Market failure in Bangkok and Kathmandu by mattsteinglass
December 2, 2008, 11:25 pm
Filed under: Economics

On the morning of November 26, the day I was scheduled to fly home from Nepal to Hanoi via Bangkok, 10,000 yellow-clad members of the People’s Alliance for Democracy occupied Suvarnabhumi International Airport and left me and several hundred other Thai Airways passengers stranded in Kathmandu. It ultimately took me an extra 3+ days to get back to Hanoi, and, as a friend whose husband got stuck in Calcutta noted, there are worse places than Kathmandu to be stranded. But what was interesting to me, as I trudged from airline office to airline office around Kathmandu for those three days along with what quickly grew to over a thousand others, was the strange and dysfunctional market for airline seats that arose when Bangkok went offline.

What happened, basically, was as follows. Thai Air was reluctant to admit, until the last possible moment, that any of their flights would actually be canceled. That, after all, would force them to issue passengers tickets on other airlines, which would cost them money. For the first two days of the protests, Thai Air would only make good the cost of tickets on other airlines for passengers once their Thai Air flights were officially canceled. This created an ever-growing backlog of passengers who had missed their flights, instead of allowing passengers to anticipate and make new arrangements.

And Thai Air would not make reservations for passengers on their own computers. They insisted that passengers go to the other airlines’ offices and obtain confirmed bookings themselves. Then, at the airport just before the flight, a Thai officer would issue a document called an “F.I.M.” to make good the cost of the ticket on the other airline.

Only a few airlines fly out of Kathmandu. Within hours of the cancellation of the first Thai flights, every seat out of the city for that and the next day had been booked. The most efficient backup to Thai Air was Silk Air/Singapore Airlines, which flies Kathmandu to Singapore, a major connecting hub. By mid-afternoon on November 26, every Silk Air seat through Dec. 2 had been booked. Other options included Cathay Pacific’s infrequent flights to Hong Kong; Jet Airlines, Nepal Airlines or Indian Airlines to Delhi (a more confusing and less efficient airport); or China Southern’s twice-weekly flights to Guangzhou (again, a lesser hub).

Wandering the streets of Kathmandu from office to office after striking out at Silk and Cathay, I chanced upon a sign for Malaysian Airlines. Inside, a travel agent found a seat for me on November 28 to Dhaka, Bangladesh on something called GMG Airlines; there, I could connect to a Malaysian flight to Kuala Lumpur, and then back to Hanoi. Failing that, I might be able to get to Dhaka the next day on Biman, the Bangladeshi airline. So I made bookings for all these dates.

GMG turned out to be a barely functional shell of an airline which canceled its flight on November 28, leaving me stranded again. A Hong Kong Chinese woman at the airport service building that day told me she’d “discovered a way” to get home — Jet Air to Delhi and KL, then Malaysian up to HK. So I rushed back to the Jet Air office in town and made the first booking that might work for me, on December 1. Then I stopped into another travel office and booked seats on two Silk Air flights, the first a standby on Dec. 3, the second a confirmed seat on Dec. 9. Then I headed down to China Southern to make more bookings…

We begin to see what’s going on here. There are a limited, possibly insufficient number of airline seats. Stranded passengers lack any information on how many total seats there are, or how many other passengers are stranded and also looking to take those seats. In response, passengers begin hoarding reservations, making as many bookings as possible. This, in turn, artificially depresses the number of (seemingly) available seats, making passengers book seats ever more desperately, since the bookings themselves are free.

Passengers have every incentive to conceal information from each other about potential open seats. Worse, travel agents seem to have an incentive to conceal full information from passengers about open seats, apparently because they would prefer that passengers buy new tickets rather than use an F.I.M. from Thai Air. (Every travel agent and airline first asked me, when I made a booking: “Would you like to buy a new ticket?” I looked at them like they were crazy; it wasn’t until the third time that I realized this was what they were really maneuvering for.) If airlines can create confusing enough conditions around confirmed bookings and F.I.M.s, they can frustrate some passengers enough to want to simply buy a new ticket for cash.

In a fully free market, the higher demand for seats would simply lead airlines to send more planes. But air transit obviously cannot be a free market; international routes and flights are codified in bilateral agreements with governments, and airlines cannot easily add more planes, particularly in bureaucracy-heavy, sluggish Nepal and India. Given that constraint on supply, the system of individual passengers trying to find flights through a myriad of independent travel agents and airlines became disastrous.

The most logical approach to the crisis would have been for one central evacuation authority to demand a list of every available seat on flights out of Kathmandu and place stranded passengers on the list, ranked by the date they were originally scheduled to fly, and taking account of useful destinations for their flight paths. But no organization was interested in or capable of playing this role. And so we got a private market with immutable constraints, confusing everyone, wasting our time, and costing everyone money and grief. Sounds like the US health care system!


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I agree with your above writing that GMG Airlines is barely a fuctional shell of airlines . It always cancels its flights from Dhaka to Bangkok , Delhi . Very unsure of their schedule and whenever any of my friends took this airline to go to Dhaka it never arrived as per schedule . Usually three to four hours delay . Very sad that airlines like GMG airlines – supposed to be private airline and they say they give first class service all the way – do not respect customers timings . I wonder how they manage to fly to India when they operate 15 -16 year old aircrafts which once you board you can see cockroaces inside the seat . How they at all allowed to fly

Comment by rati agarwal

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