Congestion Pricing Will Raise Fares, Won’t Stop Congestion

Jan 22, 2008

More Reading on This Topic: Fares, Government Regulation

We all know that crowded airports create plenty of nightmares for fliers here in the US, especially during the busy summer. A couple weeks ago, the FAA came out with its latest proposal to fix this by allowing for congestion pricing. There has been a lot of talk about this in the blogosphere, and some people are in favor of this plan. I am not one of those people. (If you’d like to read the the opinion of someone who thinks it is good, try here.

Before I get into my thoughts, let’s outline the plan itself. If you’d like to read along, you can see the entire 25 page docket in this PDF file. There are three basic parts to the plan.

Landing fees determined by both departure and weight instead of being solely by weight
Allowing airport construction costs to be included in landing fees before completion of project
Allowing airports to charge landing fees for secondary airports to the primary congested airports instead

It might (definitely) not be clear why this would reduce congestion, so I’ll talk about each one as I explain why they won’t actually solve the problem. It’s important to know before we get started that airports are required to charge “reasonable fees [that] must be based on the capital and operating costs of the facilities for which the fees are assessed.” (from the PDF)

Proposal #1 – Right now, landing fees for aircraft are almost always determined by weight of the aircraft, but airports are allowed to charge on a mix of per departure and by weight. This proposal actually just clarifies and I guess encourages airports to start charging landing fees based on a mix of weight and a per departure basis.

The idea here is that small jets are problems because they don’t carry a lot of people, but they contribute just as much to airport congestion as a 747. So, if you charge on a per departure basis, it will effectively push smaller jets out because they can’t spread the cost of landing over nearly as many passengers. Will that stop regional jets from flying to an airport? Some of them, sure. Higher landing fees will make for unprofitable flights.

The end result, however, may be a less congested airport, but it’s also going to mean less access to the hub from smaller communities. If flights are marginally profitable to a small city now, this plan could end up making it largely unprofitable and the service will cease. We shouldn’t be discouraging flights to smaller cities just because they don’t have as much demand.

Proposal #2 – This is really the heart of the congestion pricing proposal. Since airports can’t charge above and beyond their cost of operation, the FAA had to get creative here. Currently, airports cannot charge for construction projects in their landing fees until that project is finished. There has to be a tangible and current passenger benefit for inclusion of the cost in landing fees to be permitted. This rule would change that to allow for projects under construction to be included when construction begins.

I don’t really have a problem with this proposal in its basic form. It will encourage airports to start construction projects because they can pay down their debt faster. It’s definitely an incentive that would help get things rolling, but how does this encourage congestion relief?

Well there are two proposals here. One of them would let them only charge for construction projects during congestion periods. That way, they could charge more when the airport is congested and less the rest of the day. The other would allow these costs to be charged at any time. So why would you only charge this during congestion periods? I guess because it’s the only way they can figure out how to charge more during busy times without breaking the rule about having reasonable fees.

As a congestion-relief tool, this proposal is garbage unless you’re willing to accept large fare increases. A small increase in landing fees during peak periods will not get any airline to shift their flight times to a non-crowded time. A large increase for a more massive construction project may get some flights out of there, but the remaining flights would have to raise fares a lot to remain profitable. So you either don’t relieve congestion or you end up with extremely high pricing during peak periods just to cover costs.

Really, this would be a temporary measure anyway. As they say: “Any costs recovered for principal and interest during the construction period would have to be deducted from the amount later capitalized and amortized for recovery in the rate-base after the facility is put into use.” So, once construction is done, the fees would then be spread across all departures as they are now.

Proposal #3 – This one would allow primary, congested airports to begin charging landing fees for secondary airport operations. Put it this way. If LAX is a primary airport and it’s congested, it would be able to incorporate landing fees for Ontario into its landing fee package. Meanwhile, Ontario would be able to lower its fees so that costs would be lower over there. This can only work if the two airports are owned by the same operator.

I still don’t see how this would relieve the larger airport. Lower fees would probably encourage more flights at the secondary airport, but people still want to fly out of the larger airport. As long as that’s the case, the flights won’t disappear just because the costs go up. Instead, the fares will go up and the customers will have to pay.

