Scott Mayerowitz and David Koenig have a piece out on airline industry consolidation titled “Airlines carve US into markets dominated by 1 or 2 carriers.” The point is to suggest that airline mergers are driving up prices and reducing choice. I’m not sure that gives a fair read to the situation. At least to some extent though it seems like the conclusions flow from the way the piece is framed rather than clearly from the data.
Here’s the lede:
The wave of consolidation that swept the U.S. airline industry has markedly reduced competition at many of the nation’s major airports, and passengers appear to be paying the price in higher fares and fees, an Associated Press analysis has found.
Framing effects matter. Let’s take a look at the key pieces of evidence they offer.
At 40 of the 100 largest U.S. airports, a single airline controls a majority of the market, as measured by the number of seats for sale, up from 34 airports a decade earlier. At 93 of the top 100, one or two airlines control a majority of the seats, an increase from 78 airports, according to AP’s analysis of data from Diio, an airline-schedule tracking service.
… Overall, domestic fares climbed 5 percent over the past 10 years, after adjusting for inflation. And that doesn’t include the $25 checked bag fee and other add-on charges that many fliers now pay.
Framing effects matter.
- Most large US cities aren’t dominated by a single carrier.
- Despite consolidation, and the up until recently record high fuel prices, airlines have only managed to raise prices about half a percent a year.
- Indeed, inflation-adjusted airfares even including add-on feels are lower than they were 15 years ago — or any time prior to that.
Airfares inclusive of fees are lower than they were in 2000 (and any year prior). It also seems relevant that airfares are actually down this year.
This is therefore one of the best times in the near-100 year history of commercial aviation to fly.
The relevant issue here is: compared to what?
What should we expect to see? Should we have a domestic aviation market as brutal as India (where the government protects Air India from international competition and everyone else slugs it out domestically trying to survive long enough to be allowed to fly beyond the nation’s borders)? Or should we expect to see one as uncompetitive as France’s?
Would we expect to see the 50th largest aviation market bloodying itself with three or four instead of two competitors? And why don’t we think that two major carriers, in addition to flights from a third and fourth, comprise competition? Having two strong players in a market creates a critical mass that may be better for consumers than four or five weak players.
I’m not actually arguing that this is the best of times, on the contrary my point is that whether things are relatively good or bad depends on your point of comparison and your counterfactual.
And the reason this matters is because it becomes suggestive and supportive of (or at least used to support) a course of action.
- Do you rail and complain how much you hate the airlines, or that you wish the government would have pursued a policy that didn’t allow consolidation during a time of unprecedented losses (for some airlines, over half a billion dollars a quarter)?
- Or do you propose a simple change that US airlines hate but that could make a real difference?
If you do buy the premise of the piece, though, the simple approach is to lift foreign ownership restrictions on domestic airlines. If you want competition, you should shout from the roof tops that the government should allow it instead of protecting the big US airlines from new market entrants like Singapore Airlines and Ryanair.
At the very least it makes no sense to complain about a ‘lack of competition’ while at the same time supporting policies that block competition.
The cost of domestic US air travel which I’ve seen has increased a lot since 2000. “Airlines for America” lobbying group is just trying to convince people that the series of governmental waivers and favors granted the 3 major U.S. cartel kingpins hasn’t harmed consumers when it has. The evidence of the harm is even evident in what is going on with the US3 airline “loyalty” programs in the period since we’ve gone from a US6 to US3.
The Indian government protects Air India from international competition? Fortunately, not so well. Are you unaware of the fact that EK alone serves way more Indian airports with international flights than Air India serves with international flights?
The Indian aviation market is a rather brutal market, as it well should be given the commoditized nature of air passenger service.
Gary: doemstic carriers in France and Europe also compete against rail service. One can get from Paris to Lyon in about two hours. It’s faster than flying if you consider transit to/from the airport, security, etc.
And continental France is smaller than Texas. So the comparison of the U.S. to France is sort of bizarre.
Agree with the comment about France/Europe. Recently flew from Nice to Amsterdam for 50 Euros. And then even served a palatable sandwich and dessert.
And that was Air France…not the Spice jet equivalents who probably would have been even cheaper.
I think the key factor you ignore is the rail travel which is comfortable/fast and for a lot of journeys doesn’t cost anymore than air travel.
The cost of travel may have increased quite a bit over the last decade on some routes, due to less competition on those routes. For example, I remember traveling from Boston to Phoenix, AZ in 2007 for $205 and in 2011 for $280. I believe there’s no way I’ll ever see those prices again.
However, what matters is what happens to the overall market, not to the one or two routes that individuals like myself pay attention to. I believe those prices haven’t moved very much.
Gary I think you ought to disclose what, if any, compensation you receive from the industry for these pieces (whether direct or indirect- ie do you do any consulting work for carriers?), similar to how you do so with credit cards. It could be that you are just crazy, but readers deserve to know either way.
