The one economic point that I haven't seen: the whole issue also comes down to airlines' use of personalized tickets to price discriminate. (And most of the TSA's job is to enforce that price discrimination by making sure you are the name on the ticket.) If you could resell tickets, the problem would go away. Then the airline must sell only as many tickets as there are seats on the plane, as concerts do. If people aren't going to show, they put their tickets on ebay -- or another quick peer to peer ticket trade platform -- and someone else buys them. Including the airline, if it wants to send employees around. Standby disappears -- want to get on the plane? Bid for a ticket. We still get efficiently full planes -- fuller, even -- nobody ever gets bumped, and the auction for the last seat is going on constantly.
Yes, one of the hardest lessons in economics is that price discrimination can be efficient. Business class cross subsidizes leisure and pays for fixed costs. But the airlines could speculate in their own tickets as well, so its' not clear in a data mining race that scalpers would reap the price discrimination profits better than the airlines themselves.
Holman Jenkins adds, in a brilliant column,
While we’re at it, what’s wrong with Chicago airport security? Did not a single officer say, “I’m having no part of this. If United can’t deal with its overbooking mistakes in a civilized, non-cheapskate way, how is it my job to manhandle innocent customers?” This also smacks of our national malaise—police who need an armored personnel carrier before they’ll roll up and serve a warrant, who wait outside Columbine High until they’re sure the shooting has stopped.And do not the other passengers rebel at seeing such treatment? Well, maybe not the first time, but I suspect the next time they try to drag a customer off an overbooked plane, there will be a riot.
Update: More at the always excellent Marginal Revolution. One negative reaction, already on display at United -- the crush to get on the plane first will increase.
Getting on United vs. Southwest is a study in bad incentives. Southwest: you get a number. People peacefully line up when called, and quickly get on the plane. Southwest also gives free (bundled in the ticket price) bags, so people aren't hauling trunkolads of junk for the overheads. United: Board by groups, and now everyone with a credit card is in group 1. They charge for bags. Midway through the scramble for overhead space, the bins fill up, then people have to start swimming upstream with their huge bags to gate check. If ever there was a way to make an airplane board slower, having people swimming against traffic with huge bags is it. The result, you line up like it's the New Delhi airport (or Southwest, circa 1995) and 100 million dollars of United plane plus crew sits on the ground. I do it too (I'm a rational consumer!) Quite a few times I have had someone show up with a boarding pass with my seat number in it, and being there first makes a big difference. Another fully rational response -- you really want to be a high mileage customer. The love/hate relationship with United will get deeper.
I like this analysis, and something tells me that the trading of airline seats is so far outside the competence of the flight operators that it will end up in the hands of the fare-comparison websites.
ReplyDeleteIf you allow resale, price discrimination would be cruder (enhancing efficiency less) since it would allow arbitrage across PD segments. For example, someone could buy advance tickets at low prices, & resell them later for less than the higher price charged closer to departure, which would constrain intertemporal PD.
ReplyDelete"do not the other passengers rebel"
ReplyDeleteWell, they did video the kerfuffle and post the videos. It was almost as effective.
Also:
" Business class cross subsidizes leisure and pays for fixed costs."
I am not sure that is price discrimination. At least on older single aisle planes there are 8 front cabin seats (2 rows of 4) in the space used by 18 main cabin seats (3 rows of 6). Only a price ratio in excess of 2.25 to 1, would be discriminatory.
Well written, as usual. I think the most push back you will get on a secondary market for airline tickets is the lack of transparency on who is flying (from airline miles to terror watch lists). No one is going to want to own the downside risk of letting a bad guy on a plane. Inserting more companies into the chain would be a trial lawyer's dream.
ReplyDeleteThere were 4 overbooked people who were asked to leave. 3 of them left without a fight. The fourth decided he was above the law. People obeying the law also would solve the problem.
ReplyDeleteThe "law," the "rules," or the "fine print"? I'd argue the later. And this is a paying customer whom the airline allowed to board the plane and take the seat he paid for. Sure, technically he was "supposed" to give up his seat, but clearly the airline acted even more ridiculous than he did. And the market has proven him right.
DeleteYep. Someone stood up for himself and his patients. And it had nothing to do with the law. Also, the flight was not overbooked. United added employees as passengers.
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ReplyDeleteNot after seeing what the "security" (is that an oxymoron?) did to the first poor Schlub.
