Seven Thoughts on the Airline Industry

Airline-experience

Here are seven assorted thoughts on one of my main side interests: the airline industry.

1. Free market needed. Imagine if Americans could only drive cars in America that were designed/made in America. Horrible! The Japanese are the best carmakers. Now imagine if Americans could only fly domestically on airlines run by Americans. Horrible! Yet that's what we have today. The single best way to improve the domestic U.S. flying experience would be to open up the market to competition and allow foreign carriers to service domestic routes. Here's my previous post on making the Open Skies Agreement truly global.

2. Three hour tarmac rule. The new three hour tarmac rule means the government can fine airlines that keep passengers on the tarmac for more than three hours. Generally, when it comes to these kinds of consumer protection laws, I would rather the market determine real need — let consumers vote with their dollars in favor of companies that offer certain protections. Apply this philosophy to airlines: if a certain airline felt consumers would value this "feature" (a guarantee that they would be able to access the gate area after three hours), they would offer it, and consumers would pay a premium for it. But this case is more complicated.

Let's review a typical flight delay situation. Before a plane departs, as passengers wait in the gate area, everybody's priorities are aligned: passengers and airlines want to get to the destination as quickly as possible. Remember, airlines lose money when flights are delayed or canceled. Before boarding, if the consumer wants to go to the bathroom, buy food, meander, or even choose not to board the flight, he can do so.

Once he boards the plane and the plane doors close, he becomes captive to the airline. He has no freedom until he's out at the gate area at his destination. As the plane readies for departure and taxis on the runway, passenger and airline priorities are still aligned: fly to destination as quickly as possible. Now suppose there's a delay on the runway. The plane has pushed back from the gate, but can't take off. The airlines at this point still want to get the plane off the ground as quickly as possible. Some passengers, however, no longer care about making it to their destination. After three stinkin' hours on a cramped plane, they want to stretch their legs, buy food, go to a full-size bathroom, etc. So their priorities have changed but they cannot act on them. This lack of freedom and the discomfort that can result (most recently a full night on a regional jet in Minnesota with no food and a broken bathroom) makes me reluctantly support the three hour tarmac rule.

3. Government subsidizing unprofitable routes. Someone who's keen on stimulating entrepreneurship in Chile told me, "We should lobby airlines to get them to start a San Francisco-Santiago non-stop flight." Make it easier for Silicon Valley folks to go to Chile. I replied, "If the route were profitable, it would already exist." He replied, "What kind of entrepreneur are you? Do you know how many things would never have been built if the attitude was, 'If it were good it would already exist'?"

The difference in the airline industry is that airlines can mine hoards of data around passenger traffic. For example, American Airlines can easily see how many of its passengers who leave SFO are bound for SCL (Santiago). I'm not sure but I presume it's also possible to see aggregated passenger traffic from other airlines. If the airlines saw a tremendous number of passengers departing San Francisco and connecting via Atlanta, Dallas, Los Angeles, or Miami (the four non-stop gateways) to Santiago, they would introduce the route.

By the way, I think this is an easy way for a government to increase possible entrepreneurship: subsidize airlines to service an unprofitable route to the Bay Area.

4. Environmentalists and runways. Efforts to protect the environment ought to be subjected to a cost-benefit test. It's not always easy to do this, of course. (How to calculate the benefit of a pristine national park or clean air?) Generally, I am pro-environment and pro-conservation. I love the outdoors. But I think the environmental movement has gone too far in their effort to protect endangered plants and animals around airports and limit carbon emissions from more planes. A third runway in Heathrow would allow an extra 140 million trips a year by 2050.

5. Why not use the regional airline model in the whole industry? For regional flights, a brand airline like Delta will outsource the operation of the aircraft to a regional carrier like SkyWest. The plane says Delta, the ticket is booked on Delta.com, and the pricing / scheduling is run by Delta. But another company operates the aircraft and hires/fires the ground and flight personnel. It seems bizarre that a single company handles front-end marketing, reservations, customer service, aircraft operation, ground operations, baggage, maintenance, etc. Delta outsources food service to Gate Gourmet, for example. Why doesn't it outsource other aspects of its overall operation?

