The days when air travel was a glamorous experience have long since vanished. In a previous post, Surrender your dignity: a sceptic’s critique of airport security, I pointed out the indignities heaped on hapless passengers with the post 9/11 security measures. But that is not the whole story. We also have the rise of the low-cost airlines. No frills, no food, not even peanuts, no reserved seats, little legroom, surcharges if you fail to print out the boarding pass or your luggage is too heavy and the cabin has become like the Grand Bazaar of Istanbul. What went wrong? It’s nothing like these adverts from the 70s and 80s:
This intuition, however, is wrong. Today’s flights may lack full-service meals, but airline tickets are cheaper than ever if you adjust for inflation and costs. In the past airlines competed over the meals they offered; now they compete on price. Flying may not be as glamorous as it once was, but more people than ever are able to afford it. Today I am going to defend low-cost airlines.
It may be a cliché, but the saying “There ain’t no such thing as a free lunch” (TANSTAAFL) very much applies to the flying experience. TANSTAAFL is about the fact that even if something seems like it is free, there is always a cost, no matter how indirect or hidden. When you fly, you are paying for the ride on a plane. There are also the extras – food, luggage. None of this is free. Basically Airlines can deal with their customers in one of two ways:
- Charge people who use these services individually.
- Charge everyone, even those who don’t actually use the services.
Carrying baggage is a fascinating example of how the airline industry works. Carrying baggage on to a plane has costs. First of all, the plane is heavier, requiring more fuel. Then there are the time aspects. Customers who have a bag under their seat and a bag in the overhead locker will take longer to get off the plane than the ones who simply have a bag under their seat. What’s more they hold up the passengers who didn’t avail themselves of the overhead lockers. The difference may just be a matter of a few minutes, but the low-cost airlines have a business model based on fast turnaround times at gates. They need to fly more people more often. Passengers carrying bags slow the airlines down. When flights are on time, you avoid a lot of costs and logistical problems; there will be fewer missed connections and lost bags. The bottom line is lower ticket prices for the consumer. So when airline advertise that they carry bags for free, that is bullshit; nothing is free.
The dismal science provides an interesting framework for analysing consumer tastes. Economists talk about stated preferences vs. revealed preferences. The idea is there is often a discrepancy between what people say they want and what they actually choose. This concept is illustrated in this economics “joke”:
Two economists walked past a Porsche showroom. One of them pointed at a shiny car in the window and said, “I want that.” “Obviously not,” the other replied.
People will say they want one service, but when offered that service, opt for another. Consumers may say they want good service, but when faced with spending their own money, will tend to go for lower quality service at a lower price, rather higher quality service at a higher price. In a poll that came out this year budget Irish airline Ryanair came fourth in a poll of the most hated brands. However, last year it made a profit of €523m.
In America there is a similar scenario with Spirit and Virgin America. Spirit, which is the U.S.’s answer to Ryanair, is regularly voted the worst airline. Virgin has gone for a different business model. Virgin America’s model is quite the opposite. Inspired by flying’s golden age, they want to offer high-quality in-flight service. This does not come cheap and Virgin’s tickets are consequently more expensive. They will regularly top the customers’ “best airline” lists. It is obviously a wonderful business. There’s just one small problem until recently they have losing money hand over fist. In 2014 Virgin America did a bit better, reporting an $84 million profit excluding special items. What about the detested Spirit? It is the U.S. airline with the biggest profit-margins, showing huge growth in 2014.
Both models are valid if they can find a market. What we should not do is compare both services without looking at the price of each service. A BMW is better than a Picasso, but not everyone can afford or will want to spend the extra cash. Deregulation has become dirty word these days. But I would argue that the deregulation of the airline industry has been a great boon. Curiously, it began under Jimmy Carter, and the late Teddy Kennedy was one of its prime movers. Pan-Am is dead, Long Live Ryanair! (Until something better comes along.)