In Air Travel, Everyone Subsidizes Everyone

A NYT Times letter writer is upset that business and first class airplane tickets can be claimed as a business expense, meaning that all the people trapped in coach are subsidizing the fats cats sipping champagne in the front of the plane. I fly over 100,000 miles a year every year, only buy coach tickets and have a bad hip that becomes swollen and painful when I am kinked up in a small seat. I therefore have a fair claim at being outraged at this apparent inequity.

But I’m not.

Yes, even though making something a business expense does not make it free, there is some indirect monetary transfer from coach cabin passengers to business and first class passengers through the tax system. But there is also a substantial transfer in the other direction. The people at the front account for 40-50% of airline revenue. If they all flew coach, the airlines could only be financially viable by raising coach ticket prices for everyone. This is thus a case where wealth really does trickle down to the rest of us. And before those of us who buy coach tickets get too indignant, we should remember that we ourselves are subsidized by taxpayers who never fly at all but have contributed indirectly for decades to federal government bailouts and loan guarantees for the airlines.

More generally, the too-clever-by-half “airplane as economic microcosm” angle is getting overworked in the media, maybe because many journalists are frequent fliers. At a surface level, the three different classes of service in airplanes seem the perfect metaphor for the current inequality in American life. But no matter where we sit on the plane, we all arrive at our destination at the same time, experience any turbulence in equal measure, and care equally whether the whole thing crashes and burns. Airplanes are therefore much more like the way the country used to be than the way it is now. In the skies, we are still all in it together.

Comments

  1. Will says

    Well said.

    Only quibble: “Airplanes are therefore much more like the way the country used to be than they way it is now. In the skies, we are still all in it together.” Down here, we’re *still* all in it together as well; it’s just that a large and unfortunately powerful group doesn’t understand that.

  2. sven says

    “If they all flew coach, the airlines could only be financially viable by raising coach ticket prices for everyone.”

    I looked at the numbers presented in the story and I am not certain you can conclude this. Here is what we know from the economist quoted in the story. The 40-50% revenue figure includes both business and first class seating which together comprise 20% of all seats. We know that part of what is being paid for is additional space so 20% of seating might be (for argument’s sake) more like 30% of cabin volume. There are also additional costs associated with these seats. There are the higher quality meals and beverages (free drinks!), entertainment, and superior staff-to-passenger ratios. Carrying a single category of passenger likely also has certain efficiencies attached. Coach passengers may still benefit from this arrangement but I don’t think the effect is as large or as obvious as a first read might suggest. After all, “low-cost” carriers such as Southwest frequently offer only economy class yet are still price competitive.

    Here is an interesting (to me) thought. Part of what first class passengers are paying for is likely a status effect. (Some guy named Robert Frank has done interesting work in this area) If wealthy passengers are willing to pay more to sit at the front, might coach passengers also pay more not to sit at the back? Would these passengers accept a small premium on flights which didn’t have a first class section?

    • Keith Humphreys says

      Sven wrote: Here is an interesting (to me) thought. Part of what first class passengers are paying for is likely a status effect.

      I have no doubt that this is true. A business class seat is roughly five times the cost of a coach seat and is dramatically different in quality. But a first class seat isn’t really that much different than a business class seat (a extra wine or two on the list, the flat bed is 6.5 feet versus 6 feet, a real wine glass is used)– why do people shell out, for example, another 10k to fly round trip between California and London for these few added amenities of a first class seat versus a 50% cheaper business class seat? I thinks it’s the status.

      And just to establish my knowledge on this, I did once fly first class on a 777 from London to San Francisco for $198. I bought a deep discount coach ticket, used a coupon I got for flying a lot to upgrade to business and then at the airport the clerk mistakenly thought I had shelled out 5k for the business class seat and said when I checked in “There’s an extra seat in first, given what you paid for your ticket I can let you have it”.

      As for Southwest, they are first and foremost a brilliantly managed company (not just in the industry, but by any standard) — a gazillion all coach airlines in Europe at least have bitten the dust during its existence.

      • Suzii says

        My mom just flew Salt Lake to Portland and got a free upgrade to first class because she’s a frequent flyer (Delta). She reports that the difference is that the packet of pretzels you get for breakfast is accompanied by a banana, although you still don’t get a napkin, so you have to wipe the residue of the peel on your pants.