Can you see a common theme here? These proposals aren’t really going to fix the problems. Now, if you could start jacking up fees to the point where airlines would stop flying routes, then you’d be able to reduce congestion. But at that point, you’d also see a steep fare increase, and that shouldn’t be the goal here.

There’s even more ridiculousness, like the fact that Pittsburgh, St Louis, Tucson, Long Beach, and others are all defined as “congested” by this proposal. Um, those are not congested airports, but I won’t get into that right now.

The primary goal should be to create more capacity by building more runways and terminals. In the mean time, we need to get better at increasing the number of flights that can be handled at the airport. I know that at JFK, for example, there are ways to get more flights in an out by reconfiguring runways. That’s not an easy task, but it’s a good medium term fix until the long term airport projects are completed. And in the short term? Airport caps. You’re going to get to the same place with caps as you are with congestion pricing. The only difference is that with caps, fares will stay the same whereas with congestion pricing, fares are bound to increase.

Brett

14 responses to “Congestion Pricing Will Raise Fares, Won’t Stop Congestion”

Nick

Jan 22, 2008 at 10:24 am

Cranky, you make some good points, and I’ll try to compose a more thorough response at some point. For now, however, I have to take issue with your final statement:

“You’re going to get to the same place with caps as you are with congestion pricing. The only difference is that with caps, fares will stay the same whereas with congestion pricing, fares are bound to increase.”

While I agree that congestion pricing and a cap on flights will lead to similar ends, I don’t agree with the last sentence. If we cap traffic in and out of an airport at a given time of day, there will necessarily be fewer flights and fewer seats available. The only place that can lead is higher fares. Demand remains the same, but now there’s less supply, which equals higher prices for the remaining seats. I would argue the real difference is where the money goes. With congestion pricing the revenue flows to the airport, under a cap the revenue (in the form of higher profit) goes to the airlines.

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CF

Jan 22, 2008 at 11:42 am

You’re right, Nick. I didn’t really state that very well. I guess I should have said that there would be no cost-based increase required with flight caps. There could, of course, be demand-based increases depending upon how the caps are implemented.

If JetBlue and AA currently fly the same route, and the caps cause JetBlue to drop it, then yes, I’m sure AA would increase the fares significantly.

If JetBlue and AA are both required to cut their schedules on that route in half, the fares will still go up since there’s less capacity but still competition between the two carriers.

But, competition will be reduced whether it’s significant congestion pricing or caps. I don’t see why the airports should be able to keep the difference.

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Marvin Schuldiner

Jan 22, 2008 at 12:53 pm

All pricing should be done on a supply and demand basis. No business is sustainable in the long run if its market prices (revenue) is less than its market costs. That is a simple fact of economics. If the 5:00 pm departure is more popular, it may well have a higher price than an 11:00 am departure.

That being said, instead of charging airlines a landing fee, create landing (and perhaps departure) slots which airlines can then bid on. The ones that are in higher demand would garner higher prices for the airport. You could create two classes of slots (one for the larger planes and another for the smaller ones) in order to keep traffic from smaller airports flowing into the hubs.

I’ve spent too many wasted hours sitting in line (or circling) at airports in the New York area. They have to resolve this. Let the market determine it.

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Zack Rules

Jan 22, 2008 at 1:06 pm

Why can’t they just order airlines to phase out regional jets? You start by outlawing 50 seat jets to large markets such as Boston, Washington and Chicago. Then, outlaw 50 seat RJ’s to midsize markets such as Buffalo, Pittsburgh and Toronto. Then, outlaw 70 seaters to those markets and finally set the minimum at 100 seats to operate at any NYC airport. Thus, small markets won’t lose RJ service to the largest market in the US and the congestion would be eased.

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Allen

Jan 22, 2008 at 2:24 pm

“The end result, however, may be a less congested airport, but it’s also going to mean less access to the hub from smaller communities. If flights are marginally profitable to a small city now, this plan could end up making it largely unprofitable and the service will cease. We shouldn’t be discouraging flights to smaller cities just because they don’t have as much demand.”