6. Eight hour workday too long for pilots? I recently spoke with the head of a major pilots union who told me management is trying to force pilots to fly more than eight hours a day and that this constitutes a serious safety risk. The union is lobbying congress. Should lawmakers force airlines to cap pilot workdays at eight hours? How many hours do pilots actually spend flying? My understanding is that 98% of the time the plane runs on auto-pilot. We should let one of the two pilots nap during the flight. Then allow them to fly up to 10-12 hours a day — just like the rest of us — or simply let management and pilots negotiate a fair work day with corresponding compensation.

7. Consolidation such as Delta-Northwest and United-Continental is good for the airlines, bad for consumers (less competition = higher prices), but perhaps long-run good for price insensitive consumers inasmuch as these companies will be able to offer better service, joint facilities / lounges, etc.

15 Responses to Seven Thoughts on the Airline Industry

  1. On the eight hour day: what you need to do here is look at actual data on how pilot fatigue contributes to crashes. I’m quite sure the relevant safety authorities have such data. Without knowing the data, I don’t think it’s wise to be coming to any conclusions.

    On the regional airline model: the airline that has done the least of this in the US seems to be Southwest, who keep a lot of things under control that other airlines outsource or do collectively. (E.g., Southwest keeps much tighter control over their baggage handling, and as a result don’t interoperate with other carriers.) It’s perhaps telling that over the past few decades Southwest has outperformed the other airlines financially.

  2. Jay A says:

    I think there is another currently very interesting issue in the airline industry.

    Baggage fees and now (announced just this week) peak-demand surcharges. You could also throw in Ryanair’s bathroom charge or even charging for pillows and food.

    Thoughts:

    1. The media and popular sentiments (and Charles Schumer) suggests these are bad developments. But, under any market structure except a monopoly, these should ultimately increase consumer surplus over time. Airlines have just unbundled their service: in the past you had to pay for baggage service and food service and pillows whether you wanted it or not. Now, I can choose to save 25 bucks by packing a little more efficiently. But, most people see this as an extra charge rather than a discount. People don’t believe the competitive market can really work to bring down prices. They think the airlines have free reign to just keep jacking up prices.

    2. Why – as fuel prices rose in the last few years – did airlines not offer a DISCOUNT for not taking bags? Economically it is the same, but people perceive it MUCH differently. This seems to have been a huge PR blunder by all the airlines.

    3. The airlines must have figured something out however about the benefits of charges. The fuel surcharge made sense because it produced revenue and decreased costs. But now with the proposal of peak-demand charges I suspect there is an added advantage to having a charge on top of the price. After all, aren’t PRICES pretty good at rationing a service during peak demand? My guess – as with cell phone bills and a million other things – is that these charges can be hidden from at least some people. The airlines know that while the transparent prices (e.g. online – especially if Orbitz et al helpfully include this up front) will have to adjust to account for the peak-demand charge, they can still make a few bucks by exploiting some people’s lack of information.

  3. Jason says:

    I hope no professional pilots read your blog. They would have a fit over the naivety of #6.

    It is heavily documented (read anything about the Colgan Air crash) that the rest requirements for pilots are extremely byzantine and often abused. The problem is those hours of flying are spread out across the entire 24 hour spectrum, especially those pilots who aren’t high in seniority (and are also the least skilled). So the down time when they are supposed to be resting is spent trying to nap while commuting between different airports or trying to grab a couple hours of sleep in a pilot lounge where there are lots of disturbances. And study after study shows that without a consistent night’s sleep day after day, pilot fatigue begins to set in.

    As for the argument that planes just fly on auto-pilot, auto-pilot simply lets pilots divert their time and energy on other areas of concern like fuel management, weather, planning for emergencies, watching out for system faults, working with the air traffic control system, etc. The way you describe auto-pilot makes it sound like pilots are glorified bus drivers, when in actuality their jobs have a high workload and are very skill-dependent. There is a reason it takes years and tens of thousands of dollars to become qualified as an airline pilot.

