Blame Index Funds: Overbooking and Cross Selling (first story)
Blame The Law: The Deeper Scandal of That Brutal United Video
Blame The Culture of Law Enforcement in Aviation:The Real Reason a Man Was Dragged Off That United Flight and How To Stop It From Happening Again
Blame Industry Consolidation: The Airline Industry Is a Starving Giant Gnawing At Our Ecnomy
Blame And Sue United: Michaela Aleach on Twitter
Blame The Cult of Low Prices: In Brief: A United Airlines Theory
Don’t Blame Capitalism, Blame Lack of Capitalism: United Is Why People Hate Capitalism
Don’t Blame, Instead Ask Who Blamed Who And Why: It’s Time For Some Game Theory, United Airlines Edition (Marginal Revolution)
Blame YOU, Basically: Why Airlines Are Terrible (Thanks, Vox!)
Blame Reporters and Mangement: United Passenger “Removal”: A Reporting And Management Fail
Blame Mostly Unrelated Bad Airline Reporting, Not For This, Just In General: I’m All Out of Clever
No, Seriously, Blame United, They’re the Worst: How United Turned the Friendly Skies Into a Flying Hellscape, United Airlines Made Me Abandon My Mobility Device At the Gate, and honestly I could go on for a while.
Part 1: United Is The Worst
It is true. United Airlines is the worst. This is not a recent development, nor is it something we learned in the past week. United Airlines has been Brita-level worst for years. Spirit Airlines may offer worse service, but it has the common decency not to pretend it is anything but the slimeball at-your-own-risk-on-every-level experience. I can respect that. United’s slogan is “come fly the friendly skies.” My ears interpret that like they do the Domino’s ad that tells me I have thirty minutes: As a threat. I was already willing to pay a substantial premium to avoid United. If anything, that makes this a positive for my impressions of United, since they have gone from the airline everyone privately knows is awful to the airline for whom its awfulness is common knowledge.
Scope insensitivity is important to keep in mind, as is the impact of video. One passenger was forcibly removed from one plane. This type of removal is very rare. The chance of being involuntarily denied boarding a flight that actually takes off is quite low. The chance of the flight itself being cancelled outright is much higher, in which case you will most definitely be involuntarily denied boarding. The chance that you will miss the flight because of traffic, airport security and other such considerations is also much higher.
The chance of being involuntarily deboarded – removed from the plane after getting a seat – is much, much lower than even the chance of being involuntarily denied boarding. There are lots of rules designed to make this hard to do and not fun for the airline. Among these are the risk that the situation will turn violent, and in turn the risk that the police will handle themselves abysmally as occurred here. I am still unsure how culpable United is for what the police did, for the violence we want to mostly blame the police here (even if I would rather blame United, since again, they’re the worst), but the percentage of blame for United is not zero.
The case remains important for two reasons. One is that even though the situation in question is rare, the way it went down, and the way the company handled things afterwards, provides strong evidence and common knowledge of United’s worstness. As Paul Graham notes, at first this could have been one bad gate agent combined with some overzealous Chicago police, but the reaction clearly shows that it is endemic to United the company. The other reason is that it invites conversation about the airline industry, which is also widely known to be the worst even if it actually is not.
Seriously, everyone: Do not fly United Airlines. This is not a ‘boycott’ due to their awful behavior in this one case. This is based on the fact that I used to be a frequent flier, have been on a lot of flights, and I assure you that any discount they may be offering you is not worth the experience you will get. Pay a little extra if you have to, and get someone else.
Part 2: Airlines Are The Worst
The more interesting question to me is why airlines are so bad, if indeed they are so bad, and whether or not there is anything that can be done to fix it. Several of the links at the top are not about incident at all, but rather about the history of airline deregulation and consolidation, and the pressure to offer low sticker prices at any cost. There is no question that things are far from optimal.