That’s the point! Let the regionals land in the off-peak hours is they want. The cities will still have the service, just not likely during peak times. There is no reason that a few people in Fargo or Utica are MORE important than the tens of millions of other people using MSP or EWR every day.

And note that reducing the number of those aircraft during peak hours WILL help to reduce traffic during peak hours which will…. reduce conjestion!

You can’t put out an all you can eat for $10 buffet and be surprised when everyone chows down on the prime rib. We need congestion pricing to for people to decide how important it is to fly during peak times.

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CF

Jan 22, 2008 at 7:27 pm

Marvin – I tend to agree. And that’s why this proposal isn’t very good. This does not let market forces take over, because it still requires landing fees to be tied to actual costs instead of demand. So, you’ll never be able to meet demand with the right amount of supply, you’ll just end up with more demand.

Allen/Zack Rules – You tend to run into a problem when you start axing all the smaller routes. Then some of the bigger routes don’t look nearly as good because the connecting passengers from those smaller flights don’t fill seats that need to be filled.

The reality is that there is no good option in the short term, because we just need more capacity. No matter what happens, it won’t be ideal until we can get that.

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Evan

Jan 22, 2008 at 7:46 pm

When you get down to the for-the-present choice, it’s caps or charging. With charging (and the FAA’s fairness requirement), every airline is on a level playing field. Caps, however, freeze out new competitors or those who want to expand at an airport, and to permit new entrants or maintain small-community service, regulatory intervention is required. Intervention will almost always produce winners and losers, sometimes arbitrarily. Can the FAA, DOT, or PANYNJ implement a cap that will satisfactorily balance these demands?

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CF

Jan 22, 2008 at 9:20 pm

Evan – I think that caps can be handed out fairly, but whether that happens or not, we’ll have to see. I’m sure there will be regulatory intervention for new entrants, similar to what we saw at O’Hare. Of course, when Independence came in with several flights at O’Hare, United and American weren’t happy about it.

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QRC

Jan 23, 2008 at 12:50 am

Cranky! You’re killing me this is basic economics here. Marvin has a good proposal! And the core idea behind the rule – in essence, charge more during peak hours and charge on numbers instead of weight – will definitely reduce congestion. People and companies respond to economic incentives, it’s just the way the world works. Yes, some of the extra details are ridiculous…that’s the problem when decisions get politicized. But realize that air travelers, as well as the companies, are also an influencing factor in these stupid political decisions. It’s this simple: companies want more profit, and pax want to pay less. But guess what happens when both groups look to the short-run rather than the long-run? They each lose economic profits…pax by their delays inconveniences in air travel, truly shoddy airlines (save a few notable LCCs) to fly on, and the airlines end up in a multi-year spiral of fare wars because their products are hardly differentiated (nor that enjoyable) which helps kill profits in a time of insane commodity prices and overcompetition.

I am a traveler but also a realist; the way the system is setup, air travelers cannot have it both ways. We dream of the lowest possible fares but then are angered when they’re delayed, inconvenienced, have poor service, bad seats, etc. It’s called paying for the level of service you pay for. I am reminded of a frequent argument by my mom whose logic is flawed: She is socially very liberal, but is also a small business owner. Hence, she wants to increase government spending as much as possible to help every social cause imaginable, but also abhors paying absolutely any tax. Zero. Zip. Ideal? Yes. Plausible? No.

Congestion occurs because the current cost of the good (in this case, landing rights) is supported by an unfair subsidy (the stupidity of charging primarily on weight). Why should landing rights be treated any differently from any other pricing structure? Take this example I’ll make up here:

Assume the price of gold on the market is $100 per pound, and the cost of silver on the market is $50 per pound. Now assume there is a government…call it “USA ATC Company” that owns these two mines, and tacitly agrees that if as you as an individual want to mine in either mine, you pay $75 per day to USA ATC Company. Who knows why they came up with that amount. They just did. And you can’t really argue it. There are 100 people who want to work the mine split into two two types – those who can dig up 10 pounds each day, and others who can dig up only 1 pound each day. Only 50 people can work in each mine at a time. Well it doesn’t take a genius to say everyone is going to try to work at the gold mine…the guys who dig only 1 pound per day will lose money if they dig in the silver mine. And the guys who can dig 10 pounds would prefer the gold mine to maximize profits. So what happens? everyone tries to jam into the gold mine, crashing into each other along the way, breaking each others legs, and causing general mayhem for all. What if this happens, instead?

