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Thursday 03 July 2003

EU Airline Compensation, Redux

The airline business is a very inefficient one, and, for a variety of reasons, not particularly sensitive to the demands of the market.

If you want to travel from Munich to London Heathrow on the afternoon of July 10, at the moment you have a number of choices, and a number of prices:

13:0516:10Air France$676.63

Note those two 13:05 flights. bmi and Lufthansa have some kind of ‘partner’ thing going, so these flights almost certainly represent the same airplane going from Munich to London. Which flight number you’ve got on your ticket determines whether or not you pay the extra $513. And, unless you have some need to pick up a miniature Eiffel Tower or windmill in an airport gift shop at Charles De Gaulle or Schipol — or you need an alibi to account for your whereabouts for the entire afternoon — you’re much better off taking the direct bmi flight, rather than Air France or KLM, each of which requires a connection and thus takes much longer.

This could change soon, though, as new EU regulations on passenger compensation have been voted in, regulations that could put smaller, less-heavily-subsidized carriers like bmi (as well as Ryanair, Easyjet, and others) out of business.

I wrote about this in February, but the proposed regulations I was complaining about then have now been approved, and will come into effect in about a year’s time. Basically, airlines will be required to pay compensation to passengers whose flights are cancelled or excessively delayed. If that $168 Munich-London flight is cancelled or delayed for more than two hours, bmi will have to pay all the passengers €250 ($290). The first result of this will be that no tickets for short-haul flights in Europe will cost less than €250.

But that’s not the worst of it; the worst of it is that it isn’t going to help anything; this scheme makes delays and cancellations so costly that the airlines will go to great lengths to avoid them. This sounds great, but it isn’t so hot when you consider that what the airlines will do is reduce flight frequency, increase ticket prices, and build delays into the schedule. The quality of service will almost certainly go down, and the price will go up.

The best solution would be to let the market determine which airlines satisfy their customers, and to let the others go out of business. Since the United States won’t even do this, I don’t think it’s likely to happen in Europe.

The answer is to make ticket contracts more realistic. Currently, the money you pay an airline obligates them to do precisely nothing. They don’t have to carry you and your baggage from point A to point B, ever, and there isn’t a thing you can do about it. This is insane.

A better policy would be to require airlines to use a standard contract in their tickets, and for this contract to require the airline to carry you from point A to point B at the appointed time, or to buy you out of the contract at the going rate — with no exceptions.

So if you buy a ticket today for $100, and you show up at the airport and check in at the right time, and the airline, for any reason, is unable to live up to their end of the contract, they must purchase the ticket from you at the price they’re charging for that ticket when they decide to buy you out. If you’ve bought a $100 advance-purchase ticket and your flight is cancelled at the last minute, you should be able to demand the last-minute fare from the airline.

Now, if you’re willing to accept something else that you consider more valuable than the last-minute fare in cash — first-class upgrade coupons, vouchers for two advance-purchase fares at some point in the future, or whatever else — you’re free to accept that offer from the airline. But if you demand the cash, the airline would be required by the terms of the contract to pay you on the spot.

This would have several good effects.

First of all, the value of your contract is precisely what the airline deems it to be. It can’t be said that the airlines are being forced to pay out too much money. An airline that regularly cancels flights or experiences delays could reduce the price differential between its cheapest and its most-expensive tickets, thus reducing its risk.

Second, when your flight is cancelled, you (and the other passengers similarly inconvenienced) are now in possession of a large amount of money. You can then all go to other airlines and buy tickets from them to your destination. It’s not inconceivable that another airline with idle equipment wouldn’t lay on a special flight to wherever it was that you were going, if enough passengers are willing to pay the full-fare price for tickets.

In the event of bad weather, all of the same rules would apply. It’s important not to exempt weather-related problems from the scheme: we’ve all had the experience of looking at a blue sky, and watching other carriers’ planes take off for our destination, while our airline claimed that there were delays due to weather.

