Airline Ticket Prices Are Wacky

I just returned from a trip to Australia and Japan. When I first priced the trip, it looked like it was going to cost about $6,000 traveling on the most discounted economy fares. However, there was one routing that stood out. It cost only $2,000. Here it is:

$2,000 routing

Yes, by flying much farther you can pay a lot less.

Much to my surprise, flying from Australia to Japan is much cheaper if you go via Los Angeles instead of flying a more direct route. Yes, by taking more flights, burning more fuel, taking up more airline personnel time, and eating more great airline food, i.e. costing the airline more money, they will charge you less.

That sums up the problems with airline industry – they are too clever for themselves. The airlines use complex pricing models to try to fill all the seats on their planes. They place various restrictions to try to segment their buyers by the price they are willing to pay and the restrictions they are willing to put up with it. Required Saturday night stays seem to be a thing of the past, but are now replaced by strange routings to get reduced fare tickets. The above routing is an extreme example.

And yes, I did fly this routing. Flying an extra 9,000 miles compared to a more direct routing is not fun, but saving $4,000 is. Several airline gate agents quizzed me about the strange routing and wondered if it was some elaborate scheme to collect airline miles. Nope, just trying to take advantage of the airlines’ wacky pricing models to save some money.

Airlines used to be held up as an example of efficient pricing: set up a complex pricing structure with many different prices and restrictions so you get each passenger to pay the maximum amount they are willing to pay.  The problem with this is that passengers are aware of it, and they will do what they can to take advantage of it. And it frustrates passengers to know they are being manipulated this way. (Want to know the range of prices people paid on your flight? Look it up on FlightAware. You might be surprised at how little most people pay, and how embarrassingly high a price a few people pay.)

This pricing model is a “look at the trees and ignore the forest” strategy. Don’t be so clever airline guys. Follow the lead of Southwest Airlines in using a simplified pricing model. Sure, it is not as clever as your complex pricing models, but who makes more money, Southwest or your airline?

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Eurozone Crisis for Dummies

Uncertainty about the Greek economy and whether Greece will be able to continue using the Euro as its currency have caused stock market gyrations lately. Why?

First, what is the basic problem in Greece? In its simplest form, the problem in Greece is too much government debt. Too much debt, as in there are significant doubts about whether Greece can ever repay it. You can argue about why Greece has too much debt: too much spending, too little taxes, or some combination, but it is important to keep in mind the basic problem is too much debt and doubts about Greece’s ability to repay it.

So what are possible solutions? Well, what if you were in a similar situation? What if you had so much debt there were doubts you could repay it? You could do several things:

  1. You could cut your spending, and use the extra cash flow to start paying down your debt to more controllable levels.
  2. You could increase your income by getting an additional job, getting a raise, or switching to a higher paying job and use the increased income to pay down your debt.
  3. You could declare bankruptcy to restructure your debts to a level you could actually repay.

None of these options is pleasant and not all of them may be available in every situation. Increasing income is particularly difficult, so most people focus more on reducing spending when they realize they have a debt problem. If they do not realize they have a problem they continue piling up debt until bankruptcy is their only choice.

Countries have these same options, plus some others. They can cut spending, increase income, and declare bankruptcy. These actions embody fiscal policy. In addition, most countries can control the available supply of money in their country. By making money more or less available, countries generally try to keep a stable level of growth so business is able to flourish but inflation does not get too large. This is monetary policy.

Using each of these actions to get out of debt like Greece has leads to problems:

  1. Reducing spending can be difficult for people who depend on government spending. In the current Eurozone crisis, this is called “austerity.”
  2. Increasing income is mainly done through increasing taxes, which has the effect of depressing business activity leading over time to reductions in tax income. (To me, this is what actually should be called austerity.)
  3. Declaring bankruptcy makes it difficult to borrow money for an extended period of time, so it leads to a time when balanced spending (through actions 1 and 2 above) is required, not optional.
  4. Debt levels can be reduced through monetary policy by inflating the money supply. This provides more money to repay the debts and causes inflation so future debt payments are paid with devalued currency, which effectively lowers the amount of the debt.

Politically, option 4 is the obvious choice. Cutting spending and increasing taxes are politically unpopular, so most governments have difficulty doing them. (In the U.S. what we call cutting spending is actually just reducing the rate of increase in spending. It never actually goes down.) Bankruptcy is a drastic solution, and it just leads to more of 1 and 2.

So inflating the money supply is the politically easy way to go. Constituents don’t really notice it at first, and when they do politicians can blame it on businesses raising prices. Win-win! This is the traditional way for governments to get out of sticky debt situations. Unfortunately for ordinary citizens, particularly those on fixed incomes, this causes a reduction in income. Your fixed income buys less because everything costs more. Sorry, but the government has to repay its debts somehow.