Two solutions here:
1.) Force the guys who can dig 10 pounds a day to mine the silver mine, and let the guys who can only dog 1 pound per day mine the gold mine. This is now a more plausible solution, but still remarkably inefficient.

2.)The cost of mining in the silver mine is lowered, from $75 a day to $25 a day. The cost of mining in the gold mine is raised, to $100 a day. Now the guys who can only mine 1 pound per day have both a profitable solution and zero economic incentive to mine the gold mine. The guy who can mind 10 pounds a day still makes far more money mining gold, and hence chooses that route.

Ummmm..:) the illusion can’t be that far off your mind. Rewrite “gold mine” with “rush hour at the airport” and “silver mine” with “off hours”, “guy who can dig up 10 pounds a day” as a big a@$ 747 full of biz travelers from LHR and the “guy who can dig up 1 pound a day” as a regional jet from Syracuse. If, for some reason Bill Gates moves to Syracuse and is willing to pay $20k for that flight, then it becomes a “guy who can dig up 10 pounds a day.”

In reality, Marvin’s bidding system is better, but this is just to get the theoretical framework on the table.

In a perfect world we would have a brand new ATC system, more efficient use of airspace, more runways that we actually could use, etc. But it’s not like that now. It’s not efficient, fair or effective system to allow fixed pricing combined with unprofitable routes to continue at the expense of everyone else’s congestion. Indeed, if you want to encourage less profitable routes for utility reasons you can always lower landing costs at different hours. This may sound macabre, but it is going to take someone who is not a flying buff to solve this issue…the airlines, pax and others all have too many self-interested (and economically inefficient and ultimately deleterious) reasons at stake. It’s like the guy who runs Ryanair. He hates airlines and airplanes and makes fun of people who like flying, and runs the most profitable one in the world.

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Dan Hill

Jan 23, 2008 at 7:12 am

We run airports the way the old Soviet Union ran department stores – everything is cheap but you’ve got to queue for hours to get it. Ask yourself why everthing we price like this is congested (airports, roads) but Wal Mart don’t have the same problem funding new stores if the demand is there.

Make no mistake, we’re already paying for congestion, not in money (although there are costs like fuel burn while holding that the airlines will be building into the fares) but definitely in terms of time and convenience.

The problem with the FAA’s proposals is that they are still hung up on the traditional regulatory pricing regime where price = cost plus some agreed profit margin. The problem is, that is probably not the market clearing price i.e. the price at which demand is equal to supply and there is no congestion.

In terms of your specific question about why extra fees to cover expansion costs should only be charged during peak times, the answer is simple. It’s to cater for the peak time use that the expansion is required.

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CF

Jan 23, 2008 at 11:43 am

I think the common theme here is that everyone wants to keep the money. Passengers want low fares, airlines want profits, and in this latest proposal, airports want to keep more money (though I realize it’s not the airports making this proposal). So who should get to keep it?

You also run into the massive clash between government and business here. The airlines are businesses, but most of the airports in the US are run by local governments. The government sees a big benefit in having access to as many cities as possible, but the airlines just want to fly the routes that are most profitable. When slots become scarce, you have to choose between a second flight to Boston in an hour or a single flight to Buffalo. You know the airports want it one way and the airlines the other.

Of course, the solution they all want is more capacity, but that’s where the NIMBYs and environmentalists step in. Just think of how delays would disappear if SFO could move one runway further out into the bay. This isn’t even an additional runway, but they still can’t get it past the environmentalists.

Or how about my local airport in Long Beach? I’m probably the only person under the flight path who thinks we should have more flights. Everyone else thinks that since they live there, flights should disappear. Too bad they showed up long after the airport.