I’d expect that the airlines would develop some systems in order to retain their money, though. If a flight is delayed or cancelled because of weather, they’d still have to pay you the full ticket price; but they might offer you a pass to their free-booze lounge, or a free hotel room for the night, if you immediately hand the money back to them and rebook for passage with them after the weather clears up. Since genuine weather delays would affect all airlines equally, there’d be no advantage in trying to book with another carrier.

Honest, unpreventable delays or cancellations would in fact cost airlines a good deal of money. But any airline that’s in the top half of the bunch as far as reliability goes might actually see increased revenues from people buying last-minute tickets with payouts from airlines that have not been able to meet their contractual obligations.

I don’t expect any of this to happen, of course, but I like to fantasize about the problems that could be solved simply by eliminating the one-sidedness of most consumer contracts.

Posted by tino at 19:41 3.07.03
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Couple comments. First from a FT.com story on the regulations

EasyJet one of Europe’s leading low-cost airlines, said it was unlikely its fare levels would be affected

Sorry no quotes from RyanAir the other big low cost European carrier.

You also fail to point out a potentially very improtant Open Skies treaty that the US (and maybe Canada) and the EU are set to start negotiating in the fall. (Daily Telegraph article here.) This treaty would open up internal US & European routes to cariries from either side. For instance you could hope a BMI flight from Manchester to Dulles and then connect on another BMI flight to Cleveland. Or thinking about it another way you could hope an American Airlines flight from JFK to Munich and then connect to another American flight to Hamburg.

Also as for sitting in an airport seeing other carrier’s flights to you destination leave while you sit on the ground there is another possible explaination. Airports have a limited number of landing slots available. In bad weather that number is reduced. It is entirely possible that this reduction cause your flight to be delayed/canceled while the other airline was able to land.

I do agree about making a ticket into a real contract though. Actually I think that something needs to be done about any ‘contract’ that doesn’t actually oblige a vendor to provide the service you have ‘contracted’. You don’t need the added regulation/rules for compensation though. Once you make it an actionable tort one can sue for appropriate compensation based on circumstances.

Posted by: Paul Johnson at July 4, 2003 12:57 PM

I don’t believe that the open-skies treaty will actually come off in any meaningful way. It might work until some carrier is seriously threatened in its home country, whereupon it’ll be modified, watered down, to be meaningless.

It might be possible for a low-fare carrier to continue operating without increasing their fares, if they have a high volume and a very good record of not cancelling or delaying flights. EasyJet might fit this description, and I am sure they have run their last year or two’s performance through a simulation to see what these kinds of penalties would have done to their bottom line.

However, the penalties will introduce more risk, and it’ll definitely increase the cost of selling a ticket for less than €250. Since even the best-run airline will occasionally have delays or cancellations, this will either result in an increase in prices or a hit to EasyJet (et al.)’s profits. It might be that EasyJet believes that superior performance will allow it to do well as other airlines pay out the penalties on a more-frequent basis; but I remain skeptical.

And I wouldn’t require anything of the airlines buying passengers out of their contracts, except that the buy-outs be at the full current value of the ticket (i.e. not necessarily the price that was paid for the ticket), and that it be paid in some readily-negotiable form on the spot.

The first provision would discourage the current practice of maintaining an incredible differential between advance-purchase and last-minute fares. It makes sense to charge more for a last-minute fare than for one purchased in advance, but the current 400%-500% differential is just silly, and is the result of the airlines’ use of bad models.

And it’s important that the passenger not be required to sue, or even to file some claim, with the airline. The entire point of the scheme would be to foster more of a market for air travel. A passenger who is handed cash or a negotiable check by the airline that has just dumped them is free to do a lot of things, immediately, to resolve his transportation problem. A passenger who has the promise of getting a check in the mail in a few weeks, or who looks forward to a lawsuit, does not have this flexibility.

Allowing anything other the immediate disbursement of funds to a passenger who is not getting transportation would tend to result in the airline offering the passenger the option of getting a check at some point in the future, or getting on the standby list for the same airline’s subsequent flights. In other words, we’d have more or less the same situation we have today.

Posted by: Tino at July 4, 2003 02:27 PM