or nothing--some regulation is good, some is not.

Colin said...

It is only notable if you believe that the choice is between regulation and no regulation. As I've said before, the choice is not all or nothing--some regulation is good, some is not.

The fact that you decline to support its repeal clearly implies that you believe at least some deregulation was a good thing -- otherwise you want the whole thing done away with. You're also on record as supporter further deregulation.

But just to make sure I don't stuff words in your mouth, which parts of the Airline Deregulation Act do you think went too far? Because if you don't have any problems with the ADA, and you are on board for more deregulation, then I'm not even sure why we are debating this topic.

Ben said...

We are debating the topic because you reflexively defend deregulation without entertaining the possibility that it might have had negative effects: declining customer satisfaction and increased costs when actually comparing the services once provided to the total costs of those services a la carte today.

Colin said...

I have entertained the possibility, but have come up with zero evidence to support it. Consumers have gladly traded some of the previous perks for lower prices. After all, if customers wanted all the things that used to be included but no longer are -- in the pursuit of lower prices -- someone would start up an airline which offered those things. To not take advantage of consumer desires is to leave money on the table. If people really want all of the extras, just shell out for business or first class. Also, as has been documented extensively, prices have declined, and to the extent this is not the case it is a product of a shift in the underlying cost structure.

Lastly, to the extent many flying miseries exist -- such as security, flight delays, and a crappy airport experience -- it is worth noting that the government is typically responsible for all three (airports run by local government and the FAA and TSA federal entities).

What the airline industry desperately needs is further deregulation. I look forward to the day I can fly Singapore airlines from DC to Denver, or that Virgin can operate in the US without setting up a separate legal entity.