United Airlines Was Right, and Its Numerous Critics Wrong

United Airlines Was Right, and Its Numerous Critics Wrong
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That the forceful ejection of a United Airlines passenger the Sunday before last proved so newsworthy indicated something that’s largely been ignored by the airline’s myriad critics and “advisers.”  What happened was news precisely because it’s so rare

But for a commentariat prone to turning anecdote into statistic, United’s resort to force when it came to properly removing David Dao (more on this in a bit) from one of its airplanes was naturally (to the chattering class, at least) a sign of a tone-deaf airline; one clueless about customer service thanks to a culture within the airline that doesn’t prioritize it.  United’s actions were apparently also a sign that its executives don’t understand the auction process that economists – who’ve almost to a man and woman never run a business – can apparently design in their sleep.  Oh please. 

Back to reality, we all know why airlines frequently sell more seats than are physically available.  They do so because they have a good sense based on years of statistical analysis of roughly how many no-shows there will be for each flight.  The major airlines are plainly good at divining the no-show count as evidenced by travel journalist Gary Leff’s stats in USA Today revealing that, “Out of over 600 million passengers boarding major U.S. airlines in 2015, half a million didn’t have seats.  Most of those voluntarily gave up their seats.” Leff adds that the latter explains why a mere 46,000 passengers were actually involuntarily denied boarding in 2015, a rate of 0.09%, according to Leff’s calculations.  Again, Dao’s ejection was news precisely because what happened almost never does.

Despite this, economists have as mentioned used United’s alleged error to showcase their presumed worth.  You see, economists claim to solve problems.  Crunching numbers in their cubicles free of the pressures that concern those who actually run businesses, they come up with “solutions” for those businesses. 

Case in point is Robert Samuelson, resident economist at the Washington Post.  Though he acknowledges that there are lots of public policy problems that “cannot be easily solved,” he contends that “Fixing airline overbooking is not one of them.” Samuelson’s solution is for airlines to consult another economist who has largely spent his adult years contemplating the many great problems businesses face from Harvard’s leafy campus.  According to Samuelson, Greg Mankiw has a plan for the airlines.  Here it is:

“Make the airlines pay when they overbook. When they do, ‘they should fully bear the consequences. They should be required (by government regulation) to keep raising the offered compensation until they get volunteers to give up their seats," writes Mankiw. "If $800 does not work, then try $1,600 or $8,000.’"

Samuelson adds that the professor in Mankiw is "sure volunteers will appear as the price rises."  Samuelson agrees with the professor, but would “tweak” his proposed imposition of force on businesses “by requiring that all the bumped passengers receive the highest payment.”

Of course the problem for Samuelson and Mankiw, along with countless other economists awoken by United’s alleged error, is that airlines have long been doing what they propose.  We know this because airlines regularly oversell flights, only for them to offer rising rates of compensation to reserved passengers assuming they don’t have enough seats.  Sorry economists, airlines have long employed the auction process that has oddly given your profession its day in the sun. 

As for the proposed regulations offered up by economists mostly untouched by the real world, they’re passing strange simply because economists generally pay lip service to the truism that there’s no such thing as a “free good.” But in demanding federal compensation rules as Samuelson, Mankiw et al are, they act as though the compensation will be paid by 'someone else.'  Back to reality, assuming the federal imposition of highly generous compensation for bumped passengers, this will reveal itself either through reduced seat availability for consumers, much higher prices for the consumers in search of low-priced fares, or both.  Well-heeled economists presumably don’t consider this truth simply because their air travel is likely not of the supersaver variety.

Regarding Dao, it’s well known at this point that the flight he’d booked a ticket for wasn’t oversold as much as United wanted to transport four crew members to Kentucky in order to staff a flight the next day.  So that the airline could serve many  more passengers, it bumped Dao, along with three other willing customers.  And while PR mavens can fight among themselves about the brand implications of United’s actions vis-à-vis Dao, it’s worth pointing out that the airline did the right thing in removing the obnoxious passenger from the plane.

Lest we forget, a purchase of an airline ticket, particularly a supersaver ticket, is not a guaranteed reservation in the traditional, contract sense.  A supersaver ticket is low-priced precisely because such a fare might be bumped – albeit rarely – based on a lack of seats.  In Dao’s case he didn’t have a reservation as much as he’d booked the strong possibility of flying when he wanted to.  United was correct in removing him much as any business would be correct in removing from its premises any individual engaged in the act of taking.  The seat was United’s to allocate, not something owned by Dao. 

About this, readers can rest assured that United’s most frequent passengers, as in the ones that generate the most revenue for the airline, are the least likely to be bumped.  For members of the commentariat to defend Dao’s right to a seat is for those same members to reject the property rights of businesses.  Federal regulations imposed on businesses regularly ignore property rights, and because they do costs for their customers rise to reflect government disdain for property.

The economist in Samuelson concludes that “Making airlines pay more for overbooking would, almost certainly, make them more careful in their scheduling, while also more adequately compensating inconvenienced passengers.”  It’s a nice thought from the offices of the Washington Post, but if it’s so simple as Samuelson suggests, why the need for governmental force? Samuelson never considered the latter, and realistically didn’t consider business and economic realities much at all in penning his piece in which he explained to the airlines how they should operate, sans irony

But for-profit businesses don’t need the help of economists largely unfamiliar with business or profits.  As evidenced by how airlines regularly and seamlessly handle the good, pro-consumer strategy of overbooking, they’re already well aware of how to handle passenger overflow.  The problem isn’t the airlines, but an economics commentariat ever eager to turn what’s singular into a statistic. 

John Tamny is editor of RealClearMarkets, a Senior Fellow in Economics at Reason Foundation, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He's the author of Who Needs the Fed? (Encounter Books, 2016), along with Popular Economics(Regnery, 2015). 

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