The Quants and the Airlines Versus the Public

Baggage fees are a small part of the misery of American air travel. There’s also connecting flights, which, to paraphrase the Nuremberg judgment, contain within themselves the accumulated evil of the whole. For if air travel were pleasant, who would mind changing planes and spending more time in the system?

Instead, the airlines make us pay to avoid the extra hours — giving airlines an incentive to make air travel less pleasant. But once in a while you can beat the system.

For a memorial service at short notice, I once had to fly with my 2-year-old daughter to New York (and throw away our return flight to Boston). The price of a nonstop, one-way flight from Phoenix, Arizona to Newark, New Jersey: $1200 (for two people).

But what if I flew slightly farther, allegedly changed planes in Newark, but just left the airport? So I went back to airline’s website and asked for a one-way flight to Manchester, New Hampshire. It was only $400 (for two people). Not only did the flight connect in Newark, but the Phoenix–Newark leg was the same flight that cost $1200 nonstop!

This trick works only in limited circumstances. You probably cannot check baggage: It would have looked suspicious to ask for our bags to be checked only to Newark. However, given the baggage fees, this restriction does little harm. The trick also will not improve a round-trip fare: If you don’t fly an intermediate segment, the airlines cancel your remaining segments.

Even so, it sometimes works, at least until an executive reads this post and directs the quants (the operations-research types) to invent new routes and fare rules that deny the public even this small victory.

The ready availability of quants illustrate how it is nonsense to claim that air travel — unlike, say, train travel — is unsubsidized. The quants squeezing the public learned their skills on the public’s dime: through government research grants to professors or directly through graduate scholarships. Graduate training, including operations research, is mostly funded by the public — as almost all science/engineering graduate scholarships are from the government (NSF,DoD, DARPA). There are very few science/engineering graduate students who pay their own tuition, and this is also the case in the private universities.

Furthermore, the public created and nurtured the airline industry through war contracts and by sending postal mail as airmail.

If the United States had taken the path of sensible countries, instead of spending $425 billion (in 2006 dollars) on the interstate highway system, which killed the railroads and brought us suburbs, exurbs, Home Depot, and Walmart, we could have invested in the rail system and still be sending intercity mail by train. First-class mail now takes at least 3 days to cross the continent. Even a slow, 60-mph train would take only two of those days. And, instead of lousy air travel we might have a decent train network.

The word “subsidy” is a term of propaganda. It is best translated as “a public investment that I dislike but see no other way to oppose.”


Nathan Grigg

The complexities of airfare pricing and the terrible experience of flying make a good story.

That quants receive their training "on public dime" is a gigantic stretch. It is true that they often attend public universities, which are partially funded by the public. But so do all professionals, so we can't count that as any kind of subsidy. Saying that the public funds science graduate study indirectly through research grants is not really true either. The graduate students are paid for doing research, and part of that payment is in the form of a tuition waiver. Most of the time--especially for the operations research/math students--there is not enough research money to cover all of the expenses, at which point the graduate students teach in exchange for tuition waiver, while continuing to do research without pay.)

persephone

That amount of monetary disparity is offensive!

What an egregious discrepancy. Glad you were able to get there for a more reasonable fare.

Luís Costa

Even with all these "scams" how many airlines go bust, are under chapter 11 or merge to try to survive?

James

"First-class mail now takes at least 3 days to cross the continent."

Mail? What's that, daddy?

Seriously, I can't even remember the last time I mailed something that wasn't to some branch of government (tax returns and estimated tax payments, mostly), and those could easily be done on-line if the government would just accept that we're not all Windows users out here. My personal communications cross the continent in seconds.

I'd also note that most of the "sensible" countries that invested in rail systems also have pretty decent equivalents to the interstate highway system.

dicey

Just as a word of warning, if you try this on a round-trip flight and you skip the second leg of your outbound trip, it will cancel your return trip.

J1

You have to do the outbound and return legs on different airlines.

The Admiral

Airlines have revenue avoidance departments that look for people who do this. They claim it is not the contract of carriage and have sued people. In particular, if you are a frequent flyer with the airline, they will cancel your mileage balance. Word to the wise.

Andrew B

People hate the airlines and all their hassles and pricing schemes but in their defense they are almost "subsidizing us" as overall over the years they have not had a good investment return so their shareholders are the real losers. If they made a great return us flyers would have more reason to complain. Plus considering inflation, and especially the rise in the cost of fuel, tickets are low priced compared to earlier times. I bet the cost of a subway ride and the cost of cars have risen much faster, but I am just guessing. (and I neither work for an airline nor have any investments in them)

J1

They also seem to hate airlines charging what the market will bear for a given itinerary.

Bobloblaw

No highways and trains everywhere. No Walmart either. Sounds like liberal utopia.

James

Having lived in a country with decent train service, I have to say that I appreciated it, even though I'm not a liberal. Nor did I ever think of Switzerland as a liberal utopia :-)

Bryan

Oh, the airlines have you coming and going and they've figured out every trick you have so they don't get gamed. If you fly for business (through a corporate account) and book yourself a series of one way tickets just like you described, the airline will come back and charge you the higher price for the shorter distance. Imagine how that feels, to save your department $800 only to have the airline bill you after the fact.

I am convinced there is an eighth circle of hell...

Asterion

As an airline quant-in-training at a major university (funded by the private sector, mind you), this is perhaps the strangest argument against airline pricing I've ever heard (and I've heard them all).

You needed to fly to a certain place (which just happened to between the hubs of two major airlines, United and US Air, which both likely hold a good deal of market power on the PHX-EWR route) on a certain day on short notice--this is the very definition of inelastic demand, and the price you were quoted reflected this. Price differentiation might upset the public and makes for good fodder for blogs, but it's nothing more than good economics. Without it, the airlines would likely never be profitable.

