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Airlines and Congestion Pricing

This article from The Washington Post says something that needs to be said about the US airline system:

Thirty years ago, Alfred Kahn, then-head of the Civil Aeronautics Board in the Carter administration, used this analogy in a speech to the airline industry:

Suppose all meat from a cow was sold at a uniform price per pound: tenderloin, sirloin, ground chuck, soup bones. Demand for choice steak cuts would soar, even as overpriced hamburger rotted on store shelves.

And to meet this new demand for steak, huge swaths of the country would have to be converted to cattle ranching and growing cattle feed, crowding out other uses for that land.

Kahn's message: If you misprice things, you prevent markets from matching supply and demand and wind up misallocating scarce resources. And what is true for hamburgers and land, he argued, also applies to the limited space at and near airports during peak hours.

Kahn recommended that the price paid by airlines for airport and air space in peak periods be high enough so that it not only brought demand in line with supply, but gave officials the money and incentive to add runways or air traffic control capacity whenever the price paid for peak hours exceeded the cost of adding capacity.

This concept of "marginal cost pricing" ought to be familiar to anyone who has taken a basic college course in economics. But what is so astonishing is that 30 years after Kahn laid out his case, a decade after it was proposed by the Clinton administration, six months after it was officially embraced by the Bush administration, and in the midst of a consumer revolt over flight delays and cancellations, "congestion pricing" is no closer to reality...

In a letter last week to Transportation Secretary Mary Peters, James May, the president of the Air Transport Association, said the industry was opposed to any policy aiming to "artificially" constrain demand.

Perhaps it doesn't occur to May that a system that charges the same price for steak and hamburger is the artificial one, by creating artificial demand.

We need to do something about delays in the air traffic system. In August, just 72 percent of flights were on time. For the typical traveler on a two-segment trip, they had only a 51.8 percent chance of both their flights being on time. For a traveler on a round trip of four segments, they had only a 26.9 percent chance of all four flights. Think of it: in the summer of this year -- of 2007! -- only one in four travelers using a hub-and-spoke airline had all their flights arrive on time.


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