I’ve read a few outraged articles about United Airlines vs Dr Dao. As he often does, James Pilant questions the business ethics involved. I consider air travel an environmental tragedy, and agree that people wearing police uniforms are entirely too ready to dish out force and violence, but I have been generally aware (one of my brothers has been bumped) that overbooking was a common practice driven by A – people missing or not showing up for flights, or taking earlier flights and B – the airlines wanting to maximize profit by having a passenger in every seat.
I read somewhere that without overbooking the average flight might be only about 83% full, but I have seen many more empty seats on Greyhound. I’ve taken the bus from Altoona to Harrisburg to Baltimore dozens of times, and unless it is a holiday weekend, I see anywhere from 50 to 90% of seats going empty. Airlines, though, were hit hard by the price-gouging competition that came with the 1978 Airline Deregulation Act, and more recently by unpredictable fuel costs. So they overbook. As I am in the middle of reading James Kwak’s Economism: Bad Economics and the Rise of Inequality, I was trying to figure out why, in a deregulated and free market, overbooking isn’t perfectly balanced by some other market factor like voucher payments.
On April 11th, Cadie Thompson at Business Insider explained, The frustrating reason airlines overbook flights, but quoted Vinay Bhaskara, “Usually, they won’t overbook first class because that could tend to make your most lucrative passengers very angry.”
Four days later Thompson amplified the justifications, Here’s why overbooking flights is actually a good thing:
“By overbooking it actually does help keep the fares down because the airlines are able to maximize the amount of revenue they are able to collect and generate as much profit as they can,” said Henry Harteveldt, president and travel industry analyst for Atmosphere Research Group, told Business Insider.
“But if they didn’t overbook it’s possible they may have to charge more,” he said.
Overbooking is also beneficial to consumers because it allows the more flexibility in their travel plans, Vinay Bhaskara, Airways senior business analyst, told to Business Insider.
“Frequently, the people who benefit the most from overbooking are the last few people to buy, The ones who are not able to make plans in advance,” Bhaskara said. “Often times those seats are available at the last minute are only available because that flight can be overbooked. The airline knows some people are going to be missing the flight.”
Ultimately, though, overbooking is done because airlines want to ensure that they are making the most money on every seat. So they use historical data to help them predict how many people will likely miss a flight on a certain route. And most of the time it works.
Bureau of Transportation Statistics indicate that in 2015 about one-tenth of a percent of passengers were denied boarding (bumped), and that roughly 90% of those were voluntary, meaning that they took the vouchers offered. Journalist Bob Sullivan notes that while the voluntary numbers are declining, the involuntary bumps remain fairly constant. He blames the vouchers:
Again, that means one thing: the voucher offers aren’t nearly good enough.
Let’s speculate about why that is. I’ve heard from many readers today about the vouchers they get from airlines in this situation, and here’s the truth: Experienced fliers are wise to the game. They are saying no more often. Vouchers aren’t all they are cracked up to be, and they certainly aren’t the same as cash. They expire. Sometimes their remaining value is surrendered (a $400 voucher gets a $300 flight and $100 disappears). Most of all, the vouchers must be used on the airline that just did the bumping. Who wants to fly an airline that just kicked them off a plane!
And, like rebates, some of them are never used, giving the airlines a secret source of revenue.
Kwak’s central theme is that the free market only operates perfectly inside your Economics 101 class:
“… Because nobody is ever forced to make a trade (in theory, at least), a transaction only occurs if it makes both parties better off. … prices naturally adjust until supply equals demand. …”
Kwak notes that in the real world, there is, “a fundamental tension between efficiency and fairness,” which sometimes leads to price gouging, and now has led to a bloodied man being dragged off a passenger jetliner, and being vilified in the press for not going quietly.
Update 20170420, a popular article at The American Conservative quotes Fox, The Daily Mail and the Independent to paint Dao as a sharpie who instigated the whole mess, hoping for a lawsuit.
