Sunday, February 13, 2005

Compensation for delays

The European Union has decreed (see for example Times Online) that passengers on flights that are late are entitled to compensation. Cue much rejoicing that consumers have triumphed.

Or have they? Where is this compensation going to come from? Well, obviously, in the first case, from the airline - a flight is late, and the passengers all collect their hundreds of Euros compensation. But where does the airline get the money from? Well, ultimately, the airline's revenue comes from the consumer - in the form of ticket prices, or cargo charges. So if an airline ends up experiencing penalties of (say) 5% of its revenues, then it will need to put up ticket prices by 5% to recoup its costs. It's not as though airlines are making pots of money for fatcats, and these claims will mean that a few fatcats have to lose weight a bit - the margins in the airline industry are probably the tightest of any industry, and many airlines have lost more money than they have made in their entire history.

So what happens is that "the few" end up getting (literally, in some cases) a "free lunch" at the expense of "the many".

This is typical of what happens in a culture which has become obsessed with "compensation", thanks especially to programmes like "Watchdog", and changes in the law that have permitted "no-win, no-fee" legal representation. Of course, if things genuinely go wrong, people ought to be entitled to proper recourse, but we have gone too far the other way - the whole thing has become a gravy train.

It has happened in the financial services industry as well. The mis-selling of pensions was without doubt a scandal - but the effect of all the compensation claims has been to have a measurable impact on bottom line of the pensions providers - which ultimately means that as well as the shareholders losing out, so did the other people who invested their money in good faith. "The few" - those people who successfully claimed they were mis-sold to (not necessarily the same as the set of people who were mis-sold to!) - get a fat cheque - the many see their investments gradually falling in value.

There will be one group of definite gainers from this airline compensation scheme. Those people the cost of whose tickets are bought for them (i.e. they don't experience the cost) - but who will get to collect the compensation (i.e. they get the benefit). Nice little earner there! Oddly enough, an example of people in this group would be MEP's. I don't suppose they ever proposed to compensate the person who actually paid for the ticket - or to link compensation to the amount paid for the ticket.

Oh, one more thing. A lot of stuff is going to have to go through the courts. So there will be one other group who will definitely gain. Lawyers.

Nice one, Brussels!

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