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“A Sense Of Disgust With Airlines”: Enough With The Crazy Change Fees

In 2014, airlines in the United States billed more than three billion dollars in “change fees”—fees charged to customers who cancelled or changed itineraries. This bounty came after most of the industry (minus Southwest) tacitly agreed to create a new industry standard of two hundred dollars per change, plus, in some cases, an additional fifty-dollar service fee for tickets booked on non-airline Web sites. And the worst may be yet to come: as the airline-revenue-optimization consultant Tom Bacon wrote a little while back, “Don’t be surprised if you see change fees increase again. … My guess is that change fees will eventually hit $300.” Meanwhile, fees can be four hundred dollars on international routes; on some first-class fares, they are as much as seven hundred and fifty dollars. The size of the fees alone may cause many a sense of disgust: Why pay so much for something that feels like nothing? But the strongest case against high change fees is that they introduce a rigidity into the travel system that is inconsistent with the fast-moving contemporary economy.

Modern life moves quickly, and we change plans constantly, but if we need to change our travel plans we face harsh punishments. It’s as if this one part of modern life—planning how we move through the air—is stuck in another age, while everything else is in flux. This rigidity translates into an economic case against high change fees, based on what an economist might call “the deadweight costs” created by stranded passengers.  Consider two travellers—each is on a trip and, due to changed circumstances (perhaps a meeting is cancelled, or a family member falls ill), each should come home early. The first pays the two-hundred-dollar change fee. The second does not, either because she cannot afford it or because she cannot, subjectively, bring herself to pay it. The second traveller creates stranding costs—wasted time, missed meetings, neglected children, and so on—without any benefit to the airline.

Airlines prefer the high change fees for reasons both obvious and less so. The obvious reason is the money. The less obvious reason is that change fees “protect” revenue and help airlines keep their planes as full as possible (achieving “higher load factors,” in the jargon). Without high fees, last-minute changes would be more common, leaving behind seats that are hard to fill on short notice and at the high price that airlines charge last-minute travellers.

High change fees surely both generate and protect revenue for the airlines. But the potential losses from empty seats caused by changes are mitigated in several ways. For one thing, travellers who change their tickets usually absorb any increase in fares, and sometimes the airlines profit from the change, by effectively selling the same seat twice. When changes are made far in advance, there’s plenty of time for the airline to resell the seat. No one can deny that high change fees yield higher profits (for what’s presently a profitable industry). But the fact that Southwest charges no change fees yet remains highly profitable counters the argument that an airline cannot be run without them.

Sometimes airlines defend their change fees by pointing out that they also sell “fully refundable” tickets without such fees, effectively blaming consumers for failing to read the fine print. This argument comes close to a sham, for it ignores the fact that the fares without fees are so expensive that, in practice, only customers in highly unusual situations would purchase them, particularly given that the refund process is itself highly unreliable. This pricing actually serves to protect the change-fee racket, because no rational person would buy a ticket at, say, three times the normal fare instead of one at the regular price, plus a potential change fee. In other words, offering a fully refundable fare simply creates an illusion of choice that the airlines exploit.

Are high change fees a problem that we can expect competition to solve? In an ideal world, yes. But the airlines find it more profitable to collude instead of compete when it comes to fees, despite this being a country where price-fixing is supposedly a felony. To its credit, the Justice Department is currently investigating the price-fixing of fares through agreements to place limits on the number of available seats. But, when it comes to change fees, the airlines rely on a legal form of collusion. The major airlines simply take turns initiating fee increases and then play follow-the-leader. The latest increase (to two hundred dollars) was quietly initiated by United, in the spring of 2013, and copied almost immediately by the other major airlines. If the agreement were explicit, it would be a crime, but the same results are achieved legally, neutering the power of competition. Consolidation after rounds of mergers does not help; Southwest Airlines’ continued defection from the fee cartel has exerted no apparent competitive pressure on larger airlines such as United, Delta, and American.

The Department of Transportation is supposed to prohibit “unfair” and “unreasonable” practices in air transportation. All this suggests that the D.O.T., or perhaps Congress, ought do more hard thinking about what an “unfair” or “unreasonable” change fee looks like. If free changes are too much to ask for, imposing a return to the fifty-dollar fees that were charged in the late nineteen-nineties might more fairly balance the airlines’ interest in dealing with constant changers with the national interest in a more flexible and adaptable travel system. The consumer group flyersrights.org has filed a petition with the D.O.T. requesting a limit on international fees at the reasonable level of a hundred dollars. The major airlines would surely protest, but it is worth remembering that they, like the banks, have been protected by taxpayers against financial failure. In exchange for providing a safety net and putting up with so much else, the public deserves more in return.