My economic model of the airline industry is that the key elements are high fixed costs, increasing returns to scale, low marginal costs, heavy regulation (when we say ‘deregulation’ of the industry, we refer to something important, but the idea that they are essentially free to put anything they want in the air however they want is downright silly), a combination of unionization and anti-unionization, highly variable consumer surplus and huge preference for low sticker prices over superior service or even lower actual prices. The combination of these factors leads to highly sub-optimal outcomes no matter what policy you use, and solving for the best practical option is tricky.
High Fixed Costs
Having an airline at all requires an expensive infrastructure. Having access to a new airport, or maintaining a hub, also requires additional expensive infrastructure. Maintaining a route that is run every day or two is expensive, and you can’t cancel flights whenever there is not too much demand for them.
Increasing Returns to Scale
The bigger you are, the better you are able to spread many of these fixed costs across many flights. Having an additional hub somewhere massively increases the utility of your airline, as you can offer efficient transfers for both passengers and employees, and invest in more on-the-ground infrastructure. Your slack and ability to cope with situations increases, your airport lounges make more sense. Your frequent flier program looks more appealing.
Low Marginal Costs
Once you offer a flight, filling the seats on that flight costs you essentially zero dollars. An empty seat is an economic disaster. If you charge anything like marginal cost for your seats, you are quickly bankrupt, which is how entire industries can end up losing money for decades. Frequent flyer programs make this worse as well. Getting someone’s business once gives them miles that can then help lock up a customer long term, which means that it makes sense to lose money on a given flight, but if you always lose money, you lose money.
If airlines were free to offer wildly different experiences and services, they could better differentiate their products. If they were able to reasonably offer flights that were not automatically tied to a particular origin, destination, time and place, with a guarantee of service, with tickets needing to be secured in advance for security reasons, then we could get creative about serving people’s actual needs. Instead, we have been dictated to on a structure of what the experience needs to be like, what features must be locked in when and how, what safety measures must be taken and so forth. That is not to say that this regulation is bad or unnecessary. It is to say that the structure that leads to the other elements of the picture has been locked in. While First Class certainly exists, and in some ways it is quite nice, fundamentally it is exactly the same experience as coach with bigger seats and nicer service, which is why it is such an awful deal. We also instinctively blame airlines for a lot of things that are the fault of the TSA and FAA (whether or not they had a good reason).
The other problem with heavy regulation is that it shuts out airlines that want to exist, but that cannot bear the high fixed costs of compliance with the regulations, or are being shut out because we do not domestically play nice with foreign airlines. Regulation destroys competition.
Unionization and Anti-Unionization
Without getting into whether unions are good or bad, they have practical effects that make good service more difficult. In this context, I think of unions as having both a cost effect and a regulatory effect, plus an anti-unionization effect. Union labor costs more, raising costs, but this is limited by the lack of profitability of the companies and even the unionized employees, from what I can tell, have not been doing that great. The other effect is that union employees are subject to union rules. If people started being late, they would have risked ‘timing out’ of employees’ shifts, and flights would start getting cancelled outright. This sounds like the kind of thing that could be solved with (relatively) small compensatory payments, leaving everyone better off, but the rules don’t work like that. Union rules make it difficult to adjust to circumstances, and they make it impossible to make Caosian bargains. Some people asked ‘why didn’t United just put their employees in a $300 Uber?’ or on another airlines’ flight, and the answer is union rules. By having a rule for everything, you prevent abuse, but you also prevent flexibility. Getting extra labor when you need it becomes especially expensive, as does getting rid of a surplus, as does making any major change.
You can still sometimes get a little progress by spending a lot of Imperial Focus Points, but even when it works the exchange rate is really bad.
You also have the problem of Anti-Unionization. In order to save money, airlines turn to subcontractors and shell companies, and use any means necessary to use non-union labor. The problem (in addition to sucking for the workers) is that doing so complicates the situation even more, splits the available labor into non-compatible sections, and thus takes its own toll on flexibility. The other problem is that this creates such a tangled mess that any control over the quality of work that gets done is severely compromised. The race to the bottom continues.
