Airline suit settlement is a gift for the lawyers

Charles M. Kahn

August 06, 1992|By Charles M. Kahn

PERHAPS you've seen the news stories or read the ads in the past week in this newspaper: "If you bought a domestic airline ticket between Jan. 1, 1988, and June 30, 1992, you may be entitled to file a claim."

The ad goes on to inform patrons of nine airlines during those 3 1/2 years that their rights "may be affected by lawsuits now pending" in a federal court in Atlanta. Travelers are invited to send a postcard to a New Jersey address for further instructions. Eventually, they would be eligible for discounts of 10 percent or more on future tickets from a fund established to settle a $450 million price-fixing suit.

All of the major domestic airlines serving Baltimore-Washington International (except America West) are included in the suit.

Does the airline settlement sound like a good deal for travelers? In fact, it is one of the more cynical agreements made among lawyers in the increasingly dubious world of class-action suits. The only apparent beneficiaries will be the lawyers themselves.

The suit was initiated in 1990 by a group of 50 airline travelers. Claiming to represent all domestic airline passengers, the plaintiffs charged that the carriers conspired to fix the price of tickets by using an electronic fare-exchange program in Washington, D.C.

Among other things, the plaintiffs claimed that the airlines used a secret computerized code to signal each other about intended changes in fares through their listing of tariffs.

Whether or not this cloak-and-dagger stuff strikes you as silly, the negotiated settlement -- subject to approval by the U.S. District Court in Atlanta after a hearing in October -- ought to strike you as outrageous.

The real cost to the airlines will probably be zero, despite the media hoopla over the volume of discounts. As any good salesman knows, the value of a discount is dependent on the original price. For example, a $100 dress can be priced at "$110 with 10 percent off" without any loss of profit.

In the same way, airlines can adjust the price of tickets by the amount of the discount. Under deregulation, airlines are free to change their prices without government review or approval, and they do so constantly.

So if you were pleased by the prospect of a $25 discount on your next $250 ticket, don't be. The price of the ticket will probably go up to $275, and you'll end up paying $250 just as before.

But don't expect the airlines to admit this -- and don't expect to spot the price changes very easily. Airline companies are among the most sophisticated marketers in the world. They are masters at pricing strategies and leaders in targeting special markets with special promotions. Prices go up and down for many reasons, and the fare increase to offset the discounts will easily disappear into the rest of the pricing activity.

One way to blunt the real costs of the discount program is to make sure the discount will not be usable in combination with other fares -- and then offer offsetting promotions.

Carriers will also want to spread the discount as thinly as possible. This will ensure that many travelers won't bother with the paperwork necessary to use the coupons. In fact, to use the discount, a flier will have to pay out money for a ticket.

If the settlement gives no net benefit to airline customers and has no effect -- good or bad -- on airline prices, why waste legal talent and federal court time over the whole exercise?

Basically, because it gives squads of lawyers lots of work.

Sometimes class-action suits provide real benefits to society; sometimes they become workfare for the legal profession. Consider that the proposed airline settlement calls for at least bTC $44 million in cash to pay for administering the discount program. The distribution of the coupons is to be done through a committee organized by the plaintiffs and defendants.

No doubt, many fine legal points will have to be resolved by the committee in deciding who is and who isn't eligible for a discount. Fees for the lawyers will come out of this hefty cash fund.

C7 Lawyers, it should be noted, do not accept coupons.

Charles M. Kahn, professor of economics at the University of Illinois, is co-author of a recent study of airline fares.

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