But I’m getting off topic. As Evan says, in the short term we have caps or we have congestion pricing. If we go with congestion pricing, the airports get to keep the money. If we go with caps, the airlines get to keep it and potentially the passengers as well depending upon how it happens. Who should get to keep it?

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Allen

Jan 23, 2008 at 11:47 am

CF –> No one is proposing axing those smaller planes. Nothing says that they can’t pay for the higher landing fees during peak times. That is everyone’s choice to do so. The assumption is that since they’re smaller, the per passenger hit on cost is going to be higher. It’s less like that they’ll continue to do that.

And I’ll say yet again, “there is no reason that a few people in Fargo or Utica are MORE important than the tens of millions of other people using MSP or EWR every day”. So if those smaller routes do choose not to pay for those higher fees for peak times, why should they be around? If the problem is that without the trickeling of passengers from those other flights, the bigger hub flights are no longer viable…. who cares? That’s an issue with the hub and spoke system. It doesn’t preclude those flights from occurring. It just means that instead of UAL flying a 767 between ORD and DEN, they’ll be flying a 757. The folks in Aurora or Westminster or Chicago or Arlington Heights should haven’t to be subsidising either with cash or their time (probably worth more than cash) the hub and spoke set up just so some business guy in Janesville or Springfield or Pueblo or Casper can get to and from Chicago ro Denver a bit easier or bit cheaper.

And to take that another step, I would argue that if the hub and spoke model going bye-bye is a concern, congestion pricing doesn’t preclude it. It just means it’s all the more likely that the Casper-Denver flight is going to land at 4pm instead of 4:45 to catch that 5:35 departure to ORD. That is, the mo from Casper is going to sit around the airport longer rather than 130 people sitting around longer. Which does the greater good again?

Congestion pricing does not prevent anyone from doing anything they’re not already doing. It just makes it more likely that the little guys are going to adjust their schedules are going to change around.

As for caps, please, we’re talking about government doling those out. Yes, in theory it could be done fairly. But there are a lot of things that can in theory can be done, such as fission. The problem is that we’re no where near doing that today. Caps will be manipulated in the long run to keep some competitors completely out of the market and also to ensure that capacity is kept as low as possible to keep prices as high as possible.

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CF

Jan 24, 2008 at 8:37 am

Allen – Maybe I should have separated my responses to you and Zack Rules. Zack was proposing that we axe regional jets completely.

Here’s the thing. If all these flights were simply serving origin & destination passengers, then I think the argument would be stronger for permitting the flights that carry the most people. But we know that a significant number of people are actually connecting passengers. (Yes, that percentage is smaller in a place like New York, but they’re there.)

So, let’s look at the O’Hare to St Louis market. Between 4p and 8p there are 7 departures from O’Hare to St Louis on United and American. Though I don’t have this information at my fingertips, I think it’s safe to say that there is a good amount of connecting traffic on those planes coming from the East Coast and Europe.

If we eliminated two of those flights, there would still be plenty of seats available to satisfy the local traffic even without upgauging the aircraft. As for the connecting traffic . . . they can connect through some other hub. Atlanta, Dallas/Ft Worth, Washington/Dulles, Minneapolis, Detroit, even Cincinnati or Cleveland.

So this is an instance where I think you can cut flights without sacrificing much.

Now, let’s look at Fargo. There is one flight a day from O’Hare to Fargo between 4p and 8p. The only other flight that goes east from Fargo is to Minneapolis. So, the utility to people of Fargo is far greater in having that flight than the utility to people of St Louis to having their multiple flights.

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Allen

Jan 26, 2008 at 11:12 am

“Now, let’s look at Fargo. There is one flight a day from O’Hare to Fargo between 4p and 8p. The only other flight that goes east from Fargo is to Minneapolis. So, the utility to people of Fargo is far greater in having that flight than the utility to people of St Louis to having their multiple flights.”

If that utility is, the people in Fargo would be willing to pay the extra price. If not, it’s not worth as much to them as the the value of addressing the congestion. Congestion pricing doesn’t keep anyone from doing the take-offs and landings during those times; it just makes sure they’re paying what those slots are actually worth.

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