Tag Archives: economics

Time to auction flight slots & clamp down on flight time padding

Last May, the DOT dropped a proposal to auction landing slots at New York’s 3 airports.   I think this was a huge mistake.

If you’ve been unfortunate enough to sit on the tarmac of JFK, Newark, or La Guardia for 90+ minutes waiting to take off on a clear, beautiful day, you can understand my frustration.  Airlines routinely schedule more takeoffs per hour than these airports can accommodate, therefore making it impossible that all scheduled flights can take off on time.  Delays are 100% guaranteed in this case.

According to a 2009 report from the Partnership for NYC, flight delays cost the regional economy more than $2.6 billion in 2008, including $835 million in fuel.  Importantly, this takes into account the padding that airlines put into schedules. (more on that in a minute)

Everyone knows what happens when the pilot comes on to cheerily announce something like “There’s a little traffic jam this morning in NYC!  Looks like we are number 19 for takeoff, which might happen in about 40 minutes.”  There’s an audible grumble, and some people worry if they’re going to make their connections.

But here’s the thing: if you polled every person on that aircraft at that exact moment,  offering them the option to pay $50 to take off right away, there’s no doubt that some would eagerly accept and others would decline, preferring to accept the delay.  Rather than having everyone inconvenienced, the people who value the specific takeoff time the most will pay for it.  Airlines should be figuring that out in advance and pricing seats accordingly. Instead, they are transferring the ‘cost’ of higher tickets into a cost of wasted time (and fuel, and productivity). This is econ 101: price the scarce resource so that demand falls to meet its supply.

Opponents to auction pricing say that it’s antiquated air traffic control technology and a lack of experienced air traffic controllers that’s to blame, not runway congestion.  Other opponents may have a more hidden agenda: it is assumed that if takeoff slots were auctioned/rationed, then airlines would start flying fewer, larger jets and reduce smaller, regional jet service.  Less regional jet service means inconvenience for congress people (and their constituents) who want frequent service to regional airports close to them.

Opponents also point to alternatives to increase capacity: opening up underutilized military airspace, for example, or investing in on-board navigation systems that can give pilots more maneuvering options than ground-based radar allows.

But regardless of the underlying reasons and regardless of the possible long-term solutions, two facts remain clear: 1) flights can’t take off at the rate that airlines schedule them, and 2) airlines aren’t pricing these flights to take this into account, in order to shift some demand to less busy times. Side note: It’s worth noting that Mayor Bloomberg supported auction pricing, to his credit.  Not surprising, given his very sensible approach to congestion pricing for cars in Manhattan (a measure which was also struck down but which I strongly supported).

I have another gripe: the practice of airlines to massively pad their schedules so that their on-time performance record doesn’t suffer from their addiction to over-scheduling.  I routinely fly a 2 hour route from LGA to Charlotte that has at least 40 minutes of padding in the schedule.  I’ve been on JFK-Europe routes that sat on the ground for 90 minutes before taking off, yet arrived well before schedule.

Besides wasting time and fuel, padded schedules are highly misleading and distort on-time performance measures.  It’s akin to reducing a product’s base price but then adding hidden fees to the final price.  The airlines are, in fact, already penalized for this practice since flight crews and cabin crews are often paid based on scheduled, rather than actual flight times.  But clearly they find it more expedient to incur this cost rather than to shift flights to times when they can actually depart shortly after leaving the gate.

Since the DOT started requiring airlines to report their on-time performance, surprise! they’ve tried harder to be on time. (it’s the old “What gets measured, gets done” theory of management) What’s more, the airlines turned this into a marketing opportunity:  You can be sure that whoever is in the top few performers will be talking about that in their ads the next year. So it’s unfair and misleading that airlines can simply ‘lower the bar’ on performance by padding their schedules.

