The EU has recently passed a law making airline companies compensate customers for delayed or cancelled flights as stated in the article "EU Strengthens Passenger Rights". There are fixed rates, ranging from £173 for short flights, £276 for medium-haul and £415 for long-haul flights. (Reported dollar amounts vary.) If the flight is cancelled, the airlines must provide “refreshments and overnight accommodation.” These compensation penalties exclude delays and cancellations that are out of the airlines’ control. Many of the short flights that carry steep penalties are only £10 a flight. This means if you book about ten flights at £10 a piece, assuming the EU flights are as reliable as the U.S. flights, you’re bound to get penalty money for at least one. So, you spend £100 a day and get £173 a day in return for your efforts. This is a 73% increase on your investment daily. This is only the numbers for the short flights…let’s not forget there are bigger penalties for the longer flights! Oh, to think like a capitalist!

While I agree with the idea that some compensation is due for a flight being late, I think that a major perverse incentive has been created here. By doing this, airline companies are simply going to raise their rates passing the cost on to the customer’s; narrow minded people are going to abuse the system, and overall the customers will lose out.


kenny said...

This is a great example of how government regulations can destroy capitalism. Thank you for posting this, I hope that Americans can learn from Europeans mistakes.

Eric said...

I don’t know quite what to think about airlines having to compensate there customers for delays. It seems to me that market forces enough would reduce the possibility of preventable delayed flights. If the consumer is dissatisfied with the service or the product in a free market they can go else where. What's next making Smith's compensate for long check out lines? I say let the market decide.

Diane said...

These regulation seem like a new way for people to make money that doesn't belong to them. The market should be enough of a regulation.

jon said...

Actually with UK tax and charges at least £10, you would be very lucky to get a flight for £15. The flight needs to be over 2 hours late and you would also need to check-in on time for all the flights, so you will typically need at least 3 hours to get compensation for each flight.

For denied boarding, airlines can make lower offers for volunteers, so the real economic story here is which airlines will manage this correctly (perhaps using yield management) to gain a competitive advantage.

Dr. Tufte said...

This is a very cool post.

I'm dubious about the business plan outlined by MEG, but if it exists this is an example of what is called arbitrage in finance (and economics).

Arbitrage is the profits that can be made (almost costlessly) by buying something at one price and selling at another. In this case, you buy airline tickets and turn them into delay compensation.

Arbitrage is important in the real world because it can quickly make discrepancies disappear (because it looks foolish when someone scames the system).