Just wanted to share some thoughts about the recent controversy with United Airlines forcibly removing a passenger. There has been a lot written about the subject but I wanted to get past all the outrage and look at the underlying issues here. It provides an interesting case to study.
- For a quick run down of what happened you can read here:
http://www.vox.com/culture/2017/4/11/15246632/united-airlines-drag-man-off-plane
- Here is an interesting take from an expert on the industry dispelling some myths about this incident:
- Here is an article that gives an overview of the economics of air travel over the past few decades with some nifty charts and graphs.
http://www.vox.com/new-money/2017/4/12/15247172/why-airlines-are-terrible
- Here is an article explaining the concept of overbooking and why it is good for passengers and the industry. It allows for a more efficient use of space and also creates incentives for passengers to give up seats. If I am offered money to take a later flight, they allow me to trade money for time.
http://reason.com/blog/2017/04/12/the-united-airlines-incident-does-not-re
- Will bad publicity and people swearing to boycott actually change United’s behavior?
Generally speaking, companies do change when they get a lot of bad press or something bad happens. Take the case of Chipotle for example where an e. coli outbreak at their restaurants seriously hurt their sales and forced the food chain to change up many of its practices. But airlines are a special case. Whereas you can easily substitute one fast food place for another and in NY, even find another place to get Mexican style food, airlines are not so easily replaced.
When I think about my own actions, if I were to book a flight tomorrow and United’s prices were cheapest, I would most likely book on United. I believe most people would behave similarly because price matters greatly to airline consumers. It’s the reason why Spirit Airlines is routinely rated the worst airline but still always full: it’s almost always the cheapest flight you can find.
Why is the airline industry special? In a word: competition. Or more precisely, a lack of competition.
Two summers ago, I flew from New York to Thailand for under $800. A flight to California at the same time would have cost around the same amount. How is that possible when Thailand is almost four times farther than California? Distance is the most important determining factor for the variable cost between flights.
There are many airlines, particularly international airlines that fly routes from New York to Bangkok whereas those same companies, like Emirates, Etihad, British Airways, and China Eastern Airlines for example, are not allowed to fly from New York to San Francisco. The lack of competition allows the US companies that do fly from NY to San Francisco to charge more than they otherwise could (there are other factors to consider when comparing SF and Bangkok including taxes and airport costs, etc. but those factors do not account for all the price difference). In a truly competitive environment, industries that are really profitable draw new players into the field hoping to take some of that profit for themselves. The end results are lower prices and better quality. Technology companies (cell phones, computers) generally fit this pattern. Airlines generally don’t.
6. Interestingly, US airlines have been unhappy with having to compete with those international airlines because they believe those airlines get unfair help from foreign governments. Coincidentally (or not), several airlines that are based in the Middle East that have successfully established international routes and have high customer satisfaction ratings have gotten hit with “special” regulations when they fly to the US. Passengers are not allowed to have electronic devices while in the cabin. That regulation may make those airlines less popular and push even more business toward US airlines
Here are a few more articles about the United Airlines situation. They tackle different aspects of the issue but are worth reading nonetheless.
We’ll get to market competition, monopolies and oligopolies later in the semester (how much time do we have left?) but the airline industry offers an interesting case. People on different political sides of the economic issue don’t agree on what the root problem or solution is. People who are conservative or libertarian leaning say that government regulations and protections of the industry lead to less competition and therefore higher prices and worse service. Liberals say that because there are fewer regulations than there were before, big airlines have merged so that there are fewer airlines, less competition and higher prices.
Both agree that less competition is the culprit but what caused it? This goes to the heart of many disagreements about economics.
- Think US Needs Better Airline Service? Deregulate Airlines to Enhance Competition
- United Is Why People Hate Capitalism
- Deplaning of United Passenger Shows Why We Need Corporate Regulation
Clinton School Participation in Government 