And unfortunately for Greece, because of its membership in the Eurozone it does not have independent control of its monetary policy so it cannot inflate its way out of its current debt situation. This is why Greece leaving the Eurzone is being considered. Once it is back to having its own currency, Greece can inflate its way out of its debt. Good for the Greek government, but bad for Greek citizens as they deal with rapidly rising prices.

But Eurozone countries say they support Greece, and there is support for providing more loans to Greece. Does this make sense? Let’s go back to our comparison of the options available to an individual. If you have too much debt and someone tells you the solution is to provide you with more debt, would you believe them? A lot of people do believe things like this, and it never ends well.

The hope is that providing more loans to Greece will give it more time to cut spending and increase taxes. Since Greece is not the only country in the Eurozone to have government debt problems, this will also give other countries (Spain, Italy, Portugal, Ireland) time to get a better handle on their own debt problems before the shock of a Greek bankruptcy or departure from the Euro causes them additional problems.

The Greek people do not appear willing to go along with either decreased government spending or increased taxes. Therefore, Greece is on the path for either bankruptcy or leaving the Euro and inflating its currency. More loans will only delay the inevitable and make the problems worse in the meantime.

Look for Greece to leave the Euro at some point this year as its options run out. Politically, it is the easiest solution for them. The next question is whether it will end there, or if Greece will be the first domino that triggers a succession of countries departing from the Euro.

(Note: This post is a result of traveling the last two weeks and getting a steady dose of CNN International, which reports the same shallow overview of events over and over and over again. And the news always seems to be framed in the context politicians prefer, e.g. calling reducing the rate of increase in government spending “austerity.” I feel much better after writing this and getting out my frustrations!)

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TSA PreCheck – No Waiting, No Undressing

The U.S. Transportation Security Administration (TSA) has a new program, called TSA PreCheck, that allows certain trusted travelers to pass through security without removing their shoes, without removing jackets, without taking laptops out of briefcases, and without taking liquids out of their bag. The bags still go through an X-ray machine, and the traveler still goes through a metal detector, but it is much less hassle than the standard preflight screening. Basically, it is screening done pre-9/11 style.

How do you get on this list of pre-screened travelers? I am not exactly certain. I received a notice from American Airlines that I was in the program, and I have experienced it a couple times. (It is not available at every security screening location.) When I have been able to use it, it has been great. Aside from not having to unpack and undress, the security line is much shorter since not many people are in the program yet. Even the screeners are more friendly and helpful, probably because they are much less busy and are dealing with people who already know how to get through the screening process efficiently.

Want to get in the program, and no airline has invited you? It looks like you can become part of TSA PreCheck by joining the Customs and Border Patrol’s Global Entry program. That will cost you $100 and requires a background check and personal interview with a CBP agent, but that program lets you bypass the long lines at customs when entering the U.S. at some locations, including DFW. If you travel a lot, it’s worth it.

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I Am The Greenest Man in the World!

No, I’m not quoting Al Gore in the title of this blog post. I am speaking as myself. I just realized I am the greenest man in the world, and possibly the greenest person in the world.

Sure, Al Gore is generally recognized as the greenest man in the world. After all, who has done more to publicize the inconvenient truth of global warming and to plead for – no to compel –  us all to reduce our carbon footprints in order to save the planet. He says:

Each one of us is a cause of global warming, but each one of us can make choices to change that with the things we buy, the electricity we use, the cars we drive; we can make choices to bring our individual carbon emissions to zero.

Yes, we each must do our part. Of course, none of us are as noble as Mr. Gore, so we must settle for half-measures. Or, at least that is what I thought. Then I compared my carbon footprint to his.

Here is a quick tally:

Carbon Producing Item        Mr. Gore                Me                                     Advantage

House                                             10,000 sq ft           1,000 sq ft                          Me

Cars                                                 Limo idling           Toyota SUV                        Me

Travel                                              private jet             airline economy class        Me

Those are the big carbon producers, and the tally is not even close. I figure my carbon footprint is about 1/20th of his. So, I declare myself the new greenest man alive! Care to challenge me?

Oh yes, there is one green area where Al Gore beats me hand down, making money off investments in green companies. If I was cynical, I would think his public speeches are related to this rather than real concern for the environment. No, that can’t be it.

