Wednesday, December 30, 2009

Should airlines charge per passenger-pound?

Changing how we pay for airfare could improve the lives of everyone who travels by air. Let me propose one big improvement. Instead of the flat per-seat fare (plus extra fees for checked baggage), charge each passenger for the total weight he/she contributes to the weight of the plane. That's body weight plus luggage weight.

Charge by the pound. UPS and FedEx do it, and so do professional moving companies. Airlines should do it too. Charging by the pound is not a crazy idea. In fact, if you want to see something crazy, just watch chaos at the TSA screening for a couple of minutes. Aside from being what moving companies do, there are plenty of other reasons to charge per passenger-pound.

Why would this improve the way we fly?

Airlines started charging for bags to save on fuel costs. All those bags weigh a lot, and they cost quite a bit to move. Therefore, it makes sense that they should try to put a price on weighing the plane down. It's expensive! But, does charging for bags really put a price on the right thing?

Take an example. A 230-pound person with a 10-pound bag (240 pounds) burns more fuel than a 120-pound person with 60-pounds of luggage (180 pounds). By the fuel-saving logic, the airlines should charge the big person more, but if you have flown lately, you know that the second person pays more. In other words, if the airlines are trying to price the weight of the plane, they're doing it wrong.

That's not even the entire story, nor is it the most obvious problem. If the airlines raise the price of checked baggage, people readily substitute toward carry-on baggage. At $40 per trip, people may even devote a lot of energy to transferring checked-baggage weight to carry-on weight. But, from the airline's fuel-saving standpoint, there's no difference between a pound of carry-on and a pound of checked baggage.

If the goal is to save on fuel, this kind of weight-shifting is entirely unproductive. Yet, if you travel much (and don't travel light), you have probably spent some time moving heavy things from checked baggage to your carry-on luggage.

Another problem has come to light in the past decade or so. Airline security has become a big hassle. And, that hassle gets bigger as people carry more stuff onto the plane. Security officials have to check packages and backpacks and duffel bags and purses and laptops and baggy pants... et cetera. As recent events have demonstrated, something harmful is bound to slip through security. It is no surprise when everyone is in a hurry, and everyone is carrying as much as they can to avoid baggage fees.

So, it might be a security hazard if everyone loads up on carry-on luggage, it doesn't save on fuel, and it is definitely a hassle. Wouldn't it be easier and more effective if people had the incentive to check everything they didn't want on their person? That's what my plan (charging per passenger-pound) would do.

Here's how it would work

When you make your reservation. Type in a textbox (or tell the ticketing agent) how much you weigh plus how much you expect your luggage to weigh. In my case, I weigh 230 pounds and I expect to bring luggage of 40 pounds. The airline then quotes you a per pound price, and you pay an estimated price.

When you arrive at the airport. Just bring all of your bags and decide on what you want with you versus what you don't. Then, you can come to a similar station where you and all of your bags are weighed. Your actual passenger-weight will be compared with what you estimated, and you'll either pay a small fee or you'll get a refund. Upon payment or credit, you check your bags and go through security.

That's no more complicated than having to pay $20 upon arrival to check your bag. And, you might get a refund.

Going through security. Presumably, you will go through security with only the items you really want to carry through the airport. Because you have no incentive to squeeze all you can into your carry-on luggage, that's much less than the current status quo. The security officials will have to scan fewer bags, people will have to unpack fewer backpacks, people will wear only one layer of clothing (unless it is cold), and there should be less stress going through security.

It works for the airlines, skinny people and light packers

In my per-passenger-pound pricing scheme, the airline can still change the price over time to respond to demand and supply for flights. They could even incorporate the estimated weight of passengers who already booked their tickets on the flight. That's new and useful information that the airlines do not have under the current scheme.

Moreover, the airline that is first to adopt this strategy can push the pounds (and therefore, fuel costs) onto the other airlines. The 150-pound light packers are going to fly with the per-passenger-pound airline, but the 300-pound people with big bags will fly where their weight doesn't cost them. At least before the other airlines switch to per-passenger pound pricing, this means big cost savings for the first airline to switch. And, some of those savings can be passed onto the passengers in the form of lower fares.

Not everyone will benefit, but that's not all bad.

If you are overweight, I have little sympathy. A 300-pound person requires twice as much fuel to move from New York to Denver as a 150-pound person. On the basis of resources used, they should pay almost twice as much for the flight. Doesn't that make the status quo seem unfair?

Counterbalanced against having considerably less hassle pre-and-post flight, it's not hard to see that some heavier-than-average people will like the price per passenger-pound system better. I know I would.