Back in the 1990s, my employer, a now-bankrupt architectural firm, put on an in-house seminar featuring a very animated fellow from the Tom Peters Group. Peters and Robert Waterman, Jr co-authored In Search of Excellence (1982), a hugely popular business book. I had heard more about Tom Peters solo 1987 book, Thriving on Chaos, which I started to read, and still have in my basement.
The message was fairly simple: Know who your clients are, and make them happy … deliriously happy. Provide legendary service. He noted that your clients may be within your own company. Our irascible handyman and blueprint guy asked, “What if you have too many clients?” and everyone laughed. “What a problem to have!” was the reply.
At one point in the seminar he pointed out that our project managers, as our closest connection to our clients, should have been the second most influential group in the firm, right below the partners. Instead, the department heads of Design, Production, Field Supervision, and Office Services were much more influential than the PMs.
What I have taken away from what the guy from Peters told us was that we had to get good customers and satisfy them because there was no way to keep the sort of customer that only cares about low price. You can, he said, save a fortune on marketing and advertising by keeping those customers that value good service. But if you fail them, they will leave and will probably never tell you why.
I dimly remember a tv commercial where some guy on a podium tells a convention crowd, “the buzzword this year … is quality.” And everyone started dutifully chanting, “quality, quality, quality …” We instituted “round table” discussions to improve communication between departments, but ultimately very little changed. The firm I’m with now doesn’t have departments.
Anyway, Cenk Uygur interviewed Nick Hanauer on The Young Turks on Tuesday, and it is now on youtube:
Besides being a successful entrepreneur and businessman, Hanauer is known for his article, The Pitchforks are Coming … for Us Plutocrats, in Politico in 2014.
Seeing where things are headed is the essence of entrepreneurship. And what do I see in our future now?
I see pitchforks.
If we don’t do something to fix the glaring inequities in this economy, the pitchforks are going to come for us. No society can sustain this kind of rising inequality. In fact, there is no example in human history where wealth accumulated like this and the pitchforks didn’t eventually come out. You show me a highly unequal society, and I will show you a police state. Or an uprising. There are no counterexamples. None. It’s not if, it’s when.
Hanuaer told Uygur that many in his peer group were initially angry and defensive about his article, but claims that most of the rich folk he knows now acknowledge the problems of income equality, but don’t know what to do about it. Human nature is to try and spend or pay as little as possible, and the tenets of trickle-down economics have provided a comforting refuge for employers to do just that.
So it seems that employers have gone in big for low prices, and have gotten something like the situation that Tom Peters predicted. While they pay low wages (and even no wages to interns) corporations and businesses still advertise like crazy – fighting over the shrinking share of customers with disposable incomes. Customers with little or no money can’t afford loyalty to any brand, and our economy enters the death spiral that Hanauer discusses.
This is a part of the false reality that Andrew Bacevich mentioned (see my previous post). America has been a booming growth economy for so long, that entrepreneurs still believe that the sucker born every minute will have enough money for their snake oil.
As divisive as the presidential candidacies of Donald Trump and Bernie Sanders have been in the United States, Brexit – the referendum for Britain to leave the European Union – has been in Europe. By about 52% to 48%, Brits voted to leave, which stunned world financial markets, and led to the resignations of British political leaders in both the Remain and Leave camps.
It also led to widespread characterisation of Leave supporters as anything from stodgy, old nativists to racist troglodytes, and Remain supporters as anything from naive liberals to exploitative elites. By and large, the establishment media has lined up to demonize the Leave vote. Over at non-establishment The Young Turks, Cenk Uygur admitted he was sympathetic to Remain, though he understood the frustration that led to Leave prevailing.
This casting of opponents as fools mirrors the Trump phenomenon closely enough that Brown University economics professor Mark Blyth has quickly become an internet celebrity by calling the Brexit vote a version of, “Trumpism,” and explaining what it all means in his native Scots brogue. There are currently several youtubes of his Athens Interview , where he eventually moves on to the problems in Greece, and of his various anti-Austerity lectures.