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Review: An Economist Gets Lunch by Tyler Cowen

I recently read “An Economist Gets Lunch: New Rules For Foodies” by Tyler Cowen, a professor of economics at George Mason University. The blurb at Amazon made it sound like something right up my alley:

Tyler Cowen discusses everything from slow food to fast food, from agriculture to gourmet culture, from modernist cuisine to how to pick the best street vendor. He shows why airplane food is bad but airport food is good; why restaurants full of happy, attractive people serve mediocre meals; and why American food has improved as Americans drink more wine. And most important of all, he shows how to get good, cheap eats just about anywhere.

In the end, it was an interesting book, but not the rigorous, scientific approach to food I was expecting. The typical passage starts out with a presupposition. e.g. how to get cheap, good food anywhere, and then tosses out a few anecdotes illustrating how the author was able to get cheap, good food in an unusual place, with some economic principle thrown in to show it is all very analytical, don’t-you-know.

The problem is it all seems backward. It seems like Mr. Cowen starts with the answer and then comes up with an economic explanation for what he believes to be true. In the beginning, he explains how Prohibition is to blame for U.S restaurants being so bad until recently. OK. Sounds plausible. Restaurants make most of their profit from alcohol sales. If they cannot sell alcohol, they naturally go for cheap food rather than quality.

The next section of the book discusses how to shop at the supermarket and says that ethnic markets are the place to shop. Their customers are more geared to cooking at home so they know more about how to shop at a market, thus forcing the markets to stock higher quality items. Maybe things are different in the D.C. area where Tyler lives, but around here the produce is much fresher in most traditional markets than it is in the ethnic (Asian and Latino) markets. Of course, it must be economic pressures, but that is my point. You cannot do economics by starting with the answer and fitting the problem to fit the solution. It requires a broader scope.

Overall, this is an entertaining book, but it does not offer any unique insight or economic perspective. Or maybe I just don’t understand economics. Maybe economics is a lot fluffier than I thought and the economic descriptions in the book are the way economists really discuss ideas.

No, probably not. More likely, it has been fluffed so it will appeal to a wider audience. That’s OK. It is just not what I expected. An Economist Gets Lunch  is worth reading if only to learn how to find good, cheap food wherever you go.

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Satellite radio is subversive

My new car came with a free three month trail to Sirius XM satellite radio. It has hundreds of channels of programming, and being an engineer I had to listen to them all to decide if I should pay for a subscription once the free trial ran out. (To end the suspense, yes, I subscribed.)

Sirius offers a good variety of music and talk channels, and I have listened to them all, if only for a few minutes. What surprised me is that I find myself returning to Sirius XM Hits 1 (channel 2) over and over again. That can’t be me. I am a middle-aged, white male. I should be listening to political or sports talk radio, easy listening, or, if I want to stay in touch with my youth, some 70’s rock.

Instead, I now know who Kimbra, Flo-rida, Sia, fun., Neon Trees and Gotye are, and I enjoy their music. (By the way, whoever thinks the younger generation is illiterate should pay attention to how they use grammar and punctuation. Clever of that Gotye to be pronounced Gautier. Perhaps his first name is Dick?) Maybe this is a temporary phase or one of those famous middle-age crises. I don’t know, and I cannot explain it. I am just enjoying it for now.

In an homage to Flo-Rida, I am thinking of starting my own musical act. I will call myself Tex-Azz, and I will be a country hip-hop artist. If only I had any musical talent! In the meantime, I will enjoy listening to fellow DFW native Kelly Clarkson sing Stronger.

Just to show I have not gone completely wacko, the other channel I listen to is Willie’s Roadhouse (channel 56), as in Willie Nelson’s Roadhouse. I know. That is not proof I am not wacko. It probably just reinforces the notion.

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Political Haiku

I have not been able to get excited about any candidate for president this election season. Maybe I am just getting too cynical in my middle age, but I have finally decided this is actually a good thing. They work for us, not the other way around, and none of them understand that government has grown so large it is our biggest problem.

It does not matter if they are Democrats or Republicans, they are politicians, and that is what makes them different from you and me. They all want to tell us how to live our lives, as if they had some special insight to what makes you and me happy.

Rather than get all grumpy about this, here is a lighthearted look at our current government situation through some political haiku (within the limitations of my rookie WordPress editing skills):

Austerity bad! / We must pay everyone. / Oops. No money left.

 You’re a helpless naif. / I’m a benevolent sage. / You must obey me.

I promise you all. / I deliver empty vapor. / So what! Vote for me.

Freedom or safety. / Seems an easy choice to me. / But I know Ben’s words.

How did we get here? / Little promises added / and added. That’s how.

So remember, it’s not Democrats versus Republicans, it’s over-bearing know-it-alls against the normal people. Make normal normal again.

“Anyone who trades liberty for security deserves neither liberty nor security” Ben Franklin

 

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