Congestion-based Air Travel Pricing

In the United States I think sometimes we place a little too much faith in the laws of supply and demand and too little in the ability of the government to help make our lives better. We as consumers are not very good at imagining the externalities that are not present in the monetary cost of something, but are always present in the true cost of a product or service.

For example, electric cars may be good for the air quality in the city in which they are driven, but people often forget that electric cars still pollute the air (they just pollute the air around the power plant making the electricity to drive them instead) and they have the nasty surprise of battery disposal when the batteries eventually stop holding a decent charge.

Building upon this example of externalities, let’s look at an example of where the laws of supply and demand are failing us, delays in the air travel industry. There is more than one factor contributing to the problem of delayed and cancelled flights (airlines over-scheduling peak times, corporate jets and fractional ownership, etc.), but the solution to most, if not all, is the same–congestion-based pricing.

Some may ask why we need to finally implement congestion-based pricing thirty years after it was first suggested. They might suggest that prime time demand will push prime time prices higher and we’ll reach a state of equilibrium.

The problem is that although we may reach some sort of premium-priced prime-time equilibrium, the supply and demand are still too high given the capacity of airports, causing unavoidable delays and cancellations, even under blue skies. The result is that airlines and the corporate jet set have introduced externalities into the system (delays, cancellations, sitting on the tarmac) that are much more unpleasant than a higher fare would be, plus it would be your choice whether to pay it or not.

Artificially reducing supply through legislative or regulatory intervention would do nothing to address capacity constraints. Congestion-based pricing through the application of prime-time tariffs would generate a revenue stream that could lead to the capital investments necessary to optimize existing resources and even to fund capacity expansion, and safety standards.

I was living in London when the congestion charge was imposed. The city simultaneously introduced a $10 peak time tariff to drive into central London, taking cars off the rode, and increased fleets of buses on the streets to take the additional load of passengers switching from car transport to mass transit. It was so successful that not only was gridlock removed, but buses could now move about the city much more easily, making the bus riding experience better at the same time. It was so successful that London expanded the coverage area, and now New York is looking at implementing a similar congestion charge.

So, I just want to throw my two cents into the pot in support of congestion-based pricing for air travel. It’s the only way to cause the corporate jet set and the airlines to think twice about over running airport capacity and it will encourage both groups to bring some of their flights in just before or just after the peak period, providing the consumer with greater choice and more options to avoid the price surcharge.

It may not be an innovative solution now that thirty years have passed since it was first proposed, but who knows, maybe the skies will become friendly once again.

What do you think?