United’s Fiasco and the Cult of Low Prices

Airlines' emphasis on thrift above all else is permitted by regulators, supported by Wall Street, and not exactly discouraged by consumers.

The video of a United passenger getting dragged off a Louisville-bound plane in Chicago on Sunday has dominated news and social media for the past two days, with outrage spanning the United States, Europe, and even China, where it was the top trending topic on the social-media platform Weibo. Beyond the sheer shock of the video, the event has sparked a debate over who or what is responsible for the fiasco, with blame falling on several physical and abstract culprits, including:

1. The security officer (now on leave) who could be seen lifting the passenger, an elderly Asian doctor, out of his seat and smashing his head into the armrest across the aisle, before dragging his body through coach

2. The passenger, who refused to comply with security officers, which can tempt violence even if one has done nothing wrong

3. United employees, for letting the situation escalate, even though they seem to have followed company protocol to the letter

4. United operations, which booked and boarded passengers in seats the company needed to transport employees to Louisville to fly the following day

5. United booking policy, which leaves the company room to book flights at or over capacity to decrease the odds of taking off with an empty seat, allowing them to profitably reduce ticket prices

6. U.S. regulatory policy, which, by allowing airlines to consolidate, has hurt consumer choice, reduced the carriers’ incentives to provide quality service, and protected their right to deny boarding to paying customers, even if they reject compensation

I’ve read several different theories for how to apportion the blame between these entities. Personally, I sympathize with the passenger for making a fit; have pity for the United employees at the gate; think the security officers behaved like brutes; and consider bad service a symptom of oligopolies and lax regulatory policy.

But as Bloomberg’s Matthew Levine writes, bad service is also what happens when an industry becomes hyper-competitive on price—and only price. Between 1980 and 2010, travel went from aristocratic luxury to democratic commodity, as median airfare on domestic carriers fell by about 50 percent. The obsession with cheap flight is not just about regulation, or corporate strategy. It’s also a reflection of what investors want—and how consumers behave.

For most passengers, going to the airport is a rare extravagance. Even cheap round-trip flights can still cost several hundred dollars, and almost half of Americans don’t have $400 on hand to pay for an emergency. The median flyer makes about two round trips a year, which isn’t enough to build any sort of loyalty with one airline over another. They enter their origin and destination cities into a fare-comparison site like Kayak, and they click the cheapest number. (And, to be fair, flyers between sparsely populated areas sometimes don’t have many numbers to choose from.)

The airlines know this. In a 2015 investor call, the president of American Airlines, Scott Kirby, said that half of the company's revenue came from about 90 percent of its customers who only fly the airline once. In other words, customers are seen as loyal to prices, not airlines; and airlines are obsessed with pricing, not customer service.

One of the most profitable airlines of the last few years has been Spirit, a company that famously treats its consumers like luggage, requiring little beyond efficient and timely transportation. Spirit’s reputation isn’t a carefully kept secret. Many flyers know that the company offers spartan service on stiff seats, and still it’s fantastically successful, with revenues growing each quarter.

The rise of the internet has led to both cheaper flights and lower flight quality, according to a 2012 paper by Itai Ater, an economist at Tel Aviv University, and Eugene Orlov, a senior vice president at the economic consulting firm Compass Lexecon. When Spirit lowers its prices, larger carriers along the same routes do the same. Thus overbooking—which has saved the airlines an estimated $100 billion in the last 30 years—becomes a survival strategy.

The rest of Spirit’s story is a perfect fable. The company scored last in the American Customer Satisfaction Index in 2015 and 2016. But last year, the company brought in a new CEO, Robert L. Fornaro, to revamp the its image. It worked—kinda. Just this week, the Airline Quality Rating study named it the most-improved carrier in quality service. But the airline’s reward for this inspiring shift? Profit-per-passenger is down, and the stock has fallen 36 percent since its December 2015 high.

One might think that millions of lower- and middle-class are getting increasingly angry about this emphasis on price. But Americans’ view of the airline industry has steadily improved since 2008. Approval for the airlines hit an all-century-high last year, according to the most recent Gallup polling. The airlines’ monotheistic religion—thrift, above all else—is permitted by regulators and enthusiastically supported by Wall Street. But it’s not exactly discouraged by consumers, either. Even as airlines are protected from competition and regulation, they are operating in a free-ish market, where they are responding to a dispiritingly clear signal from passengers: No matter how poorly you treat us, we’ll still probably just buy the cheapest ticket next time.

What are consumers to do? Most people rarely fly, don’t have hundreds of dollars in savings, and shouldn’t be expected to spend all of it on a pricier ticket, on the off chance that this single gesture will, somehow, improve industry-wide customer service. Fortunately, there is a cheaper form of protest. They can pick up the phone, call their congressman, express their displeasure at the United States’ 40-year retreat from antitrust policy, and demand a law to protect the rights of paying airline passengers—yes, even the ones who are paying the cheapest price they can find. Americans are not going to change their flight. Better to change the law.