Highly Variable Consumer Surplus
This problem seems underappreciated. The airlines understand what is going on and attempt to minimize the damage, which causes its own massive dead weight losses and solves only a portion of the original problem.
The average flight I go on costs $500. If there was a 100% additional tax and it cost $1,000, I would still go on the majority of those flights, and the revenue-maximizing tax on me is likely substantially higher than that. The ability to fly is worth a lot!
In situations in which we want to get somewhere in a hurry, or change our flight details, often those last minute arrangements are worth vastly more than anyone could reasonably charge. That flexibility occasionally provides massive consumer surplus.
The same goes for the existence of certain flights to under-served areas. People speak of airlines ‘killing towns’ by cutting off flight service. I believe it. That means either that many flights are much more valuable than their cost, or that the ability to fly when you need to is itself massively valuable.
If there was a surplus of airline seats and flight paths, these massive surpluses would be available to all and flights would be more pleasant, but someone has to pay for them, and the airlines are not especially profitable.
Sticker Price Preference and Search Algorithms
Think about a trip that you might want to take at some point. If you were going to book it, chances are you would go to a site like Kayak, Orbitz or Hipmunk. These sites will allow you to specify number of stops or which airlines you prefer, but once you have told the program what your dealbreakers are, the sorting is purely by price. Price is king.
Price should be king, but here the sticker price is an absolute monarch. If you are not going to choose the cheapest flight, you need a strong reason to overcome that prior. That means that the tricks work. If you transfer fees to hidden places, or give up service to save a few bucks, the experience gets worse, but you get more customers to buy now. The reputational effects might eventually catch up to you, but that takes quite a long time.
The system actively makes me feel bad for not saving every last dollar, even though I know the savings are often not even real.
If the engines included an ‘effective price’ that included fees you would likely be charged for use of the overhead bin, checked bags and other incidentals, using a combination of letting you enter what you need and using averages from surveys, they could show an ‘effective price.’ If that was then combined with numbers that showed other features such as seat size, leg room, average amount late and percent chance of on time, and available Wi-Fi and entertainment and meals, and those numbers were combined into a unified score, and that was how they sorted the results, you would get a very different set of default choices. Even better, you could also put dollar or percent values on different airlines, or on particular travel times. Customers would choose flights they actually wanted.
The key is to get that information to automatically not only display but to change the search rankings by feeding into a ‘flight rating’ of some kind. If you have one thing that has a number, and other things that do not feed into that number, anything that doesn’t feed into the number gets undervalued. The calculation you have is the one you make decisions with, even if you know it is incomplete, because it feels objective and real. At best, other factors that can’t be easily quantified get considered with their lower-bound values.
With an integrated but diverse system, the airlines would then go about trying to optimize against the new rankings, rather than purely against the lowest price. That would mean balancing different factors, and having different flyers and websites care about different things, so it would be a much better approximation of ‘be a good airline.’ There would be room for low-cost terrible airlines like Spirit and United, and room for better ones as well.
I call upon the websites to do this for us, ideally as the default sorting system, but at least as available information you can choose to use.
In general, I think ‘force the display of information’ is one of the ways that regulation can provide value rather than destroy value. Requiring airlines to disclose a bunch of hard-to-fake statistical data would help a lot.
Solutions to Improving Air Travel
It is misleading to think of ‘deregulation’ as having been good or bad in an industry as inherently complex and regulated as air travel. One must instead think about whether particular rules are good or bad, and design a system that gives everyone the proper incentives without destroying too much value.
One thing to keep in mind is that making air travel better makes air travel better. If you improve the experience, more people want to fly and are willing to pay more, which means more flights and more competition, which means better air travel. Solving any problem in air travel helps solve every problem!
Changing the Details
Changing the details splits into several categories of things we can improve, without changing the big picture incentive structure problems involving fixed and marginal costs.
