Airlines Treat You Badly Because They Can
After a decade of mergers and takeovers, there's not much competition left in the US airline business.
If you've ever wondered why airlines in the US seem so terrible, from the cramped seats to the constant delays and the inexplicably bad responses to their customers being roughed up by goons, this graphic might help you understand the situation a little better:
Farewell, airline competition
Over the last decade or so, 11 big US domestic airlines have shrunk down to five extremely big ones, in a frenzy of takeovers and mergers. With less competition to worry about, airlines are now doing exactly what you'd expect them to do: spend less time worrying about how to keep their customers happy, and more time working out how to make more money.
It's not rocket science, and it's the same reason your cable company's customer service sucks so much. What are you going to to about it?
(It's also the same reason why restaurants tend to treat you pretty well.)
A few years back, inspectors at the Department of Transportation tried to figure out exactly how connected competition is to good airline service. They studied the delayed flights over a seven-year period beginning in 2005, and checked to see if delays increased as competition between airlines decreased.
The results look pretty much exactly like you expect they would. Here's a graph of the average delay time across all flights, and how it changes as competition goes from intense, on the left, to nonexistent, on the right — things get rapidly worse as competition thins away, and then remain at a baseline level of terrible as the market moves toward a monopoly:
"We determined that variation in airline service quality related substantially to changes in the level of competition within airline markets," the DOT inspector-general's report concluded. "Specifically, reduced airline competition increased both the length of delays in some markets and the number of flight cancellations in others."
Less competition means you don't have to worry as much about annoying people with delays or overbooked flights. It also means you can make a lot more money. There's less pressure to cut ticket prices — even when the price of oil, an airline's biggest cost, is plummeting — and its easier to introduce ever-more obnoxious fees and charges.
The profitability of the US airline industry recently hit an all-time high, and as a whole, it made an estimated $20 billion in profits in 2016. That's up from $7 billion in industrywide profits in 2013, which itself was a glory year compared to the $10 billion in losses the industry reported in 2004.
The industry is now so profitable that mega-investor Warren Buffett is willing to put his money into it, after a long history of avoiding it like the plague. "The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines,” he wrote in his 2007 letter to investors.
Things change. His investment company now owns more than $9 billion in airline stock, spread out pretty evenly across the four biggest US airlines. Even that industrywide bet is notable: His fund didn't bet that one company would beat the others — it bet that one industry would beat the rest of us.
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