Amidst the debt ceiling standstill on Friday, July 22, the U.S. Congress failed to approve the extension of a bill to keep the Federal Aviation Administration in operation, making it likely that the organization will remain closed through August. As a result, the government will likely lose at least $1 billion in tax revenue (at a rate of $25 million per day). But these savings have not been retained in travelers’ pockets: Instead, airlines have raised ticket prices to cover the difference, making a windfall of the error.
The oligopolistic nature of the airline industry allows firms to collude and engage in price discriminating practices. However, with this power comes an ethical responsibility for supply-side transparency. The absence of free market controls has created a moral hazard on which our country’s airlines have capitalized: To any consumer not following the issue in the news, ticket prices have remained static, rendering the firms’ actions arguably corrupt.
American, United, Continental, Delta, JetBlue, US Airways and Southwest were among the airlines that raised ticket prices the day of the tax’s expiration, mostly by around 7.5 percent (exactly the amount needed to correct for the tax). Spirit, Hawaiian and Alaska have abstained from the practice, but as the three have limited flight coverage, the effect of their actions is minimal. While Spirit has seen a 22% increase in sales recently, this trend is unlikely to lead to an industry takeover: Frequent flyer programs, which foster brand loyalty through a meritocratic reward structure, create inertia within the consumer market and further distort buy-side incentives.
The biggest problem with ticket price inflation is that when the FAA is restored, airlines may not reduce prices to their original level, leading to an artificially high post-tax fare. The veracity of this fear can be gleaned from any analysis of government (and by extension, industry) dynamics: Once a policy is instated, it is difficult to revoke — and increases usually trump reductions. As exhausting as it has been to raise the debt ceiling, any proposal to lower the ceiling would likely fall on deaf ears. Similarly, the Federal Reserve holds the power to inflate the American dollar, but attempting to deflate currency is a far less viable feat, requiring widespread coordination and reform. With an eye towards Washington, national government is ever-expanding, as the creation of new bodies and departments all but guarantees their perpetuity.
In addition to these losses on ticket purchases, consumers are also financing the shutdown itself as it wastes taxpayer dollars by extending timelines of ongoing FAA projects. Airport construction involving rental fees incurs fruitless costs while workers are off their jobs, meaning the country must pay thousands of dollars each day while Congress delays rectifying its error. Thus, although the tax on tickets has temporarily been suspended, travelers are already seeing decreased returns on their investments: The same payments provide them with a lower level of productivity and service.
The deadweight loss already imposed by the shutdown is likely a microcosm of the effect travelers will soon experience; and given the comfortable profit margin associated with oligopolies, airlines owe any savings from the ordeal to their customers. Unfortunately, it seems that the damage has already been done — in the words of Julius Caesar, “alea iacta est.” It is up to consumers to decide whether they will be passive price takers, or if they will take action to ensure that the market returns to its rightful equilibrium.
Perhaps the real moral of the story, then, is simple: When partisan politics lead to a two-party standoff, everyone from the FAA janitors to the jet-setting glitterati loses out.