The first category of things involves weakening stupid FAA and TSA rules and regulations. A lot of what we hate about air travel is security theater and safety theater. We can cut way down on that. We can also stop treating everything involving a plane as a potential criminal action, and allow airlines to more easily add flights or adjust which plane they use, when demand is high. Everybody chill.
The second category is to improve the process of flight selection and booking. I talked above about how the booking sites could help. Regulation could potentially also help here by requiring anyone selling a ticket to disclose information about the flight and airline being selected, and the nature of any fees. Something as simple as ‘here is how much the average passenger on this flight with that class of ticket pays the airline for anything that isn’t the ticket and here’s the resulting average trip cost’ could be a big game.
The third category is pricing, and the tendency of airlines to continuously change prices over time in order to price discriminate. The current pricing system causes massive deadweight losses, but can we do better? The airlines need the extracted revenue rather badly, and a reckless regulation might result in last minute flights frequently being completely unavailable. I am going to consider getting into these details beyond scope, but I find the design of a good system here quite the interesting problem. It is also very hard.
The fourth category is to better handle situations similar to the United flight, and other cases where someone has to get bumped or flights need to be cancelled. Getting better at auctions, and allowing those auctions to go to much higher prices (e.g. Delta’s new rule of going to $9,950) will go a long way. There are flights I have been on where I would have turned down $9,950, because that would have made me miss a Magic Pro Tour, but I think that literally every other flight I have ever been on, including those where I’m going to a Pro Tour but would have still made it in time to play, I would have been thrilled to take less than half that much money. It is enough, and if people do not think it is enough, they have a bigger status quo bias problem than even I can imagine.
Allocating more things by auction, and allowing transfers of tickets and seats via payment, both with customers paying and being paid, would allow prices to be otherwise lower, and give people the feeling that flying was like having a lottery ticket – someone might pay you big bucks for that seat! Similarly, if you cared enough, no flight would ever be sold out, and any time you arrived early, you could bribe your way onto an earlier flight if you cared enough to pay, and cheapskate travelers with time on their hands would reap the benefits. A true secondary market would be even better. You could worry that this would cause scalpers to buy all the tickets, but if the scalpers tried that too early, extra flights could be added, so regular people would have a reasonable window to secure travel. Near the travel date, prices already sometimes go through the roof, and allowing people to cash out when that happens would make this problem less bad rather than worse. There is a concern that this would cut down on the airlines’ ability to extract money via price discrimination, but I think they would more than make it up in other ways.
Changing the Frequent Flier Programs
Frequent flyer programs make everything worse. They exacerbate the problem of high fixed costs and low marginal costs. They seem obviously anti-competitive. They increase competition for someone’s initial ‘loyalty’, but once that ‘loyalty’ is secured, that person is now effectively forced to fly only on that airline, meaning those who fly the most don’t benefit from most of their available options, and airlines get away with giving them bad service. An airline that can’t form a complete set of offerings can’t compete, which results in the big/small pattern we see. If you are big enough you compete for the frequent flyers in earnest, if you are not big enough then you have comparative disadvantage in mediocre long routes and get priced out. Even if you could expand to be big enough, the inertia involved in the programs makes it hard to get off the ground as a new big player.
The programs are also essentially frauds. You earn miles that have to be used under rules designed to frustrate you with restrictions and fine print. Those rules can and do change at any time for the worse. The rewards for earning levels can and do change at any time, mostly for the worst. There are some nice rewards, and marginal cost is low, so they are still worth using as a customer. The real rewards are the allocation of zero marginal cost resources like seat upgrades and boarding order, so the system effectively makes the default flying experience worse.
It is not even clear that the airlines want to offer these programs. Frequent flyers are likely to be relatively price insensitive, so giving them a lot of free goodies is the opposite of good price discrimination. If they could all agree to do so, they would likely stop offering such programs, but if one airline went first it would be an obvious disaster for them, and collaborating like this is illegal, so they can’t make a deal.
An outright ban seems reasonable.
