Friday, May 20, 2011

The Airline Industry

Richard Posner analyzes the industry's woes:
The airline is providing a bundled or “one size fits all” product to most of its customers, and unbundling can increase demand by enabling a better matching of price to consumer preference. But except for the tiny sliver of flyers who can afford private planes, the cost structure of the airline industry, rooted in airliner design, prevents significant quality differentiation. 
The crux of the issue is this: airlines want desperately to differentiate their products so as to compete on the basis of services (food, customer experience, etc.) instead of simply ticket price. Two factors make this difficult: 1) technological constraints (airliner design largely determines the parameters of service) and 2) a huge set of travelers who care only about price (magnified by small, low-cost carriers). Consequently, this homogeneity (and commodification) of air travel has resulted in a decline in service quality. The new Department of Transportation consumer protection regulations set minimum requirements for service but, perversely, further entrench the air-travel-as-a-commodity trend.

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