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Airline Mismanagement

Should the airlines be free to quote each of us a different price, based on what they think is 'best' for them and for us?

Or should the airlines be required to quote everyone the same fare options, and let us decide for ourselves which fare we want to pay?

 
 
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Are the Airlines Seeking to Create Unique Fares Custom Priced for Every Passenger?

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 quote.

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 Information Distribution

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 for eligibility.

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 products?

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 anything else?

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 for now.

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 colors.

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 need.

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 ourselves.

The bad news is that this process is increasingly opaque and impossible for us to test and enforce.

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 Airlines

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 ridiculous claims.

So we either need to trust the airlines or to seek some form of regulatory oversight and transparent pricing.

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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Originally published 30 Jul 2010, last update 28 Nov 2012

You may freely reproduce or distribute this article for noncommercial purposes as long as you give credit to me as original writer.

 
 
 
 
 

 


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