Two counterpoints, one theoretical and one empirical
ReplyDeletehttp://pubsonline.informs.org/doi/abs/10.1287/mnsc.2016.2500
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1919807
Good post. But what's with the praise for the thoroughly confused MR post? Comparing the situation when you have bought paid for a ticket and sit on board a plane about to depart with the situation when you are witing in line to buy a concert ticket is relevant how, exactly? Embarrasing for Tyler.
ReplyDeletethe United Nazis did it to my wife a number of years back; threatened to handcuff her if she didn't get off (all the others in 1st class shouted at her "Don't get off!!" Turned out that they had mixed her ticket up with someone else. off she went... we have not flown United for more than 15 years, now, and life is better!!
ReplyDeleteCompounding the United overhead bin problem are the most evil of people who enter the plane and - regardless of their seat assignment - drop their bag in the first overhead bin they see. Now the people in rows 7-12 have to put their bags all the way in the back, walk back up, and the reverse upon arrival. I actually had a friend admit to me that he does this and didn't see anything wrong with it...
ReplyDeleteIf overhead bins were large enough that each passenger had a dedicated place for their bag, this could be solved. But it looks like they plan on about 60-67% of people putting bags up top.
Yes! This is about the most annoying habit in the world -- which flight attendants could easily police. It's especially hard on bulkheads, which can't use the floor. A southwest attendant policed the front few bins last time I was on -- Brava!
DeleteAirlines go about the auction all wrong. The issue is to find the passenger with the lowest reservation price for agreeing to take a later flight. Bill Vickrey solved this problem: have passengers submit (a simple app would work) written bids (without knowing the bid of the other passengers)to give up their seat. Here, the lowest bidder wins but the price paid is the second-lowest bid. If the airline can adjust for a smaller price, then it can reject all.
ReplyDeleteLaw recognizes the concept of an efficient breach; but, here, demand revealing would work better.
As an aside, the New Delhi airport is pretty nice these days and I have found the boarding process to be a lot more efficient than the US process :)
ReplyDeleteA rather bad idea here, to solve a non-problem. No ticketing and boarding system is going to be perfect to the point of eliminating double-bookings or over-booking, and in any case it is an extremely rare event...only about 0.01% of traveling passengers get bumped on their flights. A 0.01% error rate by the airlines is pretty good, even if it an be improved.
ReplyDeleteOverall this is a non story: prick on plane refuses multiple requests to leave, refuses law enforcement requests to leave...becomes national hero for being a prick.
I'm not sure the United case would be solved by not overbooking. I'm not sure this is about overbooking at all, though I haven't investigated thoroughly.
ReplyDeleteFrom what I can see, all of the passengers were boarded on the plane. Based on every flight I've ever taken this means they are ready to close the doors within the next couple minutes. Then 4 flight crew members apparently appeared at the gate and needed to get on the plane, thus bumping everybody.
So first, if United had booked exactly the number of seats on the plane, they would still be bumping people. So it's not overbooking.
Instead, it appears that AFTER the plane was fully boarded United decided they needed to send a crew. If 4 flight crew members showed up at the gate and bumped passengers, then I'll put the onus on United -- whoever assigned that crew could have called ahead while the crew was going to the gate (or do flight crews hang out in the gate area on the chance they need to fly someplace)? Any sort of advance notice could have allowed United to stop boarding, bump four passengers before they got on the plane, and put the crew on. Nobody dragged off the plane, a much calmer atmosphere.
Buy LUV!
ReplyDeleteProfessor Cochrane, I agree with many of your points to resolve this issue as well as your proposal to resell airline tickets. But, if the reseller market is implemented then what do you propose under contingencies such as if a flight is cancelled due to weather, terrorist threat/attack, and so on? Will the airlines be required to refund all tickets and then passengers will have to buy new tickets when flights are running again? What happens if you buy a ticket with a connection involved and your flight is delayed so you miss your connecting flight? Do you have to buy a new ticket and take a loss? Will the airline be responsible since your flight was delayed? Will special vouchers be issued so you can have a seat on the next available flight, but you will not be able to sell the voucher?
ReplyDeleteCould such unforeseen events cause ticket prices to spike and make travel prohibitive?
Could the airlines substantially raise their prices to accommodate everyone?
More questions concerning customers reselling their tickets:
- Will airlines still fly to smaller cities but at a higher price?
- Will airlines create secondary markets to sell/resell tickets?
