Is Richard Posner right about air travel and its problems?

by on April 24, 2008 at 11:31 am in Economics | Permalink

Who better to ask than Air Genius Gary Leff:?

…the usually sober, sometimes brilliant, and certainly prolific judge
and scholar offers up an unusually misguided rant on why he believes
“airline service is so bad” over at the Becker-Posner Blog

Here is Posner’s charge, which I might add calls for air travel reregulation.  Read Gary’s whole response.  I don’t, as they say, have a horse in this race (noting that Gary and I work together at GMU).  What I do know points to two major problems: badly run airports (rather than air travel deregulation per se) and too many flights clustered at peak hours.  That puts me closer to Gary’s analysis than Posner’s.  Congestion pricing and true markets for all airport services would solve many of the problems, in my view.

1 jorod April 24, 2008 at 12:13 pm

No new taxes please. Not all of us are wealthy economists. Part of the problem is that the Feds won’t allow anyone to build new airports. A new airport in Chicago has been held up held up for twenty years. That’s because the Democrats in Chicago wan’t control the new jobs. The are expanding Chicao O’Hare and Atlanta’s airpports. They will be obsolete the day after they are completed.

2 Andrew April 24, 2008 at 12:17 pm

I think it’s pretty obvious why air travel bites. It is just really difficult to make it good under the constraint of running the business how it currently operates.

Partly, air travel sucks because air travel sucks. You know it is going to suck, so it’s hard to pay up for something you don’t know will be an improvement. It’s regulated by government and by natural factors. The bottlenecks in the system force the same level of service on everyone at certain points. All airlines have to use the same security, airports, crappy coffee shops, etc. Maybe the in-flight is better, but I’ve never minded flying. I’ve always detested the parts on the ground. No amount of improvement by the airplane can make up for the pain on the ground. As a customer, I have no idea how to shop for quality, but I know how to shop for the best price.

Here is another case where studying success might be more fruitful than studying failure…NetJets.

After flying the corporate jet you understand what it is to approach ideality. When you pay for direct flights, you understand what is between common reality and ideality.

Standard commercial is like Greyhounds with wings.

3 Person April 24, 2008 at 12:25 pm

Why doesn’t anyone consider the possibility that the airlines are just
poorly run? In such a massive economy, surely the law of large numbers
guarantees that one industry will, by pure chance, contain a concentration
of poorly-managed companies? Once the management is patched up, we’ll be
back to competitive-like behavior.

4 Colin April 24, 2008 at 12:56 pm

“Why doesn’t anyone consider the possibility that the airlines are just
poorly run? In such a massive economy, surely the law of large numbers
guarantees that one industry will, by pure chance, contain a concentration of poorly-managed companies? Once the management is patched up, we’ll be back to competitive-like behavior.”

This is absurd. Airlines, by their hyper-competitive nature, are arguably LEAST likely to suffer from poor management as they would be quickly ousted.

5 Curunir April 24, 2008 at 1:18 pm

My favorite solution for the Chicago airport mess is this old gem , from the original Mayor Daley in 1969:

Closer to approval, however, is a $1 billion dike-protected jetport 35 ft. to 55 ft. below the water level of Lake Michigan and connected to the Loop by six miles of causeway, tunnel and bridge. Says Chicago’s Aviation Commissioner William Downes Jr.: “The main objection comes from the save-our-lakefront fraternity who don’t realize that an airport six miles out wouldn’t be visible from the shore except as a large shadow from high buildings.”

Maybe it’s a stupid, unworkable plan, I don’t really know, but it’s damn cool.

6 John Dewey April 24, 2008 at 1:37 pm

Rex Rhino: “Clearly all the airlines are poorly run. No one is going to argue with you there.”

I’ll argue with you on that point. Southwest Airlines has been profitable for 35 consucutive years. It consistently leads all the major carriers in on-time arrivals. Despite being the most unionized of all the major carriers, it offers the lowest prices and the friendliest service. And for now, at least until the merger of Delta and Northwest, it serves more customers on U.S. routes than anyone else.

