Wednesday, July 19, 2017

Airline Ticketing and Skipped Legs

My wife is flying today, so I spent some time trying to understand the economic argument for the harm airlines say they incur when you skip a leg of a multi-part trip. And I can't see it.

First, the issue: sometimes it's cheaper to fly from, say, New York to London, by booking a ticket from New York to Manchester with a layover in London. Then, when you land in London, you get off the flight.

The airline says this is a Very Bad Thing, and they've sued entrepreneurs who create websites to help you exploit these pricing differences. But in what possible way are they harmed? The airline has been paid to move a seat from New York to Manchester, and so they have no argument that they receive harm. Once the resource has been paid for, it doesn't matter to the original owner what I then do with it. If it does, the first sale price needs adjustment.

Airlines say it's bad because they could have sold that seat to another customer. But that's a bogus argument, because they've already been paid for the seat. If they have unmet demand, they should raise the price of tickets, not complain about how the buyers make use of the product.

What if the airline is operating at its efficiency scale and this phantom demand for London-to-Manchester seats induces the airline to expand its flights on the route, thus operating with diseconomies of scale? Well, If they are on their short-run cost curve, in the long run they will switch to a lower-cost production method. If they are on their long-run cost curve, there is room in the industry for another firm to open. The inefficiency will clear, but it might do so through greater competition.

Is THIS the real problem the airlines don't like? I don't see how it's my responsibility as a consumer to help manufacturers maintain their market power.

One last possible argument is related to the experience I had in Bangkok, where my mangoes-and-sticky-rice provider had a menu listing whole plates and half plates, but when I tried to order a whole plate, they wouldn't sell one to me because there weren't enough mangoes. Economic theory says price is supposed to take care of this problem--it there aren't enough mangoes, raise the price and quantity demanded will decline. But they are unwilling to do this due to some combination of influences that can probably all be called menu costs: either actual costs of changing the menu prices, or the loss of consumers' good-will when the firm is perceived as taking advantage of poor people's love of mangoes and sticky rice.

So are airlines concerned about upset customers who get turned away from London-to-Manchester flights that still have empty seats, but the airlines are unwilling to raise the ticket price because of menu costs? It's true that many airlines find themselves in Bertrand competition these days, but they get around that by turning every possible flight-related activity into a fee. They can keep the price the same and charge a connection fee, or a missed connection fee (or, knowing airlines, both). And I just don't see loss of good-will governing that many airline decisions these days (I'm thinking of what the TV show 30 Rock said was United's slogan: "We hate this as much as you do"). And besides, airlines have the stand-by list to use to fill empty seats.

I have a hard time believing they are moving any empty seats anywhere unless there is not a ticketed passenger available to sit in it. And some of those seats are bringing in money from people who have skipped a leg. Airlines are upset because either, 1) a passenger got to London without paying as much as he otherwise would, or 2) robust demand will attract competition. Neither of these concerns is the passenger's responsibility to correct.

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