Mike

I learned my skills on the public dime? First of all it is earned by hard work and study. Secondly, if you added up all the taxes I have paid in my 40+ years of working, I would say I have paid whatever subsidy you say I received back with interest. Oh, and I do have a few years of private school mixed in there for good measure.

Marcial

I am appalled at the lack of sound reasoning the author makes in this blog post. It appears that this post was written out of anger (rather than sound economics) about the increased fare the author had to pay to change his last minute plans.

In the presented example, the non-stop flight from PHX (Phoenix) to EWR (Newark) costs $1200 versus PHX to MHT (Manchester, NH) for only $400. Perhaps the airline believes there exists higher demand (at a higher price point) for non-stop travel from PHX to EWR than for connecting flights from PHX to EWR to MHT.

There is absolutely no reason that the non-stop from PHX to EWR should cost LESS than the connecting flight from PHX (thru EWR) to MHT. Airline seats are NOT priced on a “cost-plus” basis. If you choose to fly PHX (thru EWR) to MHT and then get off the plane in EWR, why shouldn’t the airline send you a bill for the difference between the fares at the time of purchase ($800 in this example)?

To make this example a little bit more concrete, let’s take a look at the following scenario. Since the author appears to like trains (a lot), then let’s take a look at a hypothetical train example. Suppose a train ran from PHX to EWR and continued to MHT. The train has a total of 100 seats and travels only once a day. Suppose you have two elasticity curves, one for the PHX-EWR market and one for the PHX-MHT market. Let’s make the PHX-EWR market an inelastic curve (line) from $1200 for a quantity up to 50 and drop to 0. For the PHX-MHT, we will also have an elastic curve (line), but this time at $400 for a quantity up to 50. (If at this point you are saying: “You’re just making the numbers work out in your favor”, then you are correct, however, I challenge you to come up with a counter example given the rest of my example). Now, if you’re the airline, I mean train operator, you can offer all your tickets at $400 and lose out on $40,000 of consumer surplus (50 x $800). (If this train operator, like all domestic airlines, is un-subsidized corporation, then it cannot leave this surplus on the table and thus should charge the full $1200 to capture the willingness-to-pay of the PHX-EWR segment.

Like the author mentions, there are certain fences the airlines can use to keep the PHX-EWR passengers from purchasing the PHX-MHT fare and getting off at EWR. It is these fences that allow the airline to capture the true elasticity curve (and thus consumer surplus) of the respective population accurately. Circumventing these fences merely amounts to shifting the difference between the $1200 and $400 fares between the firm and the consumer. (And if you believe this should be shifted in the consumers favor, then I challenge your belief in a capitalistic society).

After this point, the remainder of the author’s blog-post appears to digress from the main topic and thus I will conclude here.

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Alan

So I guess you think that the Quants that work for railroads and interstate didn't go to any public school?? That "subsidy" should cancel out I would think. If you want to call it that all industries that hire grads benefit.

Cory

" And, instead of lousy air travel we might have a decent train network." Could you specify decent? Even the "high speed" system under consideration in California (800 miles for ~$70B) will get you average speeds of 150-175 mph. You think that you'd get a decent national network for your $425B? Do you want to be going Phoenix to Newark in 2 days? or 5 hours?

It sounds like you would have been more at home in the 1880s.

Eric M. Jones

It surprises me that the airlines let Homeland Security ride roughshod over them regarding the treatment of passengers. It is as if they have no power to influence this fascistic governmental farce. When I fly...which is infrequently, I am amazed at people behaving like sheep.

Why is it that you don't get subjected to this if you own your own airplane? Any corporate jet owner or private pilot could cause great mayhem.

How is it that the airline companies have so little power? If truckers had to submit to such shenanigans, there'd be a strike until it was fixed.

Joe D

My office's admin assistant once booked me on a flight from Kalamazoo to Dallas, connecting through Detroit. I lived halfway between Kalamazoo and Detroit (she thought I lived closer to K'zoo than I did)! If I took *exactly* the same flight from DTW to DFW, skipping the KZO-DTW leg, I could sleep in an extra 90 minutes (and get home that much earlier on the return) *and* save the airline the round-trip fuel on the short leg for my body. It would have cost me an extra $700 for the privilege of saving them money.

Speed

Mahajan wrote, "Instead, the airlines make us pay to avoid the extra hours — giving airlines an incentive to make air travel less pleasant."

Mahajan didn't write, "Customers have an incentive to give their business to airlines that make travel more pleasant. Sometimes they are even willing to pay a little more for upgraded service or accomodations ... "

Mahajan wrote, "Even so, it sometimes works, at least until an executive reads this post and directs the quants (the operations-research types) to invent new routes and fare rules that deny the public even this small victory."

Mahajan didn't write, "This technique has been available to customers for two decades or more and neither executives nor quants have seen the need to 'invent new routes and fare rules to deny the public even this small victory.'"

In fact, the last two decades have been notable victories for the customer as airlines and third parties have made routes and fares more transparent giving anyone with even the least interest in saving money the tools necessary to make rational decisions with little effort. In those same two decades, Southwest and JetBlue have been successful by providing terrific and competitive and economical travel products notable for their reasonable pricing and rational routing -- their routes fly from where people are to where they want to go rather than from where they are to a hub and then to their ultimate destination.

And finally, Mahajan didn't write that airlines make non-stop flights available on a seasonal basis as demand (a good economic term) requires. A "season" may be long like winter or summer or just a few weeks like Christmas. Powerful computers (you've heard of those?) make it easier to reschedule equipment and personnel to balance supply with demand.

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