Economics tutors should thank United Airlines. The hapless company has furnished them with a perfectly intuitive case study in the power of financial incentives.
Was the right answer to a lack of volunteers to be bumped from the overcapacity Chicago to Louisville flight last week to select one at random and then drag the unfortunate victim kicking and screaming from his seat when he refused to accept?
Or was it, as many have suggested, to increase the compensation offer until someone willingly came forward? The sharp fall in the share price of United’s parent company following the avalanche of bad publicity generated by the brutal treatment of Dr David Dao (captured on other passengers’ smart phones) provides a clear answer. Talk about a false economy.
United’s gross misjudgement on this occasion seems to have been the fruit of a bad general policy. As the Wall Street Journal has pointed out, other US airlines with higher overbooking rates have fewer “involuntary removals” than United. Why? It seems the answer is that they offer more generous incentives to encourage passengers to volunteer to be bumped. Volunteers receive gift cards rather than travel vouchers with the same airline. They may have the same nominal value but passengers, naturally, prefer the greater choice that comes with gift cards.
But there’s still something of an economic mystery lingering in the background. How, it’s been asked, could an airline ever be so out of touch as to consider treating one of its passengers like United treated Mr Dao, even before the heavies of the Chicago airport police were summoned?
And how could the company’s chief executive, Oscar Munoz, have been so catastrophically cloth-eared as to (at least initially) defend the removal and even blame Dao for not vacating his seat with good grace? Doesn’t United grasp that treating its customers well is the very reason it exists?
Well, only up to a point. Economics tutors might also consider a lesson in the economic incentives of the airline as well as of the passengers. Airlines make surprisingly little money from the regular passengers who fill the back of their planes. Around two-thirds of their revenue is estimated to come from a minority of business and first-class customers, with their flatbeds, generous legroom and other perks.
On short-haul flights there are also vanishingly small profit margins per passenger. This is the fundamental reason for the famously unsentimental treatment of passengers by the likes of Ryanair. Such budget carriers also make much fatter margins from selling expensive snacks on the flight, which is the reason why stewards are often more engrossed in their trolley-rolling duties than ensuring the comfort of passengers.
Intense competition is forcing more prestigious carriers in the same direction. British Airways has provoked outrage with its decision to cut complimentary meals on short-haul flights and to sell Marks & Spencer sandwiches instead. It may even do the same for long-haul soon.
But it’s hardly surprising that the customer experience of non-premium passengers is neglected given they are so unprofitable. Indeed, given the imperative of ensuring that the premium experience is seen as premium (and therefore decent value) to the well-off, airlines have an incentive to make economy seem like a relatively unpleasant way to travel (although this may not quite extend to beating up economy customers like Dr Dao).
Airlines, when it comes to the lower end of the market, compete on price rather than service nowadays. Most of us don’t fly frequently enough for customer loyalty to be a major concern for airline management (although, again, United might be testing that proposition).
It’s not all bad news. Since deregulation in the 1980s and the advent of internet booking airline consumers have benefited enormously in many ways. Prices have tumbled in real terms and the number of routes has risen. But the regular customer experience has, for most of us, gone in the opposite direction.
The problem is that we labour under a cognitive dissonance, retaining a mental image of air travel as something for which one might wear a suit and tie and be served a three-course meal. But today flying is more like travelling by cross-country bus rather than stepping onto the deck of a luxury cruise ship. Or, if it’s a cruise ship, most of us are locked in steerage. The image of Dao being dragged down the aisle of a United Airlines plane may finally start to align public perceptions with that reality.Reuse content