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In praise of cost cutting

1 month ago
David Surdam
People exiting a plane

Major American airlines are notorious for squeezing more passengers onto their planes. The image of sardines in a can is apt. Passengers, of course, whine. Pundits, consumer advocates, and legislators are outraged and claim airlines are only interested in increasing profits. Is it ethical to reduce costs or to increase revenues in order to increase profits?

Economists can shed light on this situation. Many ethicists lack training in economics and may misunderstand some of the nuances involved.

Taking an extreme case, a profit-maximizing monopolist who finds a way to cut her marginal costs will benefit consumers by reducing prices and selling more units. An economist can easily demonstrate this result with a supply and demand-style diagram. This presupposes that consumers voluntarily purchase the monopolist’s good or service. In some cases, governments mandate that consumers purchase a good or service (motorcycle helmets and automobile liability insurance are examples). In these cases, monopolists may not cut their prices after reducing costs.

The monopolist who reduces her marginal costs will, indeed, increase her profits. This is a good outcome, as it spurs monopolists to find ways to curb costs, thereby freeing resources for other uses. None of us should want monopolists to behave in a slovenly fashion.

I’ll admit that I have a greater tolerance for cramming more people onto passenger planes. I’m a relatively small person, so legroom and seat width are of less concern to me than my colleague down the hall, who is 6’5” and 240 lbs. The cramming undoubtedly leaves him less comfortable.

There is a limit to airline cramming, aside from government fiat. Airlines understand that passenger discomfort has limits before customers seek alternative means of transportation. A rival airline might opt to provide more legroom and wider seats in order to entice customers away from the airline with cramped seating. Airlines have also created premium seating for people willing (and able) to pay more for greater comfort.

In general, American industrial titans such as John D. Rockefeller and Andrew Carnegie understood that controlling costs while improving quality were winning strategies. They gained market share by paying attention to details and emphasizing quality. Rockefeller succeeded in reducing the price of high-quality kerosene (the main product for oil back in the late nineteenth century), benefiting consumers by making illumination cheaper. Rockefeller and Carnegie also made mind-boggling amounts of profits. They never quite attained monopoly status, because of competition from rival American and international firms. In fact, both men scrambled to stay ahead of their competitors. They understood that complacency was disastrous.

Cutting costs by reducing the amount of labor is usually socially beneficial, as the displaced workers often—but not always—are re-deployed to more productive endeavors. Would we really have wanted to protect chimney sweepers or blacksmiths in the late nineteenth century, as demand for their services diminished?

The ethical aspect of cutting costs, especially with regard to labor, may lie in what responsibilities employers owe displaced workers. Few workers are ever guaranteed lifetime employment, nor would doing so be particularly desirable from society’s perspective. Employers may have duties to provide palliatives such as reasonable advance notice of layoffs and offers to help re-train or to place workers in new jobs. There are, sadly, workers who find it difficult to adjust. Perhaps they are relatively close to retirement and investing in new skills will not pay off.

Americans are fortunate that our economic system, imperfect though it be, encourages people to produce goods and services at low costs that people want or need. They have succeeded in providing us a higher standard of living than our ancestors enjoyed.

Author

davidsurdam

David Surdam

David Surdam received his Ph.D. in Economics from the University of Chicago. His dissertation, "Northern Naval Superiority and the Economics of the American Civil War," was supervised by Nobel-Prize Winner, Robert Fogel. Professor Surdam has taught at the University of Chicago, Northwestern University, Loyola University of Chicago, and the University of Oregon.

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Submitted by Annie Saxena on
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Submitted by Annie Saxena on
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Submitted by Justin Dahl on
As a person who is almost 7' tall, I have probably thought about this debate more than most people. If I am not able to purchase an exit row ticket, my knees will uncomfortably press into the seat in front of me or take up a majority of the aisle, either way, I am disturbing the person in front of me or the stewardesses who make constant trips through the aisle; along with that, my hips, knees, or back will usually start to hurt within an hour. I understand that I am not the size of a typical customer and that airlines want to decrease legroom so they can have more customers and ultimately more profit, however, I feel like most people have some level of discomfort when it comes to airplane seating and a company that wants to show its customers that it cares about them should strive to provide a little extra comfort to them whenever possible. I think the notoriety of airplane discomfort has gotten so bad that an airline that goes with a differentiation strategy of having more leg room and then proceeding to market that strategy alone could charge a little bit more than the average airline while also filling up an incredible percentage of its flights. To summarize, I understand that the airline industry does not revolve around making sure people like me are comfortable on flights. I do think though that a company that resides in an industry where that industry collectively cuts costs to the point that most of its customers do not enjoy the product should ultimately switch their product/service up, not just so they can increase their revenue, but so they can better the lives of their customers.

Submitted by Emily Ernberger on
I really did enjoy this article. I never have thought about this at all really until reading this. It is very intriguing to me the way that the world works and especially the business world. I have never realized the small changes that businesses or even airlines for example have made just in order to increase profits because I am so used to change. But thinking about it, I would never have thought that airlines would decrease seat size just to increase profits. I as a tall person would not like the seats to be crammed just like the example in the article. I feel as if business will do a lot or really anything they can to increase profits but depending on the company, they are also worried about customer satisfaction. I took away a lot of valuable information and insights from this article.

Submitted by Kari Coulter on
When it comes to airlines, I do believe that they are mostly concerned with increasing their profits. The few times I have been on a plane, I don’t think there was ever an empty seat. Airlines try their absolute best to make sure every seat is filled so that they are getting as much money from consumers as they can. If airlines reduce their costs and therefore reduce the cost of tickets, consumers would probably be satisfied with paying less. On the other hand, I do believe that a major concern for airlines is the level of comfort. The seats on the planes are small, don’t offer much legroom, and they are crammed. The discomfort that passengers face might lead to less traveling by plane, which can hurt the airline's profits down the road. The article mentioned how “a rival airline might opt to provide more legroom and wider seats in order to entice customers away from the airline with cramped seating”. I think if an airline differentiates by offering more ‘premium seating’ across the whole plane with more comfortable seats but does not raise ticket prices excessively, they will gain more of the market and become a top runner in the airline industry. This differentiation will attract the attention of passengers, and other airlines will be forced to change if they want to remain in the industry.

Submitted by Mustafa Akbar on
Consumer wants to spend money with ethical companies. Slashing payroll, lowering product quality, or impacting the environment negatively can lead to a negative public image, and a loss of trust on the part of the consumer. Businesses rely on consumer's support for profits.

Submitted by Melody Morones on
To begin with, I have been on an airline where they have sold more seats than they have and then would offer gift cards, cash, etc., if people could catch the next flight. Obviously, the attention is more to the profits they make or not. Some airlines have shot up to be super expensive but as of right now during this COVID-19, they are really cheap. That is because they are now losing money from people not wanting to travel during this virus time or because of restrictions that governors have placed from each state. I feel as if the seats are ok for my legs but I wish they had more room for arm rest since they are super close to the seats next to you. I am a short person though so I can't complain much about having room on the plane. Although profit is a big deal, I feel as if some airlines should offer more of the comfortable and space seating at the same price because then more people would see that option and the airline could become a top runner for offering better deals at the same price. In a way, they would still be making more profit because they would get more customers than before.