Airlines Seeking to Create Unique Fares Custom Priced for
Does it matter if they do? Would
this be good or bad?
We already vaguely know
that airfares are very volatile.
But what if airlines
could further change their fares, and offer each of us a
different fare than everyone else?
Would we be net winners
- or net losers?
At present, the airlines must
offer the same fares to everyone - and even if they wanted to
start quoting unique fares different for every different person,
they lack the technology and ability to appropriately customize fares
'on the fly' to each
different person enquiring.
Google's move into travel
information, by buying
outright a company with a major role in mixing, matching, and
distributing airfare information, might conceivably lead to a
situation where Google can work with airlines, using its growing
knowledge of us as people and consumers to help the airlines
make realtime pricing decisions as to if they should quote
high or low to each of us, each time we ask for an air fare
At present the airlines are not
allowed to do this. Should they be allowed full freedom
and flexibility for how they price their products? Would
this work to our advantage if they could?
Google Moves into Airfare
Two weeks ago Google
announced it would buy ITA Software for $700 million.
If you even saw the
announcement, you probably yawned, wondered who ITA Software
is, and how, if at all, it would matter to you.
Apparently, yes, it might
indeed matter to you.
ITA Software is an important
behind the scenes participant that powers many of the online
travel agencies' airfare search and booking engines. See
'How and Why Air
Fares Change When You Go to Book Them' for a discussion of
its role in the process, and how ITA adds to the imprecision of
the information we receive.
Now, what about the future
once Google takes over ITA? What might change?
Airlines Must - at present
- Offer All Fares to All Passengers
Here is a
brilliant, albeit somewhat technical analysis, of the
Google/ITA takeover. Edward Hasbrouck puts his finger on
something no other commentators picked up on. He worries
that there is a trend towards airlines seeking to create unique
airfares for each unique person visiting their website,
something they are not allowed to do by law.
Currently, airlines must
offer all fares to all passengers because they are
'common carriers'. This means that, by law, they are
required to have a published schedule of fares, and to make
these fares available to anyone and everyone who would wish to
travel with them. This was part of the 'deal' established
when the airlines were deregulated - if the government relaxed
its oversight over the airlines, the airlines in turn had to
promise to play nice.
The airlines have certainly
tried to creatively test the limits of the common carrier 'one
size fits all' fare requirements so far, by offering contract
fares, corporate discounts, consolidator fares, group fares,
government fares (which are some of the most discounted fares of
all!) and any other type of limited application special fare
they can get away with, all layered on top of a bewildering mix
of published fares with varying types of rules and requirements
The airlines also play games with
availability so as to selectively make the lowest yielding fares
on any given city pair route selectively available in
circumstances that promises to give the airline the best overall
return - in other words, if you just want to buy one flight, you
are less likely to get a scarce cheap airfare on that flight
than if it is part of a multi-flight itinerary with some of the
other flights being at much higher fares.
These sorts of actions push
the airlines' common carrier obligations about as far as they
possibly can - some might even think too far.
The General Trend to Custom
Pricing of Everything Online
Now for the internet trend
that you the airlines might wish to become part of.
Increasingly, companies doing business on the Internet are
quietly and secretively tweaking the prices they offer to sell
their products for, based on what they think they know about the
person visiting their site and how much they think the person is
willing to pay.
A couple of years ago, Amazon found
itself wrapped in controversy when its own experimentation with
variable pricing came to light. People did not think it
fair that they should be quoted a book at a different price to
the next person who visited Amazon's site.
Other companies that are
not quite so high profile may possibly already implement variable pricing to a
greater or lesser extent.
For example, it has
sometimes been my sense that one sees lower rates for rental car
hires if one first visits a site like kayak.com and then clicks
from that shopping/comparison site over to a rental car company.
It has been my experience that directly visiting a rental car
company and entering my frequent renter ID (complete with
corporate discount ID) has actually caused the daily rental rate
to increase rather than decrease, compared to the rate quoted
anonymously through kayak.com.
Clearly, the logic behind
this is that when they know who I am, they see me as a loyal
corporate renter who is not necessarily very price sensitive.
But when they get a request from an Internet shopping site, they
perceive the request as coming from someone who is very price
sensitive and so they offer a lower price.
The three part article by
Edward Hasbrouck speculates that a variable pricing model for
airfares is not only something that the airlines want
to implement, but is also something that lends itself readily to
implementation via Google's 'know it all' technology and
information store on all of us. Both points seem valid.
The Balance in the Information
Equation is Shifting Away from Us
This points to an
interesting evolution in the Internet. To start with, the
Internet allowed us as shoppers to know much more about
suppliers of goods and services than had formerly been the case, and empowered us to make better
shopping decisions. On the other hand, we were anonymous visitors to supplier
websites; indeed to start with, suppliers couldn't even filter
the information they provided as a function of where in the
world we were visiting from.
This gave hotel companies in
particular many problems due to what they euphemistically term
'regional pricing' - for example, if you are looking to book a
hotel room in Sydney, you might find that you are quoted a lower
rate if you are coming from India than if you are coming from
the United States.
This particular information
gap has long since been closed, and companies now know to a high
degree of geographical precision exactly where in the world we
are every time we connect to the internet. So if that
Sydney hotel is selling its rooms more cheaply to Indian
residents than to you, there's now no way you'll know about this
(unless you can connect via an internet proxy server in India).
Inexorably over the last
five years or so, there has been an evolutionary movement and
developing technology so that companies on
the Internet can now potentially know more about us as purchasers than we know about them as suppliers.