        Oh, and the coffee came in a ceramic mug instead of cardboard.

        She didn’t think she’d bother paying for it.

  3. EMRVentures says

    Great metaphor, and one I will probably use and try to remember to credit (conversation, not print).

    It contains within itself the rebuttal to the idiotic “democrats hate the wealthy and don’t want anyone to get rich” line. Some folks will live their lives in first class, most will live in coach, but if no one in coach gets safely and happily to the destination, neither do the folks in first class.

    • Keith Humphreys says

      EMRV Ventures said: if no one in coach gets safely and happily to the destination, neither do the folks in first class.

      Yes, that’s how it’s different than the current economy, in which 400 people on a luxury private jet are looking out the window watching a C-130 with 150 million people on it crash into a mountain.

      • Barry says

        Seconding this – Keith, in your original post, your metaphors are staggeringly wrong.

        The whole frikkin’ point of what’s going wrong with our country is the increasing decoupling of the fortunes of the elites from the fortunes of the rest of us.

        • Barry says

          Sorry – I was staggeringly stupid, and didn’t read your post with, you know – actual reading comprehension.

  4. Don K says

    First off, Professor Humphreys, if you’re flying 100,000+ miles/year, you really should concentrate your flying on one airline, thus achieving 2nd tier elite status, and if you’re flying domestic you too could fly up front most of the time (at least on Delta or United/Continental, not sure about American). That’s the dirty secret of domestic first class: with the exception of members of the Screen Actors Guild (and maybe the Directors Guild) and certain investment bankers and consultants, pretty much nobody pays to fly first within the U.S. anymore.

    Having said that, your title says it all. It’s the business travelers who are willing to pay insane prices (I recall my company paying around $2,000 for me to fly round-trip in coach Detroit-New York for some meetings in the 90′s) who keep the airline flying at all, while it’s the folks who fly Detroit-New York for $400-500 who generate the demand that allows Delta to justify flying 21 flights between Detroit and the four close-in New York airports this coming Monday, and allow business travelers the flexibility to schedule flights when they need them and to change flights if their meetings end early or run over.

    • Keith Humphreys says

      Hi Don K. I do try to consolidate miles in one airline and as I wrote above in my response to Sven have sneaked into business on a coach ticket. Like you, I suspect this is common, which means of course that the people actually buying those tickets are *really* subsidizing the whole venture because that 40-50% of revenue is not coming from the guy in 34F who paid $200 and ended up at the front of plane.

  5. says

    There’s another differential that’s almost as important: early purchase vs late. Businesspeople historically dominate the later-purchase segment, so the difference between what they’d pay for an economy seat and a business-class seat isn’t as large as you might think. They’d still be subsidizing the rest of us (or not) if they flew economy. (And then of course there’s the vast majority of business flights that involve coach tickets purchased well in advance.)

  6. says

    It’s fine to talk about coach class passengers getting a cross-subsidy (which really exists because of an agency problem with business passengers– it’s really fun to spend the SHAREHOLDERS’ or your BOSSES’ money to get better service), but how does that justify a TAX deduction which forces even people who DON’T FLY to pay the subsidy?

  7. Kaleberg says

    You didn’t mention other subsidies, such as the cost of operating airports, the NTSB, the FAA, transportation (road and other) to and from airports, aviation research and development, indirect petroleum based fuel costs and so on. Running the air travel (and freight) system can be quite expensive, and it cannot exist without cross subsidies. On the other hand, building and maintaining an airport can often benefit a metropolitan area by increasing tourism, import/export businesses, various specialty businesses that rely on fast delivery, business conventions, and a host of other economic activity. All told, an airport is much more likely to be a profitable collective investment than a sports stadium.

    I tend to fly business class because that’s what I can afford, and it is much nicer than coach. Back in the 80s, I’d always fly coach and it cost $1200 to fly cross country if you wanted a flexible fare. Now it costs less than that to fly business class, if you shop around, and that’s in much cheaper dollars. Interestingly, $300 seems to be the magic coast-to-coast cost number. That’s what the railroads charged in the first half of the 20th century. That’s what the first cross country airlines charged. I’ll bet that’s what a sailing ship would have charged you if you wanted to get to SF in time for the gold rush in 1849. Of course, who had $300 back then.