In the standard price-quality model, suppliers internalize the gains from higher product quality — in this case greater flight safety — through their ability to charge a higher price. When the alternatives are "fly" vs. "no fly," however, enough days of "no fly" mean the end of the firm. That causes the airline to favor flight resumption before it is socially optimal to do so. The safer outcome — not flying — doesn't involve higher revenue, as it often does, such as when the roller coaster manufacturer puts in seat belts to assuage nervous parents and thus boost demand.
The "no-ash-generated-crash" outcome probably involves higher reputational benefits for the industry as a whole than for any individual firm.
On the other side of the ledger, I suspect the regulators won't let the airlines charge market-clearing prices for the first week of resumed flights (so far, airlines are telling people that the next week of flights is reserved for stranded customers). That makes the airline insufficiently willing to resume flights, from a social point of view.
I believe that the first effect predominates here, but that is an intuitive judgment, not based on hard evidence.
Now you should also analyse the incentives for the regulators…
Or it is all a bunch of hooey and the real place to analyze is regulators and their upside down risk assessment.
Bill,
There are actually a fair number of unknowns as far as this is concerned. Anyway, flying airplanes through is really the way to test for safety; several airlines have flown empty planes through it for just that reason – none have found any problems with their engines. However, some NATO planes did apparently have some problems.
Market-clearing prices? Nasty regulators? What are you talking about?
The stranded passengers have these things called “tickets.” A ticket is a contract between the airline and the passenger. How is it suddenly not socially optimal to require the airlines to honor their contracts?
What is interesting about this post is that it separates those who are economists from those who are engaged in long term marketing and consumer psychology.
Let me explain.
The economist says: hey, capacity is scarce after the event, let’s have some market clearing prices, ie, let’s raise prices to ration the bottleneck. (I assume you do not raise prices to those who already purchased a ticket to get in the front of the line, but if you do, be prepared for blowback–first in, first out should be the rule.) Now, let’s say that while there are still stranded passengers who purchased tickets earlier, the airlines announce: we have some spaces for persons willing to pay more–super premium prices. If the super premium folks bump the persons waiting in line, be prepared for a fight at the airline terminal.
Sort of like if Wal-Mart were to raise ice and water prices just after a hurricane. Wal-Mart has long term reputational interests.
Now, how might an airline avoid the problem: announce that the backed up persons get to use the regularly scheduled flights under the first come, first served rule, BUT for newly specially scheduled flights–which is to say, new capacity added after the airport opens–there will be a premium for these flights. Ta da, two price market.
Now, this still carries the risk of perception of exploitation and fairness problems, like the ones encountered by Coke when it tried to raise prices at vending machines depending on the temperature. But, not as much, because the additional flights might be viewed as a new product.
The airlines could be sneakier, however, and capture the extra revenue by simply leasing access to its slots to another airline at a higher price. Let the other airline charge the higher price, so long as you get the revenue from a super premium slotting allowance. You do not even have to bring in your own capacity if you can sell or lease access rights.
The difference between an economist and someone who deals with real world marketing problems is a concern about reputation. You can have your cake and eat it too without reputational consequences.
The social optimality arguments irrationally give a higher emphasis to the immediate and concentrated risk of a crash if a “fly” decision is taken.
But what about the creeping, low-visibility, social damages of a excessively long “no-fly” decision?
e.g.
* military casualties are being medivaced all the way to the US instead of more optimal Germany
* the poor Kenyan flower laborer who loses his days of earning
* labor productivity losses due to stranded people
“That causes the airline to favor flight resumption before it is socially optimal to do so. ”
Wouldn’t the social optimality depend on the willingness of the passangers to take the risk?
I don’t know if I really buy the comment in the post: “I suspect the regulators won’t let the airlines charge market-clearing prices for the first week of resumed flights” because I doubt they have the authority to impose a price cap. Now, maybe Sen. Schumer would have something to say, and there would be publicity. I doubt a likely regulatory pricing constraint, however.
But, the regulator is doing something that may be more subtle, and even desired by the airlines: serving as a focal consensus point for start times.
Think of it this way: would you want to buy a ticket from the airline that went first? Why did the other folks hold back and not go? Are they more concerned for my safety?
No problem when you have the regulator who takes in the views of the regulated as to start time and makes the simple announcement (which may be the consensus of the airlines).
I think it intersting that we think of regulation as constraining the desired outcome of market participants. That might be the case if the airlines were competing to go first, and to be known as the first mover, but there is a cost of being the one who is willing to take the risk to reputation of going first. Better: a regulatory focal point.
“BUT for newly specially scheduled flights–which is to say, new capacity added after the airport opens–there will be a premium for these flights.”
There are a number of factors which might make this difficult for the carriers to pull off on short notice. At large airports, they may be unable to obtain the necessary gate space or take-off/landing slots. There are limits on the number of hours per day and week that the pilots and engineers can fly. There may be maintenance or other issues with trying to schedule a bunch of extra flights with only the existing fleet of planes.
Have I got a deal for you — not only do you get to pay a premium price, but you get to leave at 2:00 in the morning!
Anyway, flying airplanes through is really the way to test for safety; several airlines have flown empty planes through it for just that reason – none have found any problems with their engines. However, some NATO planes did apparently have some problems.
The usual failure rate for commercial aircraft in Western countries is about 1 in 2 million. A failure rate of 1 in 100,000 is considered very high. Given such a low failure rate, it is not plausible to do enough testing right now to guarantee a minimum standard of safety. Moreover, it appears in the case of that NATO plane that flying through an ash cloud is going to require intense and potentially expensive maintenance of the engines after each flight. Even if one flight doesn’t damage the engine, repeated flights may well.
What airlines _should_ perhaps do is let people who have bought a ticket auction their place to folks who are willing to pay more (and capture a fraction of the auction revenue). IIRC, this is standard practice already in case the plane is overbooked.
I think it depends on the aircraft and airline policy. But the major issue among all this must be passenger’s safety. Changes in terms of quality is required.
Gary Leff,
Lufthansa’s policy for anyone whose outbound flight was cancelled is that they can only book into the fare class originally purchased (or buy up to a higher fare class). And of course they aren’t releasing inventory into the inexpensive fare buckets. The result is that customers paying full fare get first dibs on flights.
Are you saying that if I buy a bargain coach ticket on Lufthansa and the flight is cancelled they can refuse to honor my ticket on a later flight by simply not making bargain seats available? I would have thought that I had as much claim on a seat as anyone else with a coach ticket on the cancelled flight. Guess not, but it sure doesn’t sound reasonable.
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