Where’s your network?
Posted by Daniel Hall on June 3, 2008
Ryan Avent wants to know if carbon and congestion pricing will boost the case for regional rail:
I’m of the opinion that a carbon pricing scheme would give a boost to rail travel over both driving and short-haul flying. But a potentially more important factor in some regions might be the runway congestion charges under consideration. I suspect that auctioned spots would tend to go toward long-distance flights, for which there are few good substitutes (question to the gallery: what are the high margin flights–where do airlines make their money?). Were that the case, demand for regional rail should significantly increase.
Aviation policy wonk Evan Sparks replies that short hop flights are a valuable underpinning of the airline industry:
An airline hub offers positive network effects up to the point of congestion, which varies by airport. Without the network effects of hubbing, few cities could support much air service on their own — especially long-haul international service. Sure, New York, Chicago, Los Angeles, Boston, and Miami might be OK, but even they would see cuts. Without sufficient short hops to feed the hub, marginal international destinations would face the axe. Therefore, you can’t discourage simply limit short-hops without seeing network effects. … policymakers must be cautious when tampering with the ability of airlines to take advantage of network effects in offering air service widely and efficiently. (emphasis added)
Evan knows more about the practical in-and-outs of the airline industry than I do about any subject whatsoever, so I want to be careful with my reply. But I think he is assuming that the existence of network effects implies that there are positive externalities, and it’s unclear to me that this is the case here. The examples Evan cites in his post involve private benefits that are being captured in market prices, e.g., Delta decides to use a hub-and-spoke service model because that is how it is most profitable. Network effects sometimes do have associated positive externalities. For example, if many different actors own or operate the network then each may have insufficient incentive to invest in it — the free rider problem — and so there is a case for regulatory intervention to encourage the socially optimal level of investment. But in this case it sounds like a single actor (i.e., the airline firm) operates the network.
Congestion, on the other hand, generally involves an unpriced negative externality — Delta’s use of runway space doesn’t only delay Delta’s other planes but also those of competitors — and hence there is a case for regulatory intervention.
The original question concerned which flights were high margin and if you read Evan’s response it does indeed sound like it is long-haul international flights that are most profitable. This seems intuitive to me since there are just not any good substitutes available. So I’d expect to see these flights to continue even once we price carbon and congestion. It’s also reasonable to think that pricing these externalities will decrease demand for short flights. This worries Evan:
Airlines have gradually centered themselves around hubs. … This tends to be more efficient, even if some individual flights defy logic. A couple personal examples: whenever I go to New York, I take surface transportation. But last year I flew through JFK from DC (thirty minutes) to catch a flight to London. On a trip to New Orleans last month, I flew first from Baltimore to Philadelphia — a fifteen minute flight. Such options maximized efficiency and provided me with much cheaper options than had I relied on nonstops.
Two things about this: First, I suspect that neither Evan nor any of you really care that much which mode you take to reach your nearby intermediate destination. If a flight is better — faster, cheaper, more convenient — then you’ll fly Baltimore to Philly, but if a train is better you’ll hop on board. Right now flying is cheap because it involves lots of things that neither you nor the airline pay for, like a warmer world, or other delayed passengers. If you have to pay the price for those things, however, rail might look a lot better. Second, what are these 15 and 30 minute flights Evan is talking about? I can’t imagine that these are the actual marginal increment of travel time that his short flights added to his trip. Let’s talk about boarding, taxiing, etc.
But these brings me to my final point, which is that as much as airline travel can be a hassle, it is very often even more inconvenient — or even downright impossible — to switch modes within a single trip. One of Evan’s commenters makes a very smart observation about this point:
What we really need is more of what Continental does with Amtrak – intermodal codesharing. You’ll notice that Continental doesn’t fly EWR-PHL. You have to take an Amtrak train with a Continental code on it. …
Of course, that requires a convenient plane to train connection and not many hub airports offer that. Sure, US Airways could do it in Philly if we could get a station built near PHL. That’s a long ways away and it will require a lot of money, but it’s ideal.
Which goes right back to a point which you can read Ryan making nearly every day on his blog: once we start pricing carbon and congestion, it will be much less painful if we have transportation options that are not carbon- and congestion-intensive. Rail is one of those options. This means that rail would be a smart infrastructure investment, and it also means we should get the institutional structure right to allow travelers to transfer between modes.