Dr. Ashley Nunes is an academic at the Massachusetts Institute of Technology and Harvard University. Previously he lead research projects sponsored by the Department of Defense and the Department of Transportation. In this article he argues the bailout conditions for the US airlines should also include more transparency about how they price their services.
To say US airlines are struggling is putting it mildly. Coronavirus has crushed air travel demand, threatening both balance sheets and jobs. It’s true we’ve been here before. In the aftermath of the 9/11 attacks, public enthusiasm towards flying waned which culminated in heavy losses for the airlines. Back then, however, US airlines received just $15 billion in government aid to stay afloat. In a sign of how serious the current situation is, Washington has upped the ante to the tune of $50 billion.
Bailing out airlines is risky. Do nothing and the knock-on effects might drag down the economy. America’s economic might depends in large measure on having a vibrant aviation industry. But propping up private carriers at taxpayers’ expense naturally invites public ire. Americans may love to fly but we also love to complain about flying. Which explains why Washington wants consumer-friendly strings attached to any bailout package. The most relevant of these (for passengers at least) include the waiving of change fees, bag fees, and fees for really anything airline execs can think of (bland meals, flat pillows and more legroom come to mind).
It wasn’t always like this. During the golden age of air travel, service ruled the skies. Back then, the meals were (arguably) better, seats bigger and the aisles wider. Champagne flowed, meat-carving stations were the norm and, for good measure, airlines often threw in an onboard piano bar to keep passengers entertained (Frank Sinatra once made a showing). “You won’t believe you’re on an airplane”, declared one airline advertisement. You wouldn’t believe the prices either.
In the 50s and 60s, a round-trip coach ticket between New York and Los Angeles cost around $200. Adjusted for inflation, that’s nearly $1,600, almost four times more what you’d pay today. The sky-high prices of old are often chalked up to government regulation. Airlines were once considered a public utility which placed fare setting within Washington’s jurisdiction. And regulation, as free-market ethos dictates, stifles competition, raising prices.
Perhaps, but regulation — at least where airlines are concerned — also ensured that fares covered costs. In fact, Washington demanded it. When setting ticket prices, government officials explicitly considered the capital costs of running an airline and required that those costs be passed on to consumers (along with generous mark-up to benefit the carrier, of course). This meant there was little reason for airlines to squeeze passengers for more cash. The result? Few, if any, add-on fees.
But then along came deregulation. Legislation in 1978 stripped the federal government of its fare-setting authority, deferring pricing decisions to airlines. The upside was less regulation, higher competition and therefore lower fares. The downside was that lower fares made it harder for carriers to cover their costs (let alone turn a profit).
You don’t need a Harvard MBA to guess what happened next. If a business can’t balance its books, it will either go bust or find other ways to generate cash. And that’s exactly what unfolded. Some airlines crumbled while others turned to new revenue sources, specifically, add-on fees. So-called ‘a-la carte pricing’ - which entails billing flyers for something other than the actual airplane seat — was devised to keep airlines solvent.
I know what you’re thinking. Airlines have — more recently at least — made billions in profit. With cash in hand, carriers therefore have no reason to nickel and dime flyers. But that’s not quite the reality. Airlines have in recent years been profitable because they nickel and dime flyers. In 2018, American Airlines netted $1.9 billion in pre-tax profit. Its total earnings haul from baggage and change fees during the same time period? $2 billion.
This doesn’t mean we should be enthused about a-la carte pricing. I’m certainly not. Nor should we accept prices that are both unreasonable and disproportionate to the cost of services actually provided. A decade ago, the true cost of handling a bag was pegged at $9; that’s $11 today. How much do airlines currently charge? Between $30 and $200. Such behaviour should be called out for what it is: price gouging. But if that’s what’s needed to stay solvent in the free market, maybe the free market could use a not-so-invisible hand.
Which brings us to the airline bailout. The case for propping up carriers is admittedly strong. The industry drives over $1.7 trillion in economic activity and supports over 10 million jobs. It connects people, cultures and businesses in ways few (if any) alternatives can. This reality warrants recognition by taxpayers. But if we are going to foot the bailout bill, a little price transparency — courtesy of federal legislation — is in order.
I don’t need to know the intricacies of how airlines set fares. But I do want to know why ‘carrier-imposed fees’ often cost more than the actual ticket, why booking ‘free’ award tickets attracts hundreds of dollars in fees, and why fuel ‘surcharges’ persist despite oil prices being at record lows. I realise that fees may be integral to an airline’s survival and agree that airlines should be allowed to profit. However I also believe that prices set by airlines should bear some resemblance to the actual cost of operating the flight. And if they don’t, I want to know about that too.
In exchange, I would gladly forgo the champagne, the meat-carving station and the piano bar. Well that and, if possible, the $50 billion.
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