In, The strange death of liberal politics, for The New Statesman, philosopher and lead book reviewer John Gray also tackles Brexit. I am not familiar with Gray, but he seems to have traveled the ideological path from Left to Right, thence to some sort of anti-neoliberal Green:
As it is being used today, “populism” is a term of abuse applied by establishment thinkers to people whose lives they have not troubled to understand. A revolt of the masses is under way, but it is one in which those who have shaped policies over the past twenty years are more remote from reality than the ordinary men and women at whom they like to sneer. The interaction of a dysfunctional single currency and destructive austerity policies with the financial crisis has left most of Europe economically stagnant and parts of it blighted with unemployment on a scale unknown since the Thirties. At the same time European institutions have been paralysed by the migrant crisis. Floundering under the weight of problems it cannot solve or that it has even created, the EU has demonstrated beyond reasonable doubt that it lacks the capacity for effective action and is incapable of reform. … Europe’s image as a safe option has given way to the realisation that it is a failed experiment. A majority of British voters grasped this fact, which none of our establishments has yet understood.
If that doesn’t remind you enough of the Trump movement, consider the following:
… Telling voters who were considering voting Leave that they were stupid, illiterate, xenophobic and racist was never going to be an effective way of persuading them to change their views. The litany of insults voiced by some leaders of the Remain campaign expressed their sentiments towards millions of ordinary people. It did not occur to these advanced minds that their contempt would be reciprocated. …
And on to the EU criticism, which sounds a lot like Blyth’s:
Free movement of labour between countries with vastly different wage levels, working conditions and welfare benefits is a systemic threat to the job opportunities and living standards of Labour’s core supporters. Labour cannot admit this, because that would mean the EU is structured to make social democracy impossible. …This used to be understood … . Today the fact goes almost unnoticed, except by those who have to suffer the consequences.
And there’s the rub. Like the US under the Obama presidency, the EU has seen some very welcome social reforms. If you happen to be in the upper middle, comfortable classes, you may be loath to challenge the status quo. If you are closer to the edge, or already in desperate circumstances, you probably agree with Tyler Cowen, who saw the Brexit vote and the Trump/Sanders votes as, “the only lever,” available to register discontent.
Of course there are other levers, but they are harder to apply amidst all minutia of life. The elites and comfortable folk are playing a dangerous game by relying on more circus and less bread to keep it all going.
In the wake of Lending Club’s executive purge, the New York Times adds specifics about the Club’s transgressions. According to, As Lending Club Stumbles, Its Entire Industry Faces Skepticism, CEO (and sailboat racer) Renaud Laplanche had an undisclosed stake in at least one concern seeking loans. Other executives were involved in changing of information on paperwork.
… on Monday, Lending Club announced that Mr. Laplanche had resigned after an internal investigation found improprieties in its lending process, including the altering of millions of dollars’ worth of loans. The company’s stock price, already reeling in recent months, fell 34 percent.
And it isn’t only Lending Club that is hurting.
The company’s woes are part of a broader reckoning in the online money-lending industry. Last week, Prosper, another online lender that focuses on consumers, laid off more than a quarter of its work force, and the chief executive said he was forgoing his salary for the year. …
Wall Street’s waning demand for loans exposed the Achilles’ heel of marketplace lending. Unlike traditional banks that use their deposits to fund loans, the marketplace companies discovered how fleeting their funding sources can be.
Since the start of the year, Lending Club has raised interest rates on its loans three times to sweeten their appeal to investors.
I regularly get mailers from Lending Club, Prosper, Embrace and various debt consolidation outfits – all of which feed the shredder.
