Baker on airline economics...

Trouble in Air Travel and the Rate of Inflation

The NYT had an article today on the increasing delays in air travel. There have been other pieces in recent months about other ways in which service has deteriorated, such as increased crowding and dirtier, less sanitary planes.

I find this especially interesting because I remember back in the days when there was a debate over the accuracy of the consumer price index (CPI), all the big honchos in the profession argued that the CPI overstated inflation because it didn't fully pick up improvements in quality. I was arguing the other side, pointing out that there were also cases where the CPI missed deteriorations in quality. Air travel was one of my main examples.

One of the reasons that air travel has come down in price is that airplanes are almost completely filled. This is obviously efficient from the standpoint of the airlines, because the marginal cost of carrying an additional passenger is close to zero as long as there are empty seats.

However, it makes a big difference to the passengers whether a plane is filled or one third empty. On a plane that is one-third empty, everyone has a vacant seat next to them (or a wiindow/aisle seat). How much more would you pay to be guaranteed a vacant seat next to you?

Anyhow, the CPI picks up the price decline allowed by fully booked planes, it missed the deterioration in quality associated with more crowded planes. In this area at least it clearly overstates inflation. For some reason, the honcho economists were not interested in looking at this one.