 

By: Tim Wu, Professor, Columbia School of Law, The New Yorker, July 21, 2015

July 25, 2015 Posted by | Airline Industry, Change Fees, Flying Public | , , , , , , , , | 1 Comment

“Whatever Happened To Antitrust?”: Ambushed By The Giant Companies It Was Designed To Contain

Last week’s settlement between the Justice Department and five giant banks reveals the appalling weakness of modern antitrust.

The banks had engaged in the biggest price-fixing conspiracy in modern history. Their self-described “cartel” used an exclusive electronic chat room and coded language to manipulate the $5.3 trillion-a-day currency exchange market. It was a “brazen display of collusion” that went on for years, said Attorney General Loretta Lynch.

But there will be no trial, no executive will go to jail, the banks can continue to gamble in the same currency markets, and the fines – although large – are a fraction of the banks’ potential gains and will be treated by the banks as costs of doing business.

America used to have antitrust laws that permanently stopped corporations from monopolizing markets, and often broke up the biggest culprits.

No longer. Now, giant corporations are taking over the economy – and they’re busily weakening antitrust enforcement.

The result has been higher prices for the many, and higher profits for the few. It’s a hidden upward redistribution from the majority of Americans to corporate executives and wealthy shareholders.

Wall Street’s five largest banks now account for 44 percent of America’s banking assets – up from about 25 percent before the crash of 2008 and 10 percent in 1990. That means higher fees and interest rates on loans, as well as a greater risk of another “too-big-to-fail” bailout.

But politicians don’t dare bust them up because Wall Street pays part of their campaign expenses.

Similar upward distributions are occurring elsewhere in the economy.

Americans spends far more on medications per person than do citizens in any other developed country, even though the typical American takes fewer prescription drugs. A big reason is the power of pharmaceutical companies to keep their patents going way beyond the twenty years they’re supposed to run.

Drug companies pay the makers of generic drugs to delay cheaper versions. Such “pay-for-delay” agreements are illegal in other advanced economies, but antitrust enforcement hasn’t laid a finger on them in America. They cost you and me an estimated $3.5 billion a year.

Or consider health insurance. Decades ago health insurers wangled from Congress an exemption to the antitrust laws that allowed them to fix prices, allocate markets, and collude over the terms of coverage, on the assumption they’d be regulated by state insurance commissioners.

But America’s giant insurers outgrew state regulation. Consolidating into a few large national firms and operating across many different states, they’ve gained considerable economic and political power.

Why does the United States have the highest broadband prices among advanced nations and the slowest speeds?

Because more than 80 percent of Americans have no choice but to rely on their local cable company for high capacity wired data connections to the Internet – usually Comcast, AT&T, Verizon, or Time-Warner. And these corporations are among the most politically potent in America (although, thankfully, not powerful enough to grease the merger of Comcast with Time-Warner).

Have you wondered why your airline ticket prices have remained so high even though the cost of jet fuel has plummeted 40 percent?

Because U.S. airlines have consolidated into a handful of giant carriers that divide up routes and collude on fares. In 2005 the U.S. had nine major airlines. Now we have just four. And all are politically well-connected.

Why does food cost so much? Because the four largest food companies control 82 percent of beef packing, 85 percent of soybean processing, 63 percent of pork packing, and 53 percent of chicken processing.

Monsanto alone owns the key genetic traits to more than 90 percent of the soybeans planted by farmers in the United States, and 80 percent of the corn.

Big Agribusiness wants to keep it this way.

Google’s search engine is so dominant “google” has become a verb. Three years ago the staff of the Federal Trade Commission recommended suing Google for “conduct [that] has resulted – and will result – in real harm to consumers and to innovation.”

The commissioners decided against the lawsuit, perhaps because Google is also the biggest lobbyist in Washington.

The list goes on, industry after industry, across the economy.

Antitrust has been ambushed by the giant companies it was designed to contain.

Congress has squeezed the budgets of the antitrust division of the Justice Department and the bureau of competition of the Federal Trade Commission. Politically-powerful interests have squelched major investigations and lawsuits. Right-wing judges have stopped or shrunk the few cases that get through.

We’re now in a new gilded age of wealth and power similar to the first gilded age when the nation’s antitrust laws were enacted. But unlike then, today’s biggest corporations have enough political clout to neuter antitrust.

Conservatives rhapsodize about the “free market” and condemn government intrusion. Yet the market is rigged. And unless government unrigs it through bold antitrust action to restore competition, the upward distributions hidden inside the “free market” will become even larger.

 

By: Robert Reich, The Robert Reich Blog, May 24, 2015

May 26, 2015 Posted by | Antitrust, Big Banks, Corporations | , , , , , , , | Leave a comment

   

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