Changing the Big Picture
We currently have a small number of large airlines due to economies of scale and large fixed costs, and we have a shortage of less popular routes because the airlines cannot extract the value from those routes. What do we do about this?
There was a long period where there was heavy competition in airlines, plenty of spare capacity and a lot of flights to random places. The problem was that during that time, the airlines combined to lose massive amounts of money. That means that if we want that world to return, we will need to do something to allow airlines to be profitable.
One solution is to simply use taxpayer dollars. The sum of the losses of the airlines over their dark period was about $60 billion, so for a mere $4 billion a year we could solve this problem. That seems very reasonable. Having higher quality, more available air travel at a cheaper price would change the entire atmosphere of the nation. The problem is that giving private companies direct taxpayer payments almost never ends well, and the public would (quite reasonably) not stand for it if it was direct.
What we should do instead is change the relationships involved so that airlines have the incentive to compete slightly more than they would be inclined to, and provide a little service to areas where it makes some sense to provide service. Market signals are still the best signals. If they are distorted, best is to introduce a counter-distortion.
One of our basic problems is that the marginal cost of filling a seat is almost zero. We need to raise that cost. If that cost were higher, competition would be much less ruinous, as would flying on routes with unreliable demand. The most obvious solution is to directly raise the marginal cost by doing two things: Taxing tickets more (which raises marginal cost directly), and using that money by offering a virtual customer to the airlines that is willing to buy those empty seats. The cross-subsidy solution is very American, and I’ve come to appreciate it; it feels just that a subsection of the economy ‘pays its own way’ in this sense, causing the system to be accepted.
This effectively transfers money from full flights to non-full flights. It also happens to be effectively a progressive wealth transfer, which is a nice bonus. There are obvious failure modes, for example if you pay too much too easily, half-empty or even fully empty flights could be profitable by design, or a larger plane that is largely empty could be better than a small one mostly full. Thus, we want to put a cap of some sort in the payments both in terms of size and quantity. Either the price goes down as more seats are bought, or there is hard cap on how many, or both. The price paid can be a function of the route and the average ticket price paid, with a cap that ensures that empty seats are never desirable.
One obvious objection to this is that you would want people on standby or otherwise looking to fly to be allowed to do so at just above marginal cost, whereas now the airline has a reason to refuse service. My response is that the airlines already refuse to bargain in this spot, to not incentivize people to wait until the last minute, so the opportunity is not there to be lost. Moving a passenger up from a future flight to the current flight still will have marginal cost $0 to the airline, so that should not be impacted much.
Note that if a flight was already full, taxing that flight on the margin will not change the ticket price, since willingness to pay did not change. The full cost is then absorbed by the airline. Prices will go slightly up overall from the marginal cost effect (since every flight has some monopoly power), but the increased competition should cause prices to net go down. Even if that proves false, it seems impossible for the deadweight loss from flights not taken to come anywhere close to the deadweight loss saved by increasing competition and available flight paths. The missed flights are marginal flights that the customer was close to indifferent about taking, whereas the flights we care about are the ones where they care a lot.
This system then allows the resulting competition to take its course, with minimal or no net subsidy required, if the details are handled well. Since this would be a government intervention, the details likely will not be handled well, so such a system might end up backfiring as such things often do, but it is the best solution I have been able to come up with.
Many aspects of the current system combine to ensure relative awfulness in air travel. If we are willing to change how we regulate airlines, we can make things better. Ideally we can do this without effectively increasing the true amount of ‘regulation’ in the system by much, while structuring to increase competition, resulting in a de facto more free market than before. Proposed solutions include eliminating or restricting frequent flier programs, having full flights subsidize partly empty flights, and improving information presentation to customers to improve default behaviors. It would also help more than people realize to have less stupid security/safety theater. We can also implement obvious fixes to broken systems like the one that caused the recent United situation, but that has small bearing on the overall picture.
Also, seriously, do not fly United. Ever. They’re the worst.