Saturday, December 26, 2009

Poll: Which of my Christmas gifts would you like best?

In case anyone was wondering, I had a fabulous Christmas. I hope you did too. My family members gave me many wonderful gifts (best of all: some great conversation and quality time).

In the spirit of Christmas, this week's poll question is:

Which one of the gifts that I received would you prefer?

Cash. Joel Waldfogel would say this is best.
A "This Young Economist" gift basket: Complete with a custom-made "This Young Economist" coffee mug, and two wonderful books (Dear Undercover Economist by Tim Harford, and Superfreakonomics by Steve Levitt and Steve Dubner).
Clothes. A mockneck shirt from L.L. Bean, and some new shoes from OBoz.
A Harry Potter DVD-BluRay-Digital Movie. Though I'll admit that I purchased this gift for my beautiful wife.

I like them all, but I am interested in hearing what would be your favorite. The poll is up for a week, so vote early and often (and on the sidebar). Tell your friends to vote. I'm interested in hearing what you have to say.

Friday, December 25, 2009

Merry Christmas

Regardless of who you are, I hope Christmas allows you to count your blessings in your own lives.

Merry Christmas! May this be a time of light for you and your families.

Wednesday, December 23, 2009

Learning and Forgetting

The economist's notion of learning by doing makes intuitive sense: People get better at their job simply by virtue of doing it. Employees make mistakes, learn from their mistakes, and improve over time. Therefore, in industries where learning to work productively is both very difficult and important, we would expect to see costs decline sharply over time. As employees get better at their jobs, the company can produce the product at lower cost.

As a simple story, the learning by doing hypothesis does a nice job, but it does not tell the whole story. A piece of research by Lanier Benkard established this empirically in 2000. In the paper (published in the American Economic Review), Benkard rejected a simple model of learning in favor of one where organizations learn, but that learning depreciates over time. In other words, some learning is "forgotten" as time passes.

There are two reasons that organizations might forget. First, employees leave the company intermittently, and as they leave, they take their knowledge with them. Second, employees might just forget how to do the tasks as effectively as a couple of months back.

To test for the existence of learning and the extent of forgetting, Benkard used data on the labor costs for producing commercial aircraft. Benkard found evidence in the data that both learning and forgetting were prevalent:
  • At the introduction of a new line of aircraft, the firm's costs would start high and then decrease dramatically.
  • If a new line of aircraft is very similar to a line that was produced in the past (i.e., many of the same techniques or parts can be reused), Benkard found that there was not much loss in the gains from learning how to produce the earlier models.
  • Finally, Benkard found that costs increased as drastically different new aircraft were introduced.
In other words, learning by doing is an important force in a company's cost effectiveness, but the loss of specialized knowledge and organizational forgetting are also important.

Saturday, December 19, 2009

Poll: Is it a good idea to print national championship gear prior to playing the game?

Last night, the evening news ran a story about my rival's football team. The Montana Grizzlies played in the national championship game against the Villanova Wildcats last night. A local apparel store, Universal Athletics, printed National Championship memorabilia prior to the game. Here's the same news station's report this morning:
It looks like one clothing company in Missoula is out thousands of dollars for printing championship gear ahead of the game.

Universal Athletics in the Southgate Mall already has 250 pieces of Griz gear in stock, proclaiming the Griz the 2009 National Champions.

Because the company took the gamble, the store will lose some to $3,000 to $4,000. Last year, it lost several thousand dollars when it also made the gear and then the team lost.
It happened again this year. Villanova beat the Grizzlies 23-21 last night. And, just like last year, the presumptuous move by Universal Athletic stores throughout Montana is going to be costly once again.

Now, that the Grizzlies happened to lose doesn't mean that the early printing is a bad business move. Good businesses take risks, and often reap the rewards when those risks pay off. But, given a $3000-$4000 expense, you have to wonder whether the potential upside is worth it.

In the spirit of in-state rivalry, here's this week's poll question:

Was printing national championship gear prior to the national championship game a good risk?


As with all polls, this one will be open for a week. Please vote early and often. Tell your rivals, your friends, your fans, and your local sports apparel store owners to vote. I'm interested in hearing what you have to say.

Wednesday, December 16, 2009

Do you want your airline to be vertically integrated?

It's the holiday season, and people are booking tickets to visit families. It is definitely the busy season for the airlines. That makes it timely to discuss some economics of airlines. In the spirit of the holidays, here's a question: Is my flight more likely to be canceled if my airline contracts with the regional carrier, rather than owns its own regional carrier?