In a potentially related vein, a few days ago, Donald Trump made heads explode by suggesting that he might want to renegotiate $19 trillion dollars of US debt. Just about all the traditional and new media outlets rushed to denounce such talk as evidence of Trump’s political inexperience, but on CNBC’s Futures Now show, Euro Pacific Capital CEO Peter Schiff said,
“Trump just admitted on CNBC that America has too much debt to afford a rate hike, and that he wants our creditors to accept less than 100 cents on their Treasuries. In other words, Trump knows a U.S. government default is inevitable.” …
Schiff has long been opposed to the Fed‘s so-called easy money policies. He insists that rather than helping the economic backdrop, the excess liquidity has created fragile asset bubbles so fragile that may send the U.S. spiraling into a recession worse than what occurred during the financial crisis.
One of the dilemmas of being both a social progressive and a believer in energy depletion is that progressives, including Bernie Sanders, confidently assert that the US economy has enough wealth that it should be the rising tide to lift all boats.
Energy depletion gurus, though, predict increasingly hard times for everyone, which puts them in an odd agreement with many conservatives, though for an entirely different reason. I suspect that Donald Trump may be right about US debt, though I suspect some version of austerity will be part of his solution.
Almost three years ago, I wrote about taking on a debt consolidation loan with Lending Club. I’ve been keeping a sufficient balance so that they can withdraw payments on schedule, and I should be able to payoff on schedule, then retire. But Lending Club has been sending me an increasing stream of email and paper mail offers to take on even more non-collateral debt. I figured these were mostly computer-generated, but some of them bothered me because they used the Open Immediately! style of mailer, with no identification on the outside. That sort of marketing tends to associate Lending Club in my mind with dicey outfits like Embrace and American Debt Mediators.
Today I ran across a disquieting CNBC article, Lending Club shares tumble after CEO resigns:
Shares of Lending Club plummeted 25 percent at the open Monday morning after the company said co-founder Renaud Laplanche had resigned as chairman and CEO.
Laplanche’s departure comes as Lending Club acknowledged it conducted an internal review of its business practices. The investigation also led to the firing or resignation of three senior managers.
The company’s executive leadership said the review of loans discovered staff knowingly sold $22 million in loans in March and April 2016 that did not meet the buyer’s requirements. It came after an unnamed staffer made a change executives described as “minor” to internal loan paperwork. …
The company said it would bolster internal controls after the sale of what it called $22 million in “near-prime” loans, and also revealed it would suspend providing the market guidance.
I don’t suppose this will affect me or my microloan investors, but now I have to wonder if I am near-prime, or just past-my-prime.
In a previous job the office bean counter asked how much I wanted to contribute to my 401k, and I told her nothing. She couldn’t believe it, but I had no confidence in the market. I started a new job in 2006, and though we all stayed employed somehow, what my previous employers had contributed to that 401k was decimated in the great recession. The account changed firms two or three times, and the few hundred dollars that remained were eaten up by handling fees. Easy Come, Easy Go.
Even though I don’t have one, I just saw an email warning that the Market Trend Analyzers (MTA) are advising 401k holders to take their money out of equities (stocks) and move it into bonds and money markets to prevent the sorts of losses seen in 2008. I don’t know if they are talking about the Hays Advisory MTA (pdf) or something from another group.
My office neighbor and I joked that too many emails like that could both predict and cause a recession. “Let’s all take our money out of the stock market, then act surprised when it collapses.” She also noted that now is the worst time to sell because stocks are so low from the oil glut, China, etc. “You don’t actually lose money until you sell low,” she said.
It’s fairly easy to predict a recession. ZeroHedge seems to be in constant panic mode -while featuring ads for gold and silver. The Automatic Earth has a Debt Rattle column every few days, and The ArchDruid Report regularly reminds that the US Empire is already in a state of collapse. Huffpost predicted a 2017 recession back in 2014. Even FiveThirtyEight and Econbrowser currently have articles about the next recession. But it is a lot harder to correctly predict a recession very soon before it occurs, so I’m not going to panic any more than usual.
