On Sun, Dec 28, 2014 at 2:16 PM, Charlie <[email protected]> wrote:
> If we may get away from the consumer perspective, isn't this development > a symptom of the polarization of incomes? A middle-income mass dominated > the market many years ago. As it splits, the airlines can narrow the > seats, selling more of them for more revenue even if at a slightly lower > price, and charge the upper tiers of the market for an extra bag, > snacks, etc. that the bottom must forego. > This is an interesting question and it seems rather more complex to me than what the analysis in this thread (and the New Yorker article headlining it) suggest. The thesis here is that the trends that we are seeing recently in airline pricing are directly related to macroeconomic trends in income inequality - especially at the very top of the income distribution. It seems to me that some of the evidence is consistent with this thesis, while some others are not. A few points. - It seems like we are seeing yet another reprise of that old age-old question in the airline industry: to what extent is air travel a commodity? Economy class passengers seem to treat air travel as more or less a pure commodity and in the past have shown themselves consistently unwilling to pay even marginally more for extra leg room etc. - What is the demography of flyers? In poor countries, air travel is still very much a luxury good and is mostly limited to the upper classes. In the US, this is certainly not true, but it is still the case that black people and the poor travel much less frequently by air compared to middle class white people. This group is far from powerless; indeed they are far more politically influential than the poor and the minorities. We saw this starkly during the Federal government shutdown last year: the impact on air travel was considered much more burdensome than, say, welfare cuts. - How would we expect rational profit maximizing airlines to respond to increasing income concentration at the top? We would expect them to focus increasingly on rich travelers (which they are). However, we would also expect increased product differentiation at the high-end. This, however, does not seem to be happening in practice. Airlines in fact seem to be homogenizing their high-end product - getting rid of first class in favor of an improved business class offering for instance. Is that because the truly rich do not even bother with commercial jets any more? If that's the case, what the airlines are responding to is not so much inquality of the 1$ vs the 99%, but rather inequality within the 99% which is a somewhat different thing. - It is also puzzling in this regard that airlines would bother with product differentiation at the low-end. Why bother, if the economy-class penny-pinchers do not have as much money as they used to? - Even if you do want to create product differentiation in the low-end, it would seem that the smarter thing to do is to create a more pricey baseline product with the option of opting out of reclining seats etc in exchange for a discount. Most people will choose not to degrade their experience for a few dollars. On the other hand, if you make your base product cheap and inferior and hope to convince people to upgrade, you face many hurdles. First of all there is the natural behavioral inertia of most people. Second, many travelers who fly for work are required by regulations to purchase the cheapest air fare available, and these travelers will generally not be able to get upgrades reimbursed by their employers etc. So this does not seem to make a lot of sense. - Is "first class" a superior product, or is it basically conspicuous consumption? The answer probably depends on the airline, and on whether the flight is a long-haul one where reclining seats really matter. Beyond a point though, it would seem that the most attractive things about "first class" is not the extra legroom or the comfortable seat, but the ability to skip lines and to generally display your privilege. -raghu.
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