The Agenda

Thoughts on Airline Luxury and Inequality

Matt Yglesias writes:

A fascinating Jad Mouawad article confirms what I’d anecdotally suspected, international first class accommodations on airlines are getting more lavish. This is in stark contrast to the generally deteriorating quality of the domestic air travel business. Tight regulation of fares used to prevent airlines from competing on price leading them to instead compete on quality. After deregulation in the Carter and Reagan administrations, it turned out that what passengers really wanted was cheaper tickets, so quality has been steadily eroded as prices fall. But international first class is different. Why? The article explains that “the airlines are betting that the image of luxury they project for the front helps attract passengers to the rest of the plane.”

That certainly helps explain why you see first class accommodations emphasized in airline advertising in a way that seems disproportionate. But does it really make sense to invest in delux amenities just to project an “image of luxury” to folks on the back of the plane? My guess is that the real answer is more banal. Income inequality has been rising sharply for decades. The Congressional Budget Office recently found that between 1979 and 2007 the top 1 percent more than doubled their share of income earned after taxes and transfer payments. Relatively few people can afford to fly first class, but with “first class” types commanding a larger share of overall resources it makes sense for firms to increase their emphasis on this market segment. What’s more, pre-tax inequality has risen even faster than after-tax inequality, so things like first-class air fare that are often simultaneously luxury goods and deductible business expenses are especially valuable.

Back in April, Rick Seaney wrote a short post that might be of interest:

We took a look at the Bureau of Transportation Statistics’ “10 percent ticket sample” to see how many folks actually fly in domestic first class fares and pay the full price. What we found is that most of those forward cabin seats are filled by miles “upgraders.”

It’s difficult to get an exact number, but it’s also pretty clear that those who pay the regular astronomical prices of first class are a distinct minority.

This, of course, refers to domestic first class fares. I’d like to know the numbers for international first class fares, but it is safe to assume that a fair number of people traveling first class internationally are frequent fliers and that, as Matt suggests, air fare is a business expense. 

What are some of the factors that have shaped the international air travel in the post-deregulation era that might be salient? Prices are considerably lower, which has increased the number of potential travelers. Many of these passengers might be middle-class people who are not frequent fliers, who are thus extremely price-sensitive. Brands might matter less to them, as they’re primarily interested in getting from point A to point B. Some of these travelers use services like Kayak and Hipmunk that are almost exclusively focused on price rather than amenities. Brand advertising to these passengers might make less sense than it did in the past, before the advent of new technologies and cultural shifts made travelers of this kind more price-conscious and resistant to brand appeals. 

For business travelers and other frequent fliers, frequent flier networks are vitally important, which makes these consumers stickier and thus more lucrative. Global economic integration has also increased the amount of business travel between, for example, the United States and East Asia. The collapse of the Soviet bloc also led to the opening of non-stop circumpolar flights, like a recent flight I took from Newark, New Jersey to Beijing. (I sat comfortably in the back of the plane — one of the many advantages of being short and a non-complainer by disposition.) It is not surprising that demand for sleeper accommodations, which take up more space on aircraft, would increase, even at a very high price points. One assumes that other factors, including the price of aviation fuel and the advent of the Airbus A380 “superjumbo,” have also had an impact.  

None of this is in tension with Matt’s analysis. What might be is this: during the long era when marginal tax rates were extremely high, wealthy individuals enjoyed impressive travel accommodations and other desirable positional goods. Yet these were more likely to be purchased for them by large multinational enterprises. The taxpayers with the highest AGI in the 2000s were a very different group from the taxpayers with the highest AGI in the 1950s or 1960s. In Walter Isaacson’s biography of Steve Jobs, the author describes Pepsi’s lavish executive facilities:

To Jobs, it epitomized the difference between the feisty new digital economy and the Fortune 500 corporate establishment. A winding drive led through manicured fields and a sculpture garden (including pieces by Rodin, Moore, Calder, and Giacometti) to a concrete-and-glass building designed by Edward Durell Stone. Sculley’s huge office had a Persian rug, nine windows, a small private garden, a hideaway study, and its own bathroom. When Jobs saw the corporate fitness center, he was astonished that executives had an area, with its own whirlpool, separate from that of the regular employees. “That’s weird,” he said.

(Well, it might be weird, but Jobs devoted part of his last few months to contributing to the design of a lavish new Apple headquarters. In a sense, the sorting mechanism at firms like Apple happens before you join the firm: its employees are homogeneously high-skilled, now that manufacturing, etc., has been off-shored. So while a firm like Pepsi might have had a range of employees at different skill levels, that is somewhat less true of the iconic technology firms of our own era.)

Perhaps the evolution of the tax code has had an impact of consumption at the firm-level vs. the individual-level. The rise of incentive-based compensation might make executives reluctant to do things like purchase significant artistic works and build lavish facilities, as they’d rather earn more direct compensation and buy such baubles for themselves. Moreover, executives in midcentury business enterprises were consuming other expensive goods as well. Job tenure for CEOs has declined considerably over the past several decades. Purchasing the kind of job security those executives enjoyed would presumably be very expensive today, as would purchasing the kind of deference they enjoyed within their firms. Some of these notional goods are things that no one can buy at any price now. But frequent business travelers can at least buy the opportunity to sleep on miserable circumpolar flights. 


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