7 John Dewey April 24, 2008 at 2:42 pm

Rex Rhino: “But how do poorly run airlines manage to survive, year after year?”

Perhaps the worst run airlines have not survived. Eastern, Pan Am, Braniff, People’s Express, and the original Midway Airlines have bitten the dust since deregulation. Other large carriers have disappeared after being acquired by stronger airlines, including the original Continental (acquired by Texas Air, which was renamed Continental), the original U.S. Airways (acquired by America West, whhich was renamed U.S. Airways), Republic (acquired by Northwest), and TWA (acquired by American).

Several airline brands should be eliminated in 2008, including Northwest, ATA, and Aloha.

Southwest, JetBlue, and Virgin America continue to take share from the other major carriers. So even if poorly-run airlines do not immediately go out of business, they are doing so gradually.

Rex Rhino: “Clearly there is something that is protecting these poorly run airlines, and if you don’t think it is the state, then who is it?”

I agree that federal government interevention in normal market functions delayed earlier consolidation. The post 9/1 loans to America West and U.S. Airways allowed them to survive when they should have died. Further, the federal government’s antitrust restrictions placed on the United-US Airways merger prevented the earlier elimination of the original US Airways.

8 Andrew April 24, 2008 at 3:08 pm

From the Becker Blog: “no intrinsic structural reason why the airline industry should be less profitable than the hotel industry.”

I’ll have to disagree with this, but the comparison analysis might give some clues. For one thing, the more people travel on airplanes, the more hotel rooms are needed. Also, there is brand identity with hotels. My in-laws prefer Hampton Inn. You know what you are going to get. Also, when something is profitable, it is easy to copy for the hotel. Easy for the competition, but also easy for the current leader to replicate. Variable costs are higher for hotels. If a room isn’t used, I doubt it gets the same cleaning service. If an airplane seat isn’t filled, that’s money lost. Worry about customer satisfaction tomorrow.

9 Andrew April 24, 2008 at 3:33 pm

From Posner: “for example, in general large planes would be taxed less heavily per passenger than small ones, because for a given number of passengers there are fewer big planes to clog the airways and runways than there would be small ones”

No, no, no! We need smaller airplanes and more direct routes. It is because we have big airplanes that the business is run for the convenience of the capital and not the customer. Air and ground is ubiquitous! We are nowhere near those being a bottleneck.

“Clearly there is something that is protecting these poorly run airlines, and if you don’t think it is the state, then who is it?”

Much as I love to jump on the state, I think what is protecting airlines is the nature of the business. It is really hard for competitors to absorb enough customers to put a company out of business. Noone can make a profit, but check out the on-time performance range from best to worst cited by John Dewey, a whopping 6%. Southwest is recognized as well run, but hardly domination on that quality indicator. So, they all just limp along.

I agree with John. They are going out of business gradually. Economics strikes me as similar to thermodynamics. They both describe equilibriums but not rates. Finance is maybe more like kinetics.

10 spencer April 24, 2008 at 3:52 pm

I just find it extremely amusing that Posner is all for free markets and letting the chips fall where they may until he happens to be on the losing side of the market results.

Once the market made him into one of the losers he sure changed his tune fast.

But we wouldn’t want to accuse him of being two-faced, would we?

11 Andrew April 24, 2008 at 3:58 pm

“I think you’re reading way too much into my single sentence.”

I don’t think so.

“If you mean nicer, but higher-priced air travel, I disagree, and the history of the airline industry backs me up. Airlines have tried to offer more services throughout the past three decades.”

But they can only change what happens once in the air. This is the part of air travel I like. What keeps me from flying is everything else, where everyone’s quality is basically the same.

12 John Dewey April 24, 2008 at 4:39 pm

“But they can only change what happens once in the air. This is the part of air travel I like. What keeps me from flying is everything else, where everyone’s quality is basically the same. ”

Not sure I understand what you mean by “everything else, where everyone’s quality is basically the same.”. Southwest Airlines reduced flight delays – and also aircraft taxi time delays, customer parking delays, and customer in-terminal delays – by using smaller airports. Even at larger airports such as St Louis, airlines such as Southwest have forced expansion of airport services. Other on the ground services controlled by airlines at most airports include baggage handling, check-in (especially automated check-in), gate design, and airport lounges. Airlines websites are another area where carriers differentiate themselves.

