Ganesh Sitaraman
Appearances
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And they partnered with Citibank to offer a credit card that would be branded and, you know, the points would be redeemable for flights on the airline. The second big change is really diffuse, occurs across all the airlines. But in the 90s, what the airlines did was they really proliferated the number of fare classes.
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Now, that's just a complicated way of saying they're charging different prices for tickets. And so once you recognize that you're not just charging the same price for every ticket, but you can charge more or less to different people in different times, different seats, and you have different types of tickets, that makes the whole fare system way more complicated.
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And then the third change I really think about as one that Virgin America did in the 2000s, and that was recognizing that once you have these complicated fare structures, What's really important to the airline is not that you flew on the airline five times, but how much money you spent. So what really might matter is just... the spend, not the number of flights.
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And so Virgin created a points system, a loyalty program that rewarded money spent rather than the amount of miles you flew or the number of flights you took. And so these three shifts, I think, really fundamentally transformed the points loyalty reward system into the kind of thing that it is today in which airlines are increasingly moving to spend money
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criteria rather than mileage or number of flights criteria. And that's a really big shift from how these programs started. In some ways, they're not really frequent flyer programs at all. They're big spender programs.
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It's a bit complicated, but here's a simplified version. The airlines create points really out of nothing, and then they sell them for real money to banks that have co-branded credit cards. And so the banks pay the airlines for these points. And then the banks award points to cardholders for spending money on the card.
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The cardholders can redeem those points with the airline for flights using these kind of web portals that we've all used. And The banks and credit card companies make money off of the swipe fees that the cardholders use every time they pay for something. So the result is that airlines in some ways are kind of like banks or quasi-banks almost.
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If you think about the Federal Reserve, airlines issue currency, the points, and they get to decide how much that currency is worth and what it can be spent on. That is a very different system than figuring out how to fly planes.
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for customers and for the country, it's not so obvious that this is a great deal because it might feel like a free bonus when you're paying for a flight or something with points. But the challenge is that every time you swipe that credit card, it, in a way increases prices across the economy. And the reason is because a credit card company takes a cut of every one of these sales.
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And so what the point system is like is almost getting a little kickback every time there's a cut. And so if you're on a points earning card, you're getting that kickback. But if you're somebody who doesn't have one of these fancy credit cards, if you pay in cash, if you don't have enough money to spend hundreds of dollars to get all the best kind of point systems,
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What's likely happening is you're paying higher prices for everything because businesses are including some of the costs they're sending to the credit cards in the prices of stuff and you're not getting the kickback.
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Yeah, and the other challenge is even for people with the credit cards, even if you do have these points, there are all kinds of problems with how they work. And probably the biggest one, or maybe the easiest one is how I should put it, is that the point system really feels unclear. What's the average value? How much should I be thinking about these as I think about planning trips?
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We do that, too.
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And the reason is they don't tell you. Right. The airlines don't have a kind of exchange rate that is fixed and consistent. Right. they can change them whenever they want. They can reduce their value, they can reduce the value of the things you can get for the points, or for status if what you're interested in is status.
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And so one of the things that we've seen is the kind of changing value over time in these point systems The other thing that goes on is sometimes what I think of as pretty deceptive kind of practices in this industry. So, you know, if you ever have that pop-up come up when you're buying a plane ticket and says like, you know, do you want to buy extra points? You know, the mileage multiplier.
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And you can buy a thousand extra points for whatever, however much money. In a lot of cases, the estimated value of those points is a lot less than what they're charging you for them. They might be charging you three cents a point when the estimated value is one cents a point. I mean, that's the equivalent of saying, how about you give me $30 and I'll give you $10. No one would make that deal.
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So I think there's a lot of things like that that could be addressed in this area to make things fairer for consumers.
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I think the really key things are being careful up front. Do you really want to sign up for that credit card, which may have a huge fee every year associated with it? when it's uncertain if you're going to reach status or see how many points you're really going to get out of it and what the benefits are going to be.
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So being careful about that up front, because there's a downside also to canceling credit cards. And, you know, these things impact your credit score. So being careful about that in your own personal circumstances, I think is an important thing. A second thing that people often give advice on is using points when you have them in order to prevent really them being devalued over a period of time.
