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Wednesday, July 23, 2008

Why Is Airline Service So Bad?

Chris Hayes wants to know why air travel is so lousy. A source inside the industry responds:

Why Airline Travel Sux: Big Air Responds!, by Christopher Hayes: So I’ve been on a bit of a jag about how awful flying is. I’ve flown four of the last eight weeks and every single return trip has had some very significant problems: three cancellations and one flight delayed long enough we would have missed our connection. What gives?

Megan McArdle made some good points on the general topic of complaints about air travel, which Matt added to here.

I decided to email my super secret source inside a major air carrier, and I’m pasting in his response below, which I found pretty fascinating. The subject of my email to him was “Why does flying suck so hard?” His response:

Actually, people have been asking me this question for the entirety of the ten years I have worked in this business. I think the best thing I can do is to basically give you the answer I gave ten years ago, and then take you through the ways in which that answer has changed (or, really, gained additional layers and nuance) as 1) the tech bubble burst, 2) 911 and aftermath 3) the current fuel crisis happened. First off, flying today *doesn't* suck so hard. There, I said it. Flying today, however, is often racked with numerous small frustrations and irritations, and on occasion is a complete pain in the ass. What is the difference?

Well, you are still getting pretty good value for your money -- in inflation adjusted dollars, fares are still unbelievably low... even with recent increases (more are coming). But over the past three decades, lower airfares have dramatically reshaped the quality and tenor of life in the United States -- from frequent trips to see family even though they may be far away, to commuter relationships, to college students being able to go to school further away from home but still come back for holidays. These are just a few examples -- I'm leaving aside growth in business travel, and the too-numerous-to-list ways in which exploding intercontinental air travel has transformed our world. Sure -- there's no more chateaubriand on flights from JFK to LAX. But getting from NY to LA is no longer only the province of the super rich. The Southwest Airlines slogan "You are now free to move about the country" has more than it's share of accuracy *and* meaning -- it's right-on, and it speaks to the dramatic democratization of air travel since deregulation. That's why President Carter signed it into law, and it has been a huge success. This success has come about, however, with a cost: complete and constant change in our industry. Mao called it "permanent revolution." Second -- four trips, four cancellations -- a bad run, no doubt. The last one -- DCA-AUS via CLT -- four legs total, leaving from and returning to the notoriously delay and weather-prone NE Corridor. Also, this trip was in the middle of the delay-prone summer season, when thunderstorms wreak havoc, and planes are full. When were your other three trips, where were you going, and what was your routing? You touched on one point -- full planes makes reaccom a headache. You're right, but the culprit isn't that schedules are smaller (not yet, really), it's that it's summer and everything is packed to the gills. This point is really, really hard to overstate: O'Hare Airport in Chicago has *worse* delays in the summer from thunderstorms than it does in winter from snow. Plus everything is full, so there's not a lot of recovery opportunity when you run late or cancel.

Let’s rewind to, oh 1999/2000—I’m new to the industry, and I’m joining at a good time. Things have been going pretty darn well in the industry for a while, so the airlines are relatively flush with cash, holding a pretty big portfolio of aircraft, and generally well-staffed. (Labor will always contend that last point, and there’s a lot to contend there—for the sake of this general argument, let’s assume that I’m right). Everything you fly makes money, so as you take new aircraft, you don’t exactly rush to retire your older planes—you have them already, even if they are old and gas-guzzling, demand is strong and gas is cheap. Everyone is growing.

Here’s the problem—if your airline is planned properly, you are already flying your best routes, and the stuff you are adding is, by definition, your most marginal capacity. Even more telling: those extra flights you add on at the beginning and end of the day, increasing your capacity but not requiring you to have any more aircraft on the property? The big costs are sunk already—all you need to do is cover your variable costs: some crew cost (although not much since you are already well staffed), gas, landing fees. That flying covers its incremental costs to the airline, but isn’t exactly gangbusters, and wouldn’t make sense if it had to justify buying an airplane to fly it. But everything is OK—it’s 1999 and demand is good, so you ratchet up the airline as much as you can.

Skip forward to fall 2000—the bubble bursts, demand starts to dry up. Not a whole hell of a lot, but just enough for all that marginal capacity to start to be awful for the industry. Capacity needs to decrease… but with gas being cheap, it’s not really in any one airline’s interest to cut back. It’s the classic “Tragedy of the Commons” problem. It’s in everyone’s interest for the industry to shrink, it’s in no one’s real interest to make the cuts.