    I highly recommend you read some pilot blogs to get a sense of the complexity of being a pilot:

    link to flightlevel390.blogspot.com

    link to alancockrell.blogspot.com

  4. Ben Casnocha says:

    To the first point, I agree that would be valuable. I haven’t seen objective data on that front. From the pilots’ perspective, they just want to work fewer hours and get paid the same, like anyone. From the company’s perspective, they want to get the most out of their employees, like any company. So I’d be skeptical of any safety claims from either group.

    Southwest is unique. Due to their size and scale their approach works. I’m focused more on the big boys. Also, it’s hard to tell how much their financial success has been due to smart fuel hedging versus anything else… I do think there are other good reasons for their success…

  5. Ben Casnocha says:

    “And study after study shows that without a consistent night’s sleep day after day, pilot fatigue begins to set in.” — What is “pilot fatigue”? You mean just fatigue? Millions of Americans struggle with sleep.

    “It is heavily documented (read anything about the Colgan Air crash) that the rest requirements for pilots are extremely byzantine and often abused.” — Where’s the best unbiased documentation of this? I would like to check it out…thanks.

  6. Ben Casnocha says:

    Totally agree re: #1. I am pro baggage fees insofar as it debundles the pricing structure overall.

  7. Wikipedia links to several interesting sources on pilot fatigue and its impact on crashes:

    link to en.wikipedia.org

  8. I was a “professional flight” major in college before switching to a general business degree. The book, Hard Landings, was required reading and I’ve actually re-read it several times since.

    Check it out on Amazon its a great book on the history of the airlines.

  9. Jason says:

    The difference between pilots and the millions of Americans who didn’t sleep the night before:

    1) When they show up to work tired/hungover/etc. they do not have 50-300 lives in their control,

    2) they are not operating a highly complex machine — so complex, in fact, you are trained to run down a checklist because a single mistake could be fatal,

    3) and they rarely work a job where the hours they work might put in a 3 hour shift at 4 am, a shift at 1 pm, and a shift at midnight — for a solid week (and the rest you are supposed to get is in between stints).

    Don’t get me wrong — I believe pilots can be serious prima donas. But the Colgan Air incident was a much bigger deal than people realize, and reflects a gaping hole in the regional airline industry that no one wants to admit to. While maybe the 8 hour restriction isn’t the best answer, there is a serious problem with pilots being put into circumstances where they do not get the amount of rest they need to perform their job safely.

    link to cnn.com

    link to gadling.com

  10. Interesting thoughts on pilot fatigue. The same conversation is happening on the military side of the house (specifically the C-17), but on a different scale.

    We currently have a 16-hour flight duty period that can be extended to 18 for two pilots and 24-hours for 3 pilots. Of course, by the time you add up the time that takes to wake up, eat, get to the airfield and similar tasks on the back half it often ends up being a 30-hour day.

    Stories of extreme fatigue are rampant and there’s a growing concern that it’s only a matter of time before a major mishap occurs.

    So, it’s hard for me to feel bad for the airline guys having 8-hour duty days, but I also understand it’s a slippery slope and when it comes to people’s lives I’d rather error on the side of safety. The optimal mix is probably somewhere between 8 and 16.

  11. Karl Sakas says:

    @Ben: I agree it makes sense to outsource non-mission-critical things like food service and marketing. But outsourcing maintenance (particularly to contractors that aren’t FAA-certified) seems to raise safety concerns.

    There’s a clear misalignment of incentives here. Mechanic unions want to keep work in-house, and airlines like that contractors can do it faster and cheaper, frequently by using overseas sites that may not use FAA-certified mechanics.

    A few articles, pro and con, from the past few years:
    link to nytimes.com
    link to washingtonpost.com
    link to amtonline.com
    link to sae.org

  12. In terms of government action and airlines, I’m more inclined to favor something like forced conversion to GPS rather than radar tech that would allow for many more planes to be in the air at once, and closer, than currently. This moves the goal posts in a more significant way, I think, than does subsidies here-and-there for specific interests.

    American Solutions has a decent video explaining the concept a bit further: link to youtube.com

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