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The third thing that I would say, though, is looking more broadly than just these particular systems, which is talking to your elected officials about making the system better. Because the reality is this is just a set of policy choices that we can make. We can decide to say it's actually unfair to do this and you have to make this transparent.
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Well, I think what's really interesting about the Department of Transportation's investigation is how it started. There was actually bipartisan interest in the Senate on this. There was a letter from Senator Richard Durbin from Illinois, who's a Democrat, and Senator Roger Marshall from Kansas, who's Republican.
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And the two of them got together and wrote this letter to the Transportation Department asking, why do we have all these problems in the airline credit card systems? And I think what the real question is, is going to be on the government side, how does the new administration, the current administration, move forward with this? Do they move forward with these investigations? And where does it go?
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And I think on the airline side, whether or not the current administration goes forward with this, Do the airlines recognize that there's enough interest in the public and from members of Congress on both sides of the aisle that they need to preemptively take some steps to try to make the system a little fairer?
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And I think there are things they could do that would be pretty easy for them, including having a kind of fixed exchange rate, making the exchange rates transparent. There are some very specific practices that are a little unfair that they could try to address. excessive fees in transferring points from one person to another, the cost of these multipliers that are overvalued.
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Those are some other things that they could do on their own. And we'll see what happens and we'll see if there's any additional public outcry.
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Thanks so much for having me.
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Thanks so much for having me.
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Well, like a lot of people, I fly a lot. And I've had my fair share of miserable flying experiences. But the other side of it for me is that I am a law professor and I study regulation and public policy. And so a few years ago, when we were in the midst of the COVID pandemic, And the airlines went to Congress and they asked for taxpayer support and they got it.
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The year after that, we still had tens of thousands of flight cancellations and there was loss of service to cities. And what struck me was that there was a real policy story to be told here about why flying had gotten so miserable and why it's been miserable in this moment of crisis.
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You know, to me, the worst experience is when you're in some giant hub connecting between two different cities and you run what seems like, you know, a half marathon to get from one side of the airport to the other side of the airport.
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Carrying your stuff. And then you get there and at the end, you are just a few feet away when you see them close that door and you know they can't open the door once they've closed it and you've just missed your flight by seconds. To me, that's the most frustrating experience.
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Everything that we think about in the country with flying is really a function of public policy choices. We decide as a country whether children's toys are safe, whether we want rural places to have electricity. These are all policy choices, and airlines are not so different.
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So after the Wright brothers first had their flight at the beginning of the 20th century, the early years of airline flying was really subsidized by the government through the form of the post office. And there were subsidies for airmail. And the purpose of this was to build this industry up.
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And so you had government really involved in that as a way to get there to be more airlines flying more routes to more places. And once the initial technology starts taking off and there's a bigger and bigger airline industry, by the 1930s, you get what I would think of as really the first modern era of airline policy. And this is a period of regulated competition.
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And Congress created what they called the Civil Aeronautics Board, or CAB, which was a federal agency. And the job of the agency was to make sure that the airline industry was successful enough that the airlines didn't all go bankrupt, but not so successful that just one airline dominated and created a monopoly.
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And the way they did that was that the Civil Aeronautics Board would allocate routes to different airlines, so which cities they could fly between, and it regulated the prices of those flights as well. And this had a really important effect, which is that it ensured that there would be geographic access to flying in lots of different parts of the country.
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So places that are smaller cities, more remote, don't have that much volume, it might not be economical to serve them, would still get airline service. And that system worked pretty well, actually, for about 40 years, from 1938 to 1978. We had more people flying, there were big improvements in safety, and we had really big innovations, like the shift to the jet age.
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Prices, interestingly, were also declining over this period. It was a really reliable, stable, workable system. And then in the 70s, you had this really big push for deregulating the industry. And the view was that the Civil Aeronautics Board was kind of like a government-run cartel. And the theory was maybe market competition would be better.
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The pitch was something like, imagine if you had dozens, maybe even hundreds of airlines operating competitively with lower prices, with no losses of service. There'll be no real downsides.