What do you mean by “everyone’s quality is basically the same”?

13 Andrew April 24, 2008 at 5:03 pm

Okay, I generalize. It’s my curse.

By “everything else, where everyone’s quality is basically the same.” I basically mean this. Take cars. They all have to drive on the same roads and have similar safety and performance features. However, a cursory glance at the Initial Quality Study indicator shows that there is a range of about 50 problems per 100 cars to over 600. That’s a factor of 12. Your chart shows a 7.3% difference in on-time arrivals. That doesn’t really move the needle. Now, I assume the differences for other quality indicators between airlines are somewhere in the range of the 7%. I don’t really notice marginally better quality when the overall quality is so bad. I don’t care much about airlines, and I don’t travel enough to want to think about it. They haven’t differentiated themselves to me.

14 Andrew April 24, 2008 at 6:30 pm

“subject to numerous factors outside the control of an airline”

This sums up my whole premise. Even an amazingly well-run company like Southwest can’t be an amazing business because its fundamentals are outside of its control. Nobody sits around the water cooler talking about how bad soft drinks are.

“Why? How do you make the leap…”

I don’t make a leap, I make an assumption. When I look at a 5 hour drive, and the time from point A to B to go by air is 5 hours, I am not thinking to myself, well, Southwest is ~10% better on-time arrival, so I can estimate I’ll be done travelling 10 minutes sooner. I’m thinking about that TSA patdown.

15 happyjuggler0 April 24, 2008 at 8:07 pm

I love (so to speak) Southwest Airlines. For many years now whenever I fly I try really hard to fly Southwest, and they keep getting better in my opinion. For example, their (relatively) new boarding system is an improvement from my point of view that allows me to sit in the bar longer than otherwise. 😮 None of the staff has ever been unprofessional towards me. Ever. The opposite is also a factor, they are also the friendliest flight crews out there, in the US anyway.

My advice for potential SWA passengers (in addition to packing a sandwich) is to simply avoid any flight that connects into Chicago. Midway isn’t as bad as O’hare, but the whole location seems a disaster waiting to happen. Most of my significant delayed planes have been there.

I’d love it if airlines were rated on more than just the 15 minutes late stat. How about 15 minutes, 30 minutes, and 1 hour or more late stats? I agree with John Dewey that SWA would shine even more compared to the competition if those stats were kept. Or perhaps they could give the mean average late time? Or both.

16 happyjuggler0 April 24, 2008 at 8:41 pm

Some quick stock price research from Google, with market caps in billions of US $:

Southwest 9.29
JetBlue 1.10
USAir 0.65
American 1.90
Delta 2.12
Northwest 1.86
United 1.83
Continental 1.74

Clearly one of them is much better managed than the others, even if it just had a bad quarter that barely made money.

17 jonm April 25, 2008 at 12:36 am

happyjuggler0, have a look at flightstats.com, or download from the BTS and do your own number-crunching. Or have a look at delaycast.

Bottom line is yes, the detailed information is there for those times when it does matter.

18 John Dewey April 25, 2008 at 6:14 am

Jake: “Southwest runs a good airline, but a gigantic chunk of their profits came from their commodities trading division. Now that they are paying the same rates for jet fuel as everyone else, they are hurting.”

It is true that Southwest’s recent profitability has been somewhat dependent on fuel hedges. But the reason they could purchase those hedges – and the other airlines could not – is the huge cash flow advantage they’ve realized over the past decade. Southwest is not as profitable as in years past, but fuel hedges still reduce their expenses. 70 percent of Southwest’s expected 2008 fuel consumption and 55 percent of 2009 consumption is hedged at $51 a barrel.