Not just our current location, but our unique personal identity,
our interests, and our shopping history increasingly follows us
around the Internet.
Maybe you have noticed this
in a semi-benign form already. Have you ever noticed that
after visiting a particular type of website, you then start to
get advertisements on unrelated webpages for those sorts of
For example, a couple of
weeks ago I was researching the purchase of new tires for my
car. After having visited a major online tire store, I
noticed that for several days afterwards, all sorts of different
websites would be displaying ads for tires, both for the store
that I had visited, and in general. Clearly something
about me and my past website visits was being tracked and passed
on to other websites I went to look at.
So rather than giving us as
customers more information, the Internet now gives us less
information, while at the same time promising to give the
merchants (including airlines) increasingly more information about us in return.
Progress is a funny thing.
The balance in the
information equation is shifting in favor of the sellers rather
than us as buyers.
Would (will!) Airline Custom
Pricing Benefit Us?
Does it really matter if
sellers in general, and the
airlines in particular, know more and more about us and our
purchasing histories, whether it be information about tires, airfares, or
Yes, it does matter.
For example, how would you feel if you walked into a regular
retail store with no prices on anything, and before the shop
assistant would quote any prices to you, you had to fill out a
multipage questionnaire about your lifestyle, your demographics,
and your recent purchases of everything? That is a mildly
offensive and definitely intrusive invasion of privacy.
But, whether a privacy
invasion or not, what will all this information about us, our
lifestyles, our demographics, and our shopping histories be used
for? We all know that
this information will be used to allow a company to set prices
as high as they think they can get away with; of course it will
not be used to encourage a company to drop its pricing.
Can you imagine the
conversation? In a mattress store, for example
Well, yes, sir, you could buy the $150
mattress, but don't forget that you're getting married in
three months time - don't you want to have a better mattress
on your new matrimonial bed?
And remember also that you have
trouble sleeping, and some back problems too. I think
you should consider the $850 mattress, it would be much
better for you.
And, of course you can afford it.
You earn $120,000 a year, you have few outgoings, your house
mortgage is only $1000 a month, and you've no dependents.
And - oh yes, you just got a $10,000 bonus too.
So let's look at the $850 or the $950
mattress - now this one here is very popular. Your
neighbors two houses along bought this mattress through
another store a week ago, and when they bought it, they
actually paid $150 more than what we are offering it to you
And - here's a thought - you know that
special offer you got from the other credit card company in
the mail a week ago, why not use that card to charge the
purchase and you'll get double frequent flier miles and not
have to pay interest for six months.
I see that you're only 1500 miles
short of having enough miles to fly business class to
Europe, something that you've been looking at doing this
coming summer, so let's get this mattress to you and you'll
be able to go to Europe.
Oh, here's a coupon from our
promotional partner, XYZ Airlines and another from ABC
Hotels that you can use when you are in Paris - that seems
to be where you most want to visit, I think.
Lastly, could I interest you in a new set of bed linens,
too. It is more than eight years since you last bought
any bed linen, and we have some styles here in your favorite
And so on and so on.
Now, of course this
conversation is not likely to happen in real life - yet -
but if a very clever internet pricing engine was to know this
sort of information about you, don't you think it could drive
the products and prices to you to reflect its knowledge, and
couldn't it choose what extra options to offer or not offer, and
optimize even small things like sizes and colors too. Or
perhaps ensure that pictures of people modeling the items you
were looking at were of similar demographics to yourself.
And so on and so on.
At the risk of repeating the
obvious, the more that companies wishing to sell us things can
find out about us, the more they can use that information to
pressure us into buying things we don't necessarily want or
We are advantaged at present
by having airlines offer all their fares to everyone. As
soon as the airlines get a chance to pick and choose what fares
they offer, and to whom, it seems inevitable that this
information will be used to 'increase their yield' ie to
increase their average ticket selling price.
Detailed Air Fare Information
is Getting Harder, not Easier, to Obtain
The good news is that
currently, as common carriers, the airlines must make all fares
available to everyone. Instead of the airline getting to
choose which airfare it will offer us, we can make that choice
The bad news is that this process
is increasingly opaque and impossible for us to test and
An unexpected side effect of
the Internet is that airline pricing has become very much less
transparent. This is completely the opposite of what many
people predicted enthusiastically a decade ago. These days
it is close to impossible to see a 'raw data' display of actual
availability on an actual flight and to understand the different
classes of service on that flight and the different levels of
availability for each class of service and the fare implications
associated with the different classes. All we see is the
final result in the form of available airfares without
understanding how they are calculated.
Should We Just Trust the
So I guess that means we just have to trust the airlines, right? Either that, or
accept the assurances that will doubtless be offered in time to
come about how customizing airfares to each individual traveler
will be to our advantage, will save the airlines money, will
enable them to operate more efficiently, will increase airline
competition, and that the savings as a result of these
improvements will be passed back to us in the form of more
choices and lower fares.
Of course, no one would be
as na´ve as to believe any part of such a claim.
Oh - but wait. Aren't
these the exact same reasons that the airlines trot out to
justify their successful requests for antitrust immunity each
time they group together and reduce the number of airlines
competing for our business? Gulp. Apparently there
are lots of people who do choose to officially believe such
So we either need to trust
the airlines or to seek some form of regulatory oversight and
For now, we want to oppose
any move away from airlines being common carriers, and insist
they must continue to publish their full fare schedule and allow
anyone/everyone to buy the fare they freely choose themselves,
not the fare the airline seeks to impose on them.
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30 Jul 2010, last update
28 Nov 2012
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