Center for Business and Public Policy
at the University of Illinois, Urbana-Champaign

Airline travel used to be so expensive that is was considered a rare luxury. Now we fly all the time, and it seems to be cheap. Is it? Has the price really fallen so much for the same quality-adjusted product over time?

Mention airlines to a group of people, and the usual response is a collective groan, rolling of eyes or a chorus of “Do I ever have a horror story for you…” (At least in regard to North American airlines – I have heard people wax poetic about various East Asian carriers, mostly in comparison). So why is travelling such a pain these days, to the point where we consider an extraordinarily good flying experience to be one where we actually were able to get where we wanted, on time, with our luggage? One would think this should be a bare minimum – isn’t this the basic good that we’re buying?

After having 3 flights cancelled on me recently, only one of which was for weather reasons (I won’t even get into the seemingly arbitrary and often mysterious definition of what compromises a ‘weather delay’. ), I’m beginning to think that we’re actually purchasing something that was equivalent to the old standby tickets. Years ago, you could buy a guaranteed seat, or for cheaper you could buy a stand-by seat. It gave you the right to use an open seat on a flight, and if one couldn’t get on that plane, one tried with the next one. Usually you could be pretty sure to get where you were going within half a day of your first attempt. These tickets made sense when airlines were flying at 50% capacity, and before they adopted the ‘hub and spoke’ system, so there were actually direct flights from A to B. The whole standby thing got a lot iffier as soon as you were trying to link up 3 or more segments. This approach makes sense as a form of price discrimination, which you might expect in an industry with substantial fixed costs and relatively low marginal cost of letting one more person onto the airplane.

But compare that scenario to Thursday where my “guaranteed” flight was cancelled, and I, along with 100 of my new closets friends were on the standby list for the next three flights (I was number 72 – yeah for me!). These are over 100 people who have paid for a ticket on some other flight, and either had that flight cancelled, or missed it because of a late connection (in this case, they were not allowing people to go standby who were already booked on a later flight). Next to me in the crowd was a super platinum member who was not even allowed to get his name on the list, since the airline decided to cap it at about 105. This scene was repeated for the next flight which had already been oversold. In short, most of us ended up spending $100 for a hotel and cab, or spending even more for a one-way rental car, and arriving at least 12 hrs after scheduled. I admit I was particularly peeved since, on the same trip, on my way out, I had also had a cancelled flight, resulting in an 8 hr delay. Add in an overpriced airport meal and just for the one-way trip back, the real price of the plane ticket was at least $150 more than the initial purchase price, even without counting a value of time. Now multiply that by 100 stranded passengers for this one incident, and that’s a lot of economic surplus lost.

You might well be thinking that you have several stories that are far worse than mine – and I’m sure you’re right. My point isn’t only to whine (which, I admit, I’m finding cathartic ) but to think out loud about the appropriate price comparison, particularly pre and post deregulation. Many other people have noted that the old tickets used to be refundable and changeable, and argue that the appropriate comparison is full-priced tickets, which have actually gone up in price. (Consumer Reports quoted by Unbossed 2008). This argument does not even touch the added fees for things like baggage (Consumer Reports 2008)

I haven’t done research on deregulation of the airline industry, and there are a number of papers that argue its success (see Smith and Cox for an overview). My only point is that I would be interested to see a deregulation study that quality-weights the services provided. Mostly I just want to not get stuck in seat 34 E next time…