At this point in the story, the DC Editor of The Nation sits up, bright eyed, and says “But if this is a “Tragedy of the Commons” problem, why doesn’t it make sense for the government to intervene?

1. Yep, gov’t regulation works for things like car emissions—but that’s not reversible at all, and the private sector needs to have its hand forced on that stuff. Throughout all the tumult of the early 00s in the industry, the vaporization of any one major network carrier would have solved all of the industry’s ills.

2. The health of any one airline is not in the national interest of the government, even though individual regions/states/cities may well be primarily dependent on the access provided by one carrier. If someone vaporized, there would be backfill—I promise you.

Now 9/11 hits, demand tanks, and the network airlines respond by aggressively parking their oldest fleets (less fuel effecient, and in many instances having three-man cockpits instead of two). Massive layoffs, and a truly psychotic couple of months until the “new normal” of demand is determined (I have anecdotes from this era that are outstanding and I’ll share them over a martini; inclusion here would destroy my anonymity in an already incestuous industry). In the meantime, the airlines (including my employer at the time) lobbied hard for federal bailouts to ensure that they survived, all the while hoping that a competitor would fall by the wayside and solve everyone’s problems. The industry whines, and DC responds with silly federal largesse that rivals that which Sen. Stevens brings back to AK, the criminal Archer Daniels Midland subsidies, and the sinfully wasteful Essential Air Service program.

The pain continues. UA, US, NW and DL all take a trip through the dry cleaners of Chap 11 bankruptcy. Major progress in streamlining cost structures is achieved at all four; but all four bankruptcies are not created equal by any means. Labor takes a pretty dramatic and painful haircut, but from pay rates and work rules that are completely unsustainable.

The overcapacity problem continues, with better and worse points. The bankrupt carriers are insulated from some of the financial pain of the capacity decisions; at one memorable point Continental issues a press release calling for the industry to shrink by another 6% or so, and follows it up the next day with a press release announcing capacity adds. Thanks, Gordo, for doing your part.

And. Then. Fuel. Prices. Start. To. Rise. Slowly at first… and then faster and faster. At one point, fuel expense eclipses labor expense for the industry. That’s huge… and it’s the solution to the problem (although the medicine is going to really burn going down).

Fuel costs are variable, so marginal flying doesn’t have the cover that it once does. You can’t limp along flying stuff that doesn’t work anymore, because the gas bill just makes you pull out the mechanical pencil and start cutting flights that can’t cover their variable costs, let alone overhead.

We are in late spring 2008, oil is sitting around $125 a barrel, and the industry has its come-to-Jesus moment—and starts announcing their capacity pulls for the fall. (Remember my earlier point about seasonality: a whole bunch of stuff makes sense June-August and then becomes useless in September, so if you’ve got the planes and the people on the property, you announce cancellations effective after Labor Day). The industry is poised to shrink about 16% overall: that’s (at least) one percentage point more than the industry contracted after 9/11. UA announces that after its fall layoffs, its overall staffing on the property will be the same as it was in 1980. Or, rephrased, the vaporization of all its deregulation growth. Ouch.

But the big lesson is that the major structural flaw of the industry (high fixed costs, low variable costs leading to every incentive to produce too much capacity) has been righted—alas, by pushing up the fuel price input.

So what’s going to happen? Fewer flights, higher fares, emptier planes (yeah, fares are going to drive down demand, not consolidate fullish flights onto each other), fewer air traffic delays. In short, the fuel price will accomplish just about everything that reregulation could hope to do. It’s exactly the same reasoning as why anyone concerned about climate change needs to see $5/gallon gas in the US and cheer, because it’s the only way to change consumer behavior. (Yes, it sucks that the working poor and working class folks who are car-dependent for employment are disproportionately hit by this. My dad is one of them—and now for the first time he’s cursing his big stupid 1997 Jeep Cherokee, which he does not need to negotiate the wilds of Nassau County. I digress.)

Less flying is going to make some huge differences in air traffic control, and that slack is going to make delays drop pretty dramatically across the US system. The FAA is working on some pretty important advances in air traffic management that it will be implementing over the next several years—also good news. The whole experience is about to change. For the better? Well… that depends. It’s almost guaranteed to be more pleasant, and it is guaranteed to be more expensive. The best thing the Federal government can do to help the situation? Ease off on the crazy deficit spending and get the budget in order so that the dollar starts to climb some against foreign currencies.

Domestic manufacturers would disagree pretty strenuously with this last point.

    Posted by on Wednesday, July 23, 2008 at 03:06 PM in Economics, Regulation | Permalink  TrackBack (1)  Comments (40)


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