Even if they had no fuel hedges, Southwest would still enjoy considerable competitive advantage. Operations employee productivity is unmatched among all the large carriers. Though it is the most unionized of all U.S. carriers, its relations with its labor force remain extremely positive, due to an unswerving focus on respect for all employees. Unlike its hub-and-spoke competitors, Southwest is able to maximize utilization of its fixed assets through its legendary aircraft turn times. Southwest Airlines aircraft are simply in the air earning revenue for more hours of the day. Finally, now that Southwest is as large as any of its competitors and still growing, the airline enjoys the same economies of scale with vendors as any top tier airline.

The success of Southwest Airlines is much more than just smart fuel purchases. Everyone in the industry knows that.

19 james B. April 25, 2008 at 7:32 am

For a possible look into the future read James Fallow’s piece in this month’s Atlantic on DayJet

http://www.theatlantic.com/doc/200805/dayjet

20 John Dewey April 25, 2008 at 9:43 am

“How can you possibly compare the airline business to the hotel business? They are completely different models.”

I agree. Barriers to market entry for hotels are fairly low. For airlines, gate space is limited, and fortress hubs in most large cities are formidable economic disincentives.

“But they will often stay at a handful of hotels that struck a deal with the convention’s organizers. Therefore, you have tremendous competition for getting there, but limited competition once you arrive.”

Do you think those hotels compete fiercely to gain the convention deal in the first place? Not sure about everywhere else, but here in Dallas several large hotels were built around each of the convention locations.

“The increase in shipping brought on by the Internet and just-in-time industrial production means companies like Fed Ex need more flights.”

That’s true, but the impact may be limited to daytime traffic at FedEx and UPS hub cities. When I planned aircraft and package routing for FedEx – admittedly over a decade ago – we only added significant daytime congestion at Memphis, Indianapolis, Newark, and Oakland. Fort Worth’s Alliance airport is a Fedex hub, but that airport has no passenger traffic. Miami is also now a large Fedex sorting location, but I’m not familiar with how many aircraft move through there. A few other cities have daytime arrivals and departures, but only a couple of aircraft at each one. Fedex’s U.S. overnight package volume has grown modestly since I left the company, and that growth has been handled through expansion of those hubs I listed. The 2-day and 4-day products, plus the LTL freight segments, have added billions to FedEx’s revenues, but these require few flights.

USPS overnight packages add little congestion to airports, by the way. Those packages are moved on FedEx planes.

21 jiim April 25, 2008 at 10:26 am

Southwest is successful for the same reasons that Wal Mart is successful: nobody went broke catering to the frugal, the drunk, the morbidly obese, those with many children.

Yeah, sorry, I’m a snob. I miss Pan Am.

22 Andrew April 25, 2008 at 12:53 pm

“How can you possibly compare the airline business to the hotel business? They are completely different models.”

I guess you mean I must be contrasting them, then? Hey, I didn’t start it, the guy who wrote the blog post that this blog is in response to did.

From the Becker Blog: “no intrinsic structural reason why the airline industry should be less profitable than the hotel industry.”

23 Andrew April 25, 2008 at 1:03 pm

On the other hand, to differentiate yourself, maybe think along the lines of….

Mile High Airlines: What happens at 10,000 feet, stays at 10,000 feet.

24 John Dewey April 25, 2008 at 4:53 pm

happyjuggler: “Airlines in the US are little more than busses that you can’t get off of until you arrive at your destination”

True, but these “busses” travel 550 mph about 30,000 feet off the ground. They defy not only air resistance but also gravity. Just as automobiles were an order of magnitude faster than horses, airplanes are an order of magnitude faster than automobiles. But automobiles weren’t designed to intentionally lift off the ground. That’s the part that makes the task so complicated, and so expensive.

25 Andrew Blake October 18, 2010 at 12:29 pm

Most of the air travel problems he refers to appeared because the airports weren’t thought and built back in the days to cope with the amount of traffic today. The quickest solution but surely not the cheapest would be to build new airports, but that’s not going to happen any time soon…
Alaska fishing packages

Comments on this entry are closed.

Previous post:

Next post: