Wednesday 19 September 2007
Airline Economics at Dublin Airport
David McWilliams has observed, both in the Indo and in his new book, that Dublin airport is remarkable that it is a place where all classes mix. Rich and poor, both are there sharing the same endless queue. In fact, this phenomenon is typical of airports in all developed countries. The more interesting question is why is this the case? Why has the air transport market not adapted to customer preferences for varying quality levels at different prices?
Some might argue that in fact that this has already happened. There are business class seats and airport lounges for those who pay more. But for short routes many airlines, such as Aer Lingus, have dropped business class entirely. The success of low cost airlines has pushed the likes of Aer Lingus to streamline and mimic their rivals. Why then has the low cost, no frills option been so successful?
Is the air travel market mostly made up of individuals whose primary concern is price? Clearly this is not the case. Mr McWilliams talks of rich and poor at the airport. The wealthier travellers are what economists might call infra-marginal consumers, who would be prepared to pay a higher price than the current market price if they could be guaranteed a higher quality of service.
For short trips, however, the key component of higher quality of service is not a free meal but a service which avoids painful delays at the airport. The trouble is that the level of service would have to be guaranteed, not sporadic. Many of the factors which cause delay -- bad weather, air traffic control, busy runways, badly run airports -- are outside the control of the airline.
Worse still, the spillover effects from other less punctual airlines can hurt an airline which tries to do better. Another factor is that the higher load rates and higher aircraft utilisation, pushed to the limit by low cost operators, mean there is less availability in the system to 'borrow' a plane when one of your own fails. All of these mean that an airline would need to bloat its costs significantly to attempt to provide a better service.
An airline which differentiates itself on punctuality would have to market itself as such, but owing to factors outside its control, it couldn't really guarantee a better service. The market will not tolerate a high end product unless it is consistent. In the end, therefore, the Airlines revert to the no frills model and everyone is bunched together. Hence the extraordinary diversity on view at Dublin airport.