Chad Wilcox tipped me off to this article about new airline regulations going into effect in the EU. I was tempted to write about it but don’t know anything at all about the European airline system. Fortunately, the Adam Smith Institute blog has saved me the trouble by hitting all the major points. Dr. Eamonn Butler elucidates many of the possible drawbacks and unintended consequences that could arise from the situation.
I do want to comment broadly, however, on the ridiculous epistemics involved in making these regulations. The new rules define how much compensation airlines must pay passengers for cancellations due to certain causes, setting higher penalties based on how long the missed flight is. They also stipulate that after a two hour delay airlines must provide snacks or meal service. After five hours, refunds and possibly hotel accommodations are in order.
Do those penalties sound reasonable? I guess so, but how would I know? How does the committee drafting the regulations know? The short answer is, they don’t. They choose what seem to be reasonable numbers in 2005 and impose them on all manner of flights. These rules will remain rigidly in place until bureaucrats decide to revise them; they’ll do so based on inputs from lobbying groups representing passengers, airlines, and perhaps other groups. Who benefits from those revisions will depend on who has the most influence on the regulatory agency.
It seems that a better approach for the EU would have been to ensure that consumers have access to information about what they can expect from various airlines, who would be relatively free to set their own policies. Allowing markets to handle the problem would have numerous benefits. Airlines would have to compete against each other to meet travelers’ needs. Travelers and airlines could work out different levels of ticket security for different types of travel, with leisurely vacationers taking discount fares while business class fliers pay a premium fare for better guarantees of timeliness. Most importantly, the policies of different airlines could be changed dynamically in response to a feedback loop provided by customer demand. Leaving aside the particular regulations at issue, which process would one expect to create better policies over time? Perhaps the EU should have examined what needs to be done to improve the transparency of its travel markets rather than overriding them.
To the EU’s credit, the new regulations do permit airlines to offer benefits to passengers to free up overbooked space. According to the NYTimes article, about 250,000 passengers lost their seats to overbooking in 2002, so it’s a real problem. I’ve noted before that a reverse auction system works great here in the U.S. and am amazed that it’s taken this long to be adopted in the EU. Regrettably, the regulations referenced above set a de facto price ceiling on the process. If a carrier can’t find volunteers to be bumped from an overbooked flight before reaching the amount of the mandated penalty, it appears that it can arbitrarily choose someone at that price. Perhaps the ceiling will be set high enough that that rarely happens, but it’s hard to see how giving airlines this escape clause is good for the consumers the regulations are supposed to protect. Again, why would one believe that EU bureaucrats can set a fairer price than an on the spot auction?
Finally, the new regulations subvert market solutions in another way the Times article barely mentions: they’ve been extended to charter airlines for the first time. By definition, charter airlines exist to cover the needs that the major market misses. And unless the European travel system is very different from that in the U.S., they probably tend to cater to a wealthier clientele that doesn’t need government intervention to protect its interests. What justification is there for making the charter market play by the same rules as everyone else? Is this a case of the mainstream airlines capturing the regulatory agency and trying to hamper the competition, or is it just run of the mill regulatory overreach?
In conclusion: If composing this post has taught me anything, it’s that I’m glad I write about regulatory policies as just a hobby and not as a living. I already want to bang my head against the wall and I don’t even live in Europe.