25 July 2007

When is a breach of contract not a breach of contract?

When one of the parties is an airline.

Wall Street Journal columnist Scott McCartney reports that for the first time in 29 years, the Department of Transportation is considering raising the paltry sum airlines must pay when they bump passengers from flights due to overbooking:
The federal agency is asking travelers to weigh in on the issue and will take comments from the public until Sept. 10. After that, it will propose a new rule, which would likely be effective next year.

Airline bumping, when passengers with confirmed reservations get left behind because of overbooking, is on the rise. In the first quarter this year, 1.45 of every 10,000 passengers were involuntarily bumped from flights on U.S. airlines, up 11% from 2006. That's a higher rate than even the late 1990s when airline service deteriorated under crowded flights and long delays, and the increase caught the DOT's attention.

"This year things have really gone in a different direction, and this is one of several consumer issues we're dealing with," said Andrew Steinberg, the DOT's assistant secretary for aviation and international affairs. Among the issues under study: congestion, delays, and passengers kept on grounded planes for extended periods.

For the record, I'm not in favor of raising the mandated compensation -- I'm in favor of doing away with it altogether and letting bumped passengers claim for breaches of contract and the actual damages which flow therefrom. Absent a government license to unilaterally disavow a contractual commitment, a breach of contract is what passenger bumping really is.

While I think that a normalization of contracts in airline travel would be advisable, I don't believe for an instant that it would be without significant cost to travelers. By allowing the airlines an essentially cost-free option to abandon their passengers when it suits their business interests to do so, the airlines have been able to, in effect, increase the supply of airline seats beyond the actual constraints of their fleets. This increased supply is reflected in lower ticket prices. Take away that artificially-inflated supply of seats and the same level of demand for air travel will result in greatly-increased ticket prices.

Would it be worth it? The airlines know that they sell more tickets (not all of which will be traveled by passengers) because fares are historically low; consumers certainly don't want to pay more than they need to. The wonderful thing about a free market, even one where normal contract rules are enforced, is that parties can strike their own bargains, taking account of their subjective considerations.

Today's budget-conscious travelers are willing to absorb staggering levels of physical discomfort in exchange for cheaper fares; business travelers whose schedules change frequently are willing to pay much higher prices for fully-refundable tickets. Similarly, if the current rules were abandoned, some travelers would be willing to accept a "bumpable" ticket if the price were right. Left to its own devices, the market will find its own level.

Much of the frustration expressed by those commenting to the DOT concerning the proposed rule change (many are quoted in McCartney's column) is not directed at the practice of passenger bumping per se, but rather at the low value placed on that privilege by the current rules. In essence, much like other government-mandated pricing, this one gets it wrong; considering the high demand by airlines for the right to bump overbooked passengers, the government has set an artificially-low price.

To raise that price, as the DOT currently is considering, might ameliorate the discrepancy somewhat (and might even get the price right in the short term), but over time the underlying problems associated with government-set pricing would reassert themselves. It's better to give up the charade and let the market work.

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