- How will airlines handle special accommodations for food, special needs including infants and the elderly, and prevent tickets with special accommodations from being sold on the secondary market? What if someone with special needs buys a ticket on the secondary market and then demands special accommodations at a greater cost to the airlines then the cost of the ticket? Are the airlines on the hook or is it buyer beware and the person with special needs will be required to pay the difference? If an elderly person receives a senior discount on their ticket then can they resell it to a younger person at a higher price? Will airlines get rid of senior discounts?
- How will frequent flyer miles (FFM) be handled? Will the miles stay with the original purchaser? Will the FFMs travel with whomever is the final buyer of the ticket? What type of database system will be needed to track who owns/uses the tickets and who gets the FFMs?
On another note, more ideas (in addition to your ideas) to mitigate airline problems under the current system
Do not load the plane until employees who need to be on the plane are on the plane. Employees should be subject to at least the same time limits/constraints (be at the gate 30 minutes before the flight is scheduled to depart) as paying passengers.
If employees are flying for free and thus standby then they should not be able to bump paying passengers. If a paying passenger is bumped then the "free" ticket becomes a taxable benefit with the tax being based on the average price of the paying customers’ tickets.
Emphasize customer service. It seems that too many airline employees have forgotten customer service. At a minimum, airline employees should treat customers like customers. Encourage better customer service and training for all airline employees. Employees may have power under FAA rules but they need to learn they cannot abuse that power. With great power comes great responsibility to always do the kind, moral, and right/just thing.
BTW, this was a Republic Airlines flight. Republic is not owned by United. It only has a ticket share agreement with United, so technically the marketing and ticketing is done by United but the actual flight operations is Republic.
ReplyDeleteThis case is text-book of the incredible stupidity and hysteria of people. Jump to all sorts of idiotic conclusions based on a 30 second video without any details at all of what actually happened. Then everyone becomes an expert on how an airline needs to operate.
Jesus H F**ing Christ.
At first read, I thought that John's suggestion was a great one: treat plane tickets like concert tickets, allow free-trading and don't oversell. But there are two problems.
ReplyDeleteFirst, this would expose ticket buyers who subsequently decide to cancel to price risk, since there is no guarantee that the secondary market will provide the same price as the purchase cost; this could easily be seen as a "too bad" issue. Second, the reason we have overbooking is that the airlines sell refundable tickets. These are designed primarily for business travelers who, for example, don't know how long a meeting will last and therefore need options for return flights. These are last minute decisions and it is difficult to see how peer-to-peer auction sites can handle last-minute (literally, within minutes of boarding times) dumps of tickets.
Although John's resale of tickets can usefully grant options to certain ticket holders (although I do think that there are security concerns and pre-clearance issues), this cannot be a complete solution. Alternatives for a complete solution are:
- cease the sale of refundable tickets and don't overbook; or
- continue to sell refundable tickets, continue to overbook AND allow unlimited auctions at the gate to fully clear the market; or
- continue to sell refundable tickets and don't overbook, with the airline company taking the risk of last-minute cancellations and pricing this risk into the ticket.
A note: A Vickery auction has one problem here: each potential "buyer" of a delayed ticket has too little information about alternatives. Each needs to know what is their next flight to their destination and what is the total delay prior to making a bid. How to disseminate that information is the real key.
ReplyDeleteDr. Cochrane, I don't know if you've seen this blog but it provides an interesting read on the United story:
ReplyDeletehttp://viewfromthewing.boardingarea.com/2017/04/11/real-reason-man-dragged-off-united-flight-stop-happening/
For example, why didn't United just up the voucher price into the thousands until someone bit? Because of DoT regulations setting an upper price limit.
Except for the fact that allows more than United offered.
DeleteAl-Qaeda and ISIS would love ticket resale on Craig's list. Will never be allowed. Too dangerous.
ReplyDeleteI left these sorts of comments, in the spirit of "come on, now, you guys can figure this out for yourself, can't you?" but apparently not. Let's make it a problem set -- how can you design a ticket resale system that does not cause security problems? It's not hard. Before crossing security, of course, it's no different than now. If you want to cancel your trip, you sell your seat, and the person buying it goes through security. You do this on the airline website anyway. If you want to participate in a last minute auction, you can sign up on the airline website just as now. It's just like changing a ticket and going standby. People with checked bags are handled just as now. It's all just as now, really, just without the financial penalties.
DeleteSecurity currently requires that the name on your boarding pass, which is the name on your ticket, is exactly the same as the name on your photo ID. I think that a third-party broker like Craig's List will have a hard time dealing with getting the right name on the ticket/boarding pass, and I do not foresee airlines cooperating with it or Homeland Security ever allowing it.
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