My proposal is that airlines be forced to publish their schedules based on actual flight time + no more than a single digit percentage.  Some allowance is reasonable since there will be variations based on headwinds and unpredictable ground conditions, but consciously overbooked takeoff slots don’t fall into those buckets.  A less favorable alternative approach would be to penalize airlines when on-time tables are calculated, by discounting their reported on-time performance by the relative disparity in their scheduled flight times vs. actual flight times.  Either way, this would put more pressure on airlines to stop scheduling flights when they know the airport is congested and facing almost certain system-wide delays.

It’s high time for the airlines to stop pretending that there is no cost to their over-scheduling of flight slots.  Auction pricing would be an efficient way to take care of this.  It’s also time for airlines to stop artificially manipulating their on-time performance with wasteful and misleading schedule padding.

£9.99 for a limited time: Psychological Price Points

A recent trip to London reminded me of something I’ve always found perplexing: the practice of retailers to mark prices at arbitrary “psychological pricing points” (usually ending in 50 or 99).   The fish and chips in London were always £6.99, not £7, and an attraction would likely be priced at £14.99 rather than one pence higher.

This isn’t just my imagination; a 1997 study of pricing in New Zealand concluded that about 60% of retail prices end in the digit 9 and another 30% in the digit 5.  Need more proof?  Look at the circulars in any Sunday paper and count how many electronic items go for $400.  Not many; they’ll all be priced at $399.

It’s a little insulting that retailers think they’re fooling us into believing that $399 is a whopper of a bargain compared to $400.  Do they really?  Are we really?

Pricing studies have indeed concluded that consumers generally respond pretty well to this type of pricing.  Still, I’ll bet many retailers just do it out of habit at this point.

There might have been a time (like when most transactions took place between individuals in street markets) when rounding to even numbers or zeroes truly made things easier: easier to calculate totals, easier to give change, less change to carry.  But most of those arguments have gone away now: cash registers compute most totals, many transactions happen without cash, and round numbers become distorted, anyway, once tax rates are applied on top.   So round numbers don’t even make a whole lot of sense anymore.

While there might have been historical rationale for round number pricing, the practice of pricing in the ‘9s’ is built quite simply on the assumption that consumers are so daft that they can’t meaningfully process much more than the left-most digit in a price.  We’re all busy and don’t have unlimited time to research perfectly efficient prices, but come on now, I mean – really.

Even if there’s a slight increase in retail demand at these strange price points, don’t you find that all those 95s and 99s come with an important quality perception trade-off? It’s like everything has been marked down in some gigantic blue light special extravaganza where the pricing guns have more 9s than any other digit.  It’s something retailers should think about, and some of them have.

High end retailers such as Neiman Marcus and Nordstrom have been pricing their goods in whole numbers for some time now.  Other retailers use a mixed model; Macys and J.C. Penney, for example, tend to price standard goods with 00 and price marked down/sale price goods with 99.  I guess that makes some sense.

Some retailers price standard goods with $x.00 and sale goods with $y.99.

Some retailers price standard goods with $x.00 and sale goods with $y.99.

It’s worth noting that wholesale pricing generally doesn’t follow this same illogical pattern. If you’ve ever seen a wholesale price list, the prices tend to be exact and all over the place. In mature categories, manufacturers will often increase their wholesale prices by an exact 2 to 3% increase each year, so the trend continues. It’s really the retailers who feel compelled to round everything in ways that dull our senses.

A few years ago I started noticing many New York restaurants rounding prices to whole dollars, excluding even the zeroes for cents.  While that’s equally arbitrary to rounding to lots of 9s, at least it doesn’t seem like a veiled attempt to insult our intelligence by assuming we’ll ignore everything after the leading digit.  I actually find whole dollar prices weighty; authoritative.  “Here’s what we’re charging.  Take it or leave it,” the $14 next to the crab salad appetizer suggests.

All this gets even more intriguing when you think about the implications of economic inefficiency driven by this type of arbitrary pricing.  This is particularly enlightening when you take a look at the same good priced in multiple currencies which have a close relative value to one another.  But let’s tackle that in a later blog entry.

I'll take that octopus at $16, but not at $15.99, thanks.

I'll take that octopus at $16, but not at $15.99, thanks.