Thursday, April 20, 2017

"Southwest, where we beat the competition, not the customers."

[Part of a flight attendant's closing announcement Thursday]

Just to review:
On Sunday, a man was forcibly dragged off a United flight headed from Chicago to Louisville after he refused to give up his seat to a United employee who “needed to be in Louisville” for a flight the following day, The Courier-Journal reports.

Passenger Audra Bridges, who uploaded a video of the incident to Facebook, told the newspaper that United initially offered customers $400 and a hotel room if they offered to take a flight the next day at 3pm. Nobody chose to give up the seat that they paid for, so United upped the ante to $800 after passengers boarded, announcing that the flight would not leave until four stand-by United employees had seats. After there were still no takers, a manager allegedly told passengers that a computer would select four passengers to be kicked off the flight.

As many people have pointed out, United could easily have avoided all this if they hadn't arbitrarily capped their offer at $800, a fairly low ceiling given the potential inconvenience for the travelers. We often hear libertarian pundits and freshwater economists arguing that we could take care of all of air travels problems with less regulation and more airports, but when an industry reaches the point where it avoids obvious market-based solutions, expecting that industry to be fixed by more market-based solutions is naïve bordering on delusional.

Markets can be exceptionally powerful and effective tools for aligning incentives and allocating resources, but they are not magic. The people who think that they are should be granted no more respect or attention then is given to people who believed in any other kind of magic.

The auto industry makes a useful point of comparison here. Relative to the airline industry, it is more responsive, innovative, and customer focused. This is because the conditions necessary for having a well functioning and efficient market are much better met.

We have vigorous international competition. True, this is slightly undercut by the way we license dealerships, but the overall result is still far better than the airlines could ever hope to achieve. Furthermore, there are few principal agent problems (unlike the case with business air travel). The pricing is more opaque than it should be, but nothing like the roulette wheel of buying an airline ticket.

And there is one other factor that is extremely important but which seldom gets mentioned: the car buying process is relatively unconstrained. There is usually a great deal of flexibility as to when and where you can buy a car. That ability to walk away shifts considerable power back to the consumer and makes for more informed and rational decisions.

None of this is meant to hold up the automobile industry as a model of perfect capitalism. There is a great deal of room for improvement, but at least it makes sense to talk about automobiles in these econ 101 terms. Airlines aren't even close. With the possible exception of a handful of very large markets such as Los Angeles/Orange, you will never be able to get enough airlines, flights, and airports to achieve the necessary critical mass of options and competition. No one has proposed a level of expansion that would give most Americans a range of choices whenever and where ever they need to go, which means talk of market-based solutions is premature at best.


  1. Well said.

    And if you think the airline industry is ill-suited to developing real markets, wait until you start talking about health care!

  2. I agree with Clyde.

    I will also note that the use of force for economic advantage is the precise opposite of a market. Feudalism, at best, and likely banditry. Yves Smith has an article where she points out the flight wasn't overbooked -- putting crew on the plane isn't overbooking as they didn't have paid and confirmed seats. So force was used to break FAA regulations.

    Now let us consider another context where being a customer means being subject to police intervention if you don't follow orders. I can't think of one. Even medicine avoids that feature.

    Finally, we don't know if the $800 was cash or vouchers. And the next flight was 2 pm the next day, so inconvenience was high -- really a case to increase bids since it was the United supply chain that broke.

    What is amazing about this incident is how sympathetic the media has been to United Airlines in focusing on it as overbooking and not a failure of staff logistics being imposed on the customers.