Well... maybe this isn't a burning question for everyone, but it does have some interesting economic repercussions. Dating back to Coase's seminal article on the Nature of the Firm in 1937, economists have been interested in the boundaries of firms. Why do firms exist? Why isn't there one firm that produces everything? Why do firms grow or shrink over time?

Recent work by Silke Forbes and Mara Lederman provides some interesting answers to these questions in the context of the airline industry (working paper here).

Forbes and Lederman ask, if you're a major airline, what are the benefits of owning your regional carrier's assets rather than contracting with an independent regional airline? The authors find that an airline that contracts everything has one percentage point more cancellations and five minutes longer delays than an airline that owns all its regional carriers (even after netting out the effects of other explanations).

The authors argue that this advantage of owning your regional provider allows for better flexibility in scheduling, and a closer-to-optimal departure and arrival schedule. That sounds like a competitive advantage for airlines that own their regional carriers. So, why on earth would a major airline pass up the opportunity to provide better service? The answer from Forbes and Lederman: It costs more.

A chief disadvantage of vertically integrating with a regional carrier is that independent regional carriers are able to get away with paying lower wages, and hence, have a cost advantage. This is not true if the airline owns its regional carrier. In this case, the unions representing the airlines can force the major airline and its owned regional airline to pay the same wages. As such, the cost advantage is wiped out.

Consequently, some airlines contract routes with independent carriers, while others own their own regional carriers. Others still, operate some routes on contract and others under ownership.

So, the next time you're flying, ask yourself whether your airline is vertically integrated (i.e., owns its regional carrier). If it is, you're less likely to leave late, your flight is less likely to be canceled, and your pilot and flight attendant probably get paid more!

Happy travels.

** By the way, the finding of a 5 minute longer average delay time is significant. A 5 minute shorter delay on average can be interpreted as "If every sixth flight is delayed (and the rest are on time), an owned regional carrier has 30 minutes shorter delays than a contracted regional carrier." In my mind, that's big.

Friday, December 11, 2009

Poll: How many tournaments will Tiger golf this year?

Until his recent announcement that he would postpone golfing professionally indefinitely, there was plenty of speculation about what Tiger's recent family problems would do to his golf game. Greg Mankiw even linked to a discussion of the income and substitution effects on Tiger's golf game.

As of right now, it's up in the air, but that makes it an interesting poll question for this week.

How many tournaments will Tiger golf this year?

(a) None. He will turn into the ultimate family man.
(b) A few near the end of the year, but he has fallen hard and fast.
(c) Almost all of them. Once Elin leaves him, he will pour his anguish into golf.

As always, vote early and often (and on the sidebar --->). The poll will be open for a week. I'm interested in hearing what you have to say.

Wednesday, December 9, 2009

Wouldn't this be better?

Here's a graphic I produced in my spare time.

Now, in light of having five undefeated teams this season in major college football, wouldn't this be a more satisfying way to end the season? At the very least, it is interesting to explore the possibility.

I understand that there's money in the bowl system for everyone who makes decisions, but the underdog in me wants to see the kind of drama that a Boise State team or a TCU team could bring if the little guys were truly given a chance to play on the same field as the big conferences. Maybe they would be crushed, but then, at least, we would know.

Judging by the hysteria that surrounds March and the March Madness tournament, I don't think I am alone in my demand for an exciting tournament to end the year.

Saturday, December 5, 2009

Poll: Take-home or in-class finals?

This quarter, my coursework has taken an interesting turn. Instead of having multiple in-class exams, I have take-home final exams in each of my classes. Two of the exams involve writing a referee report on current working papers (which I love).

That brings me to my poll question of the week:

Which do you prefer?

(a) Take-home exams
(b) In-class exams.
(c) Neither. I'm indifferent.

Please vote early and often (on the sidebar --->). I'm interested in hearing what you have to say. For now, I'm off to work on those exams!

Wednesday, December 2, 2009

Learning Economics on a Budget: Part III

One of my current projects is to produce educational videos on economics, and post them to YouTube. Here are some of my latest videos [feed subscribers: click through to see the videos]:

In this video, I highlight the similarities between consumer theory and producer theory in an effort to make the isocost-isoquant graph intelligible.

This video takes a more technical approach, going from a Cobb-Douglas production function to the implied cost function.

This is just the start of the videos on producer behavior. Since last time, I have also made some videos on compensating variation, equivalent variation, elasticities, and using calculus on these topics. Feel free to explore my channel to see what else I have done.