Price Gouging Returns:
This time it's airline fares

20 Nov 2006 in Regulatory Economics, Regulatory Policy

Price-gouging occurs when a willing buyer pays a willing seller an amount that exceeds what the buyer really wanted to pay, and upon reflection the buyer is really unhappy about it. It has no objective definition, nor is is ever defined from the seller's perspective.

Wall Street Journal air travel columnist Scott McCartney says price gouging is back.

McCartney reports the unremarkable news that airports served by discount airlines have lower fares. He also repeats the popular myth that fares ought to be proportional to small differences in distance.

The Piedmont Triad Airport Authority operates the Greensboro, North Carolina airport (GSO). It is served by American, Delta, Continental, Northwest, United and US Airways (or their regional affiliates). Even without a discount airline like Air Tran or Southwest, that's a rich array of airlines. So why are fares so high? The most likely explanation is that it is a much smaller airport.

How small is GSO? Excluding cargo flights, and flights reported with either zero seats or zero passengers, Department of Transportation statistics show that in 2005 there were 66,590 passenger flights to or from GSO (182 per day on average) carrying 4,174,210 seats (11,436 per day) and 2,626,657 passengers (7,196 per day).

McCartney compares fares from GSO unfavorably with fares from other North Carolina airports Charlotte (CLT) and Raleigh-Durham (RDU). But both airports are much larger and serve many more passengers. Charlotte almost breaks into the top 30 airports in the world in passenger volume. (The 30th ranked airport -- Seattle -- handled 29.3 million passengers. CLT handled 3.9 times as many flights and 10.7 times as many passengers as GSO (257,971 flights, or 707 per day; 28.2 million passengers, or 77,277 per day). RDU reports handling 3.5 times as many passengers as GSO (9.3 million). Air service to or from small airports is characteristically more expensive, something inexplicably McCartney fails to mention.

Higher fares to or from GSO also might be explained if flights from GSO were unusually crowded such that airlines could "charge whatever the market would bear" to those determined to patronize GSO. The table below lists the proportion of flights by load factor decile, and it shows that only a small faction of flights to or from GSO are very crowded. (The original data set shows only 15 of 556 flights were full.)

Fares to or from GSO might still be higher even controlling for airport size if there isn't much competition. there is nonstop service from Greensboro to 18 different cities. Only a single carrier serves 17 of them. The exception is New York--La Guardia, which is served nonstop by Delta and US Airways. The lowest current round trip nonstop fare is $178. (It's $128-163 from Charlotte and $123-153 from Raleigh-Durham. We can't find the $691 fare McCartney mentions in his lede to support the point that fares from Greensboro are excessive; the highest nonrefundable nonstop fare we can find is $268.)

But any price comparison that includes just nonstop flights is misleading. One-stop service is surely an imperfect substitute, but it is a close substitute and a reasonable one for passengers choosing to travel from a small airport like Greensboro. In addition to Delta and US Airways, three other major carriers offer connecting service to La Guardia. In none of the 17 other destination cities from GSO is there any genuine shortage of competitors offering one-stop service.

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This time it's airline fares