I was going to write a nice, thoughtful post where I survey the literature on a current event.

But I spent all morning on a terrible call, so I’m going to rant about the terrible economics instead.

Why??

Why are airlines so bad at customer service? I have spent hours on the phone over weeks trying to get a refund on a flight. The customer service experience has been terrible. And it feels like this is a general pattern. Know how I know that? Because I don’t even have to mention the name of the airline and you agree with me.

I don’t mean the people I talk to have been terrible. Actually, I have been surprised by the kindness of the representatives on the phone. But they have been powerless in resolving my problem.

The problem is quite simple: we booked a flight, within a day the airline changed the flight schedule to a time that did not work for us, so we booked a different flight with a time that worked for our schedule. Since only the trip back was a problem, we kept that the same and chose a new flight home. But instead of canceling and refunding our original booking, the airline double booked us. We had two sets of tickets on the same flight. Clear case for a refund, right?

Apparently not. Refund denied.

After all of the hassle, the one itinerary was canceled, so we do not have two sets of tickets anymore. But we also don’t have our money back! The airline is trying to convince us to take a flight credit, but there is no way that we will be taking a flight like this anytime soon, so we need the cash back.

They’re arguing that it will be easier to pay off the national debt than give me a refund.

But really, why??

This experience led me to ask the question of this essay, “why is airline customer service so bad?”

I’m not an outlier. I just went to twitter to look for discussion on the major airlines, and all three of these were tweeted just in the last 10 minutes!

Now, I’ll readily concede that I’m looking at a biased sample. I’m sure there are lots of products where I could find negative tweets. The purpose of twitter is to complain about companies. But still, I was still surprised to see how quickly I found these relatable tweets.

So why are we in this equilibrium? What are the economics that led to every airline offering terrible customer service?

Maybe it’s not actually terrible customer service. Maybe, like my search on twitter, we just have a highly selected sample. 99% of the time, things go fine. But the 1% of the time things go wrong, the victims are loud and obnoxious about it, writing long newsletters to their readers.

But there are plenty of other services that have 1% “failure” rates that still handle refunds just fine. Costco will refund almost anything.

Maybe we are more upset with airlines because the purchases are often significant. This is an international flight for two people. In all likelihood, it will probably rank in my Top 5 Purchases of 2022 by dollar amount. And, for a lot of people, a plane ticket represents a significant financial investment. Even if they’re providing fine customer service, we can be pretty upset when we don’t get a refund on a big financial cost. Again, maybe this is contributing to the selection bias.

But let’s assume that it’s not selection. Let’s assume the customer service is legitimately bad. Why is that the case?

I think it comes down to what customers are sensitive to. If you don’t have to interact with customer service 99% of the time, then it’s probably not a big influence in your decision. You’re most sensitive to ticket prices. So airlines compete on ticket prices, not on customer service. And since they compete on price, they don’t want to spend anything extra on service. In fact, they will try everything they can to keep your money instead of getting it back to you.

So do any industries compete on service? Maybe Costco counts. Like I mentioned above, Costco refunds just about anything. My dad got a refund on a used toilet!

But isn’t Costco also competing on price? Kind of. Costco does sell everything super cheap, nearly at cost. But a significant share of its profits comes from membership fees. See this twitter thread.

Ryan Reeves @investing_city

Costco is a fascinating business. You know all those groceries you buy? Yeah, they basically sell those at breakeven and then make all of their profit from the $60 annual membership fees. Quick [THREAD]

If all of the profits come from membership revenues, you need to keep members.

And how do you keep members?

You make members happy. And you keep them happy with better customer service.

Well, at least I learned something writing this.

Market Power Newsletter

The one where I rant