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It's a great pitch. And who wouldn't want to go for that pitch? And in fact, Congress then jumped at the idea and deregulated the industry in 1978. But as we all know, we didn't really end up in that world. What happened instead is that there was this moment of competition that started after deregulation, but then it quickly turned into something that I think of as more like the Hunger Games.
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There was just cutthroat competition between these airlines. The new entrants came in. They offered no frills. They had no unions. They wouldn't take on these more rural routes. And that meant lower prices on the high traffic, high volume routes between big cities. It meant some more competition initially.
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But then the big airlines, they fought back and they pushed out a lot of these new competitors and then afterwards raised prices. And that's when you also see this shift to these consolidated big fortress hubs like Atlanta or Dallas or Charlotte, where You have one airline that's really dominant in those cities. And by the end of the 80s, there had been dozens of bankruptcies, mergers.
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There was a lot of conflict between labor and management. Quality of service was going down. There was a lot of lost baggage. The result was actually a reconsolidation to the same number, in fact, the same big airlines that existed under regulation.
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And they were still the dominant players, but now without any of the checks of the regulated period, where there's very, very little competition, few choices. Often the prices aren't great. Sometimes the service isn't that great. But guess what? There's not much you can do about it because airlines are an essential service for how we get from place to place over long distances.
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Yeah, it's a really interesting question. I think the conventional wisdom that we often hear is, well, after airline deregulation, prices went down. And that's true. Average prices went down after deregulation. But average prices were also going down before deregulation and at just about the same rate, which might get you asking the question,
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Was it really deregulation that made the prices go down? You see prices going down in some places, but prices going up in other places. And a big function of that is how much competition there is.
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In the pre-deregulation period, in the era of regulation, you would not have been allowed to become a monopoly because what the regulators did was they prevented any airline from becoming too powerful at any big airport. And that's what made the system work in a reasonable way.
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Exactly. And so what you ended up with was a system where even in the 70s, the biggest airlines didn't really have a huge percentage of any of the major airports. You know, they might be in the 25, 30 percent range, but not like we're seeing today where it's twice that or more in some cases.
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One of the really fun things about doing the research for the book was digging into what happened in airline deregulation and afterwards. And there's a real cast of characters of...
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the heads of these airline companies in the 80s who are really ferociously fighting for market share and engaged in all kinds of what we would now say are anti-competitive business practices, but also creative and innovative business practices to try to win in what they knew was going to be a really difficult competitive environment.
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The one character that I found really interesting was a guy named Robert Crandall. And Crandall ran American Airlines. for a long time, really legendary head of American. In the 1970s, when deregulation was being debated, he, like really almost all the major airline executives, were against deregulation. And that might be surprising. Usually industry is for deregulating.
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But he and others said, you know, this is not a good thing because our industry works because of the system of regulation. Otherwise, you're going to end up with a lot of things that we've seen, really cutthroat competition, airlines going bankrupt, the need for public subsidies, loss of service.
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I mean, all of these kinds of things he and others understood were likely to be a problem if you didn't have a system of regulation. And he's there at Congress and there are these hearings going on. And afterwards, he says to one of the people in the hearing, you academic, and there's an expletive, are going to ruin this industry. You don't understand it.
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But then when deregulation happens and he becomes head of American, I would say he is one of the most aggressive players in navigating through that environment, trying to win that Hunger Games. He was going to play by the rules of the game and was a cutthroat shark like everyone else.
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Yeah, so it actually comes out of deregulation. After deregulation, when there's this need to compete really ferociously with all these other airlines... the airlines start thinking about what they can do to keep people with them as opposed to going to some competitor.
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So Crandall and American come up with this idea of the frequent flyer program to give their frequent flyers additional benefits so that they'll stay with American and not go to others. Now, obviously, the purpose of this is to keep the travelers with your airline. And people at the time in the 80s thought of frequent flyer programs as anti-competitive. That itself is kind of interesting.
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But then they've changed so much over time. And I think the changes are pretty interesting, too. So early on, the programs were pretty simple. I mean, you can think of them almost like the punch card at your airport. favorite coffee shop or something where, you know, buy 10, get the 11th one free kind of thing. The first big change, I think at least, was really American again.