I wondered how much effect a near term recession would have on the presidential race. Almost no one but Scott Adams gives Trump much chance of winning the election because his unfavorables trump his favorables for a net of -37. According to a recent poll, Sanders would destroy Trump by 18 points and Clinton would defeat him handily by 13 points. And polls are never wrong, are they?
But if we had a recession this year, I think you could throw those polls out the window.
FDR certainly owed his election to the great depression that started three years earlier, and only got worse, but from 1942 to 2004, recessions seemed to cluster in the second year after a presidential election.Then we had the 2008 recession, which began a mere seven weeks before the McCain-Obama vote, on a day when John McCain claimed, “the fundamentals of our economy are strong.” McCain would probably have been dragged down by choosing Sarah Palin anyway, but it had to help Barack Obama that he wasn’t in the incumbent party.
Which candidate would a recession help? A recession during the primaries would have to seal the deal for Trump and favor Sanders.
In the general election, I would think the Republicans with an outsider candidate, Trump or Cruz, would benefit greatly. Kasich or Rubio, not as much. For the Democrats, Sanders has already distanced himself from the current financial system, so he might avoid the ire that usually befalls the incumbents. As an establishment candidate against an outsider, Clinton would be toast.
In the long run, though, recessions have greater implications than just who gets elected at the top. I’m certainly not hoping for one.
It was big news in 2014 when the Kingdom of Saudi Arabia (KSA) convinced other members of OPEC to lower oil prices, and several theories were put forth to explain it. On Jan 22, 2016, in, It Really Was A Trillion Dollar Blunder, Robert Rapier, who used to comment on The Oil Drum, wrote:
Because they were losing market share — but perhaps more importantly because they saw that trend continuing — that strategy was abandoned at their November 2014 meeting. It was then that OPEC announced they would defend market share that was being lost due to the rise of non-OPEC production, especially from the United States. Some have argued that OPEC had no choice but to defend market share instead of cutting production to balance the market, but I disagree. I think Saudi Arabia pushed for a strategy that will go down as one of the greatest mistakes in OPEC’s history. It was a decision, I might add, that 9 of the 13 OPEC members reportedly oppose.
Since 2014, US, Canadian, Russian, Venezuelan, Nigerian, Angolan and other oil producers have suffered. FiveThirtyEight claims, Saudi Arabia Is Winning Its War Against The U.S. Oil Industry:
Recently, though, there have been signs that the Saudis’ strategy might be working after all. On Monday, Chesapeake Energy, once the highest flier of the U.S. oil boom, had to deny publicly that it was preparing to file for bankruptcy; some 60 oil companies have already done so, and the research firm IHS estimates that as many as 150 companies could follow suit. On Wednesday, The Wall Street Journal reported that private-equity giant KKR & Co. was backing away from risky bets on oil companies. Industry leaders are starting to sound desperate: The New York Times quoted the head of a Texas oil group as telling his members that “today our goal is to survive.”
FiveThirtyEight, though, says nothing about the effect of low prices on Saudi Arabia itself, which has looked into nationalizing Saudi Aramco. That has been seen by many as a sign of weakness.
Yahoo Finance has an OilPrice article, The Hidden Agenda Behind Saudi Arabia’s Market Share Strategy, claiming that KSA’s target was not the US, but rival suppliers of China and other emerging markets.
The view that the Saudi market share strategy is focused on crushing the U.S. shale industry has led market observers obsessively to await the EIA’s weekly Wednesday petroleum status report and Baker-Hugh’s weekly Friday U.S. rig count—and to react with dismay as U.S. rig count has dropped, but production remained resilient.
In fact, they might be better served welcoming resilient U.S. production. It may be that the Saudis will not change course until Russian output declines, Iraq’s stagnates, Iran’s output growth is stunted—and that receding output from weaker countries within and outside OPEC would not be enough. If this is case, the Saudis will see resilient U.S. production as increasing pressure on their competitors and bringing forward the day when they can contemplate moderating their output.
I don’t think we’ve seen a full explanation yet, but it is certainly too soon to proclaim victory for any particular party.