15 Responses

  1. Gary Leff
    Gary Leff at |

    The people writing and talking about this don’t understand the difference between accounting fiction and profit, or even what a cost is.

    This is especially obvious when airfares are falling and fees are rising. Some of what was the fare is simply broken out. And the fees themselves aren’t pure profit, more checked baggage fees means more bags being carried on and a more cumbersome boarding process which imposes costs on the airline operation including in the most efficient use of aircraft which has revenue implications as well. I’m NOT suggesting that these completely offset, but talking about revenue without tradeoffs in this context is silly.

    And any discussion that doesn’t LEAD WITH the tax treatment of fees versus fare on domestic tickets misses the point completely (as does any politician who grandstands about fees without proposing to address the disparity in tax treatment!).

    Meanwhile a statement like “the airline does not always incur costs when offering some optional services, for example allowing a passenger to select a seat in a preferred location, such as a window seat or toward the front of a cabin” fails to understand that there are a limited number of forward and window seats, giving them to one passenger trades off with giving them to another, so there is an economic cost (tradeoff) even if there’s not a marginal cost (incremental cash out the door).

    So much sloppy thinking out there about airline fees!

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  2. andrew
    andrew at |

    This article is what happens when you get an economic illiterate writing about economics. Fees are not increases, they are unbundling and more efficient allocation of resources. On Southwest, the ‘Wandering Aramean’ travelling light pays for my heavy baggage. Many thanks, but why should you? I don’t expect to pay for your driving lessons through a bundled lesson plan in new car prices.

    Seats with more legroom are preferred by me, more than by small Wanderering Arameans (mini-Arameans). Before seat location was unbundled I could not express that preference. Likewise, Basic Economy is a label where essentially everything unbundled is stripped from the fare. Judging from the success of Ryanair (largest airline by passenger numbers in Europe), basic economy is what most people prefer and we can expect it to grow quickly in the US.

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  3. andrew
    andrew at |

    “And this particular week has Ryanair cancelling thousands of flights because it screwed up crew scheduling so badly it doesn’t have pilots available to work.”
    Irrelevant. A diversion from what they have done to European airfares — for over 30 years.

    ” I’ve also paid enough attention to the conversations with MOL to know that even he admits Ryanair is suited to a very particular type of market and type of operation.”
    I should hope so! Focus. One reason they are financial successful, but irrelevant to this issue. Nonetheless, I have never met an airline that did not have a business model that applied to certain types of market, except for ones whose business model didn’t apply to any existing market (e.g. pre-deregulation airlines post 1978).

    “…Scott Kirby was honest enough to admit it was about raising fares, revenues and profits. ”
    He wants to. So does every airline. The point is, and this is where you don’t understand the economics, it is COMPETITION that prevents him from doing so. Indeed, the frustrating experience he cites is exactly competition in action.

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  4. Glenn
    Glenn at |

    Seth, I’m with you on this one. There is no evidence that the airlines lowered their base fees when they unbundled all of these fees. In fact, the evidence is to the contrary. Airlines suddenly became profitable as soon as they segregated fees and people (the market) accepted and paid them. It is supply and demand, but people should be under no illusion that airlines made their lives better (or cheaper) by coming up with all of these fees.

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  5. andrew
    andrew at |

    “There is no evidence that the airlines lowered their base fees (sic) when they unbundled all of these fees. ”
    Where have you looked?

    Reply
    1. Glenn
      Glenn at |

      You can simply look at the stock market price of the major airlines to correlate the change in financial performance due to fees. Take a look at the Government statistics on fees gathered by airlines as Seth cites, compared with their overall revenue. Fees amount to about a third of overall revenue.

      Reply
      1. andrew
        andrew at |

        And when you find that the stock of Southwest Airlines has done the best what do you conclude about your “fees hypothesis”?

        Reject it right?

        Reply
        1. Glenn
          Glenn at |

          You take a trend, not an outlier, to evaluate hypotheses. C’mon that’s basic academics. Suggest you own some airline stocks and take a look at a complete analysis.

          Reply
  6. ken
    ken at |

    Let me first disclose that I like your posts way more than Gary’s posts but in this argument, Gary is right. Your argument that airlines suffer no cost for unbundling is simply untrue but I am not also sure if the cost is large enough to justify the price, so on that front I agree with you. The margin is higher when the firms have more market power, which is the trend in airline industry these days.

    Also, Andrew is quite right about efficient allocation by unbundling. However, the point he is missing is probably price discrimination he mentions achieves efficiency at the cost of consumer surplus, which is probably why many people, including Seth (and me), are not happy about the unbundling. In Ryan air’s case, the price is low enough to justify unbundling because competitors have a high cost structure and charges higher prices, so reference point for consumers is different there. Andrew is also quite right about price being stable due to less competition. Mergers happened as US airlines started unbundling. So we won’t be able to tell the correlation Glenn mentions is due to mergers or due to unbundling. Logically speaking, less competition due to mergers probably increased the price but unbundling decreased the price a bit, so we won’t see much decrease due to unbundling. But I would be happy to see some empirics on this.

    Finally, I also agree with Seth about government tax and fees. I think fees are going out of control because it gets a differential treatment everywhere. It is economically rational for airlines to decrease the base fare and increase the fees/carrier imposed “taxes”. Government should fix this but of course the problem is that airlines have lobbying firms to protect them. Politicians usually do not work for average citizens unless it becomes a rage. Unfortunately, an average citizen does not travel enough to understand all of these and be affected by these to have a rage about it.

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