As for this post, look, I agree the Mayerowitz article is trash, but you are fighting bad analysis with equally bad analysis, and I think it is at least intuitively clear the Mayerowitz conclusion is the right one even if his arguments for it suck. There is far more to the cost of flying than just the fare/fees. If the price of wheat goes down, but I can’t make as much bread from it due to quality issues, the cost of wheat hasn’t really gone down for me, has it? Similarly all you have to do is open your eyes at an airport to see that the product delivered today is not the same as it was 10, 15 or 20 years ago. Is there anyone that doesn’t think commercial air travel is miserable these days? The government now fondles us on our way into the airport, steals things from our (by law unlocked) checked baggage and we have to arrive earlier at the airport for the privelage. Load factors at all time highs mean the boarding process is now a stress-filled nightmare with a race to the overhead bins (and for those that don’t win this fight, more time is wasted waiting for bags), and you can pretty much kiss the chances of having an empty seat next to you goodbye. Not to mention reduced capacity means route networks have little redundancy, so tiny disruptions can lead to massive delays, waiting in hot planes on tarmac, etc (when did you ever see a *systemwide* shutdown of UA due to a computer glitch before the merger?). Further still, declines in service (meals, etc), reductions in the value of FF programs (too many to list), and the use of more and more smaller, less comfortable aircraft have all cheapened the experience as well. Though they might not have express dollar values, these are all real costs, and are all born by the consumer. Enough to punch a hole right through any simple one-dimensional analysis of airfare price trends such as the one you laid out above.
Perhaps the only things that have improved over this period are premium cabin long haul products (and even that is a mixed bag on US carriers, with hard products up and soft products way down) and Internet on planes (I don’t exactly see travelers rejoicing over this). And interestingly I don’t see you analyzing fare trends for premium cabin travel; I suspect the data doesn’t help your argument any.
Chas,
Are you claiming that the average domestic coach product offering has materially changed in the last 20 years or so? For those who say that things have gotten worse in that time period, I disagree. They haven’t improved, don’t get me wrong, but they haven’t gotten worse either. The needle has barely budged. Sure, they don’t feed you like they used to, but then again, coach food in the last 20 years has always been considered to have been crap. Is the lack of crap actually a decline in service?
You have to keep the TSA out of this one, because that has nothing to do with the actual transportation involved. Same with the FF programs, TBH.
Gary,
You’re right that framing matters. These things are always framed in terms of the “consumer.” What I’d like to see is a much larger aggregate analysis that looks at the impacts of insolvent pension funds and bankrupt airlines on the economy.
When airlines go bk and shift their pension funds on to an insolvent PBGC, what are the effects? When airlines ditch contracts in BK, what are the effects?
The “consumer” and the “economy” are one and the same. The reality is that *somebody* pays the price. It’s just a matter of who and how.
@Chas $0.00
TO be clear not saying that the right counterfactual is 2000, just that it isn’t obviously 2004 or 2008 either. And not obvious that half a percent of real price growth over 10 years is a lot or a little. Regardless, barking up the wrong tree to complain about consolidation in the past and do something about it going forward(eliminate foreign ownership restrictions, i.e. make it legal to have competition here if what you want is competition)
@gary fair enough re: barking up the wrong tree, but that isn’t what you post was about. Just find it odd that you constantly rail against most of the issues I raised on their own, but yet quickly jump to carriers’ defense when these are cited as evidence of increased pricing power.
@Dan
Are you kidding? Food is last on the laundry list of things I laid out. You are nuts to think none of these have any economic value.
And the TSA is definitely in play – this is part of the experience (both directly and indirectly since taxes on your tickets actually fund the program). The fact that airlines have maintained pricing despite the imposition of both (i) draconian screening procedures that should theoretically reduce demand for air travel and all else equal and (ii) direct taxes on airfare is quite central to the analysis.
@Chas I think that we more or less get the airlines we deserve, or are at least willing to pay for — and frequent flyer devaluations are mostly the result of (1) needing to spend less money to fill plane, and (2) a government that has immunized programs against suit.
I actually do think lawsuits matter, but not over mergers or collusion. Experimental economics has done a lot to show that you need fewer market participants to get competitive conditions than traditionally thought. However, we can easily have more. Not much to be done now that the mergers have happened. But what we can do is stop outlawing competition, remove laws that keep out competitors.
@Gary
I think we agree on many points, just where those points take us that is different. In general I agree having big brother swoop in and break up the carriers is not the solution, but rather (however politically infeasible) reducing the complexity of regulations that make it impossible for any but the largest carriers to successfully operate (and this goes beyond just foreign ownership, cabotage, and the like, in my view). Where I don’t agree is the premise that taking this view necessitates defending the industry (read: large carriers).
At any rate, thanks for entertaining the discussion, I’m sure there will be more!
@Chas I’m doing the opposite of defending the industry, they hate the solution I recommend. What other rules would you change?