Airlines using reverse auctions to determine true seat pricing
cheeptalk.wordpress.com
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Personally, I can't get upset with a situation where I have 100% control. Amazon's pricing experiments are similar; if I don't like Amazon's price + value add, I can just buy from one of their many competitors. So no need to get mad at them for changing their prices randomly. Similarly, I would probably be willing to give up my $50 seat for $2000, so I'd type that number in. If I got my $2000, great; I would walk over to the competitor's counter and pay the $500 walk-up fare. If not, travel proceeds as planned.
What is there to be upset about?
So you're faced with a flight with 105% passengers, you have to figure out who's not flying. The schmucks who'll take a $50 bump (free drinks at the bar later?) or those who'll hold out for $400?
When no-one takes a deal, or there isn't budget, then it becomes involuntary, with minimum comp. That sucks the most. It's like wheel of fortune, except the airline _always_ wins.
I don't believe this is true. At least in the US, the compensation for being involuntarily bumped is usually much better than the voluntary, and as a result it is almost in the airlines' interest to find a volunteer. Also, the involuntary compensation involves cash, whereas the voluntary (on the US airlines I'm familiar with) is a voucher for future travel.
I believe these are the current rules:
"If the alternate transportation is scheduled to arrive between one and two hours after the original planned arrival (between one and four hours on international flights), the compensation equals 100% of the passenger’s one way fare to his or her next stopover or final destination, with a $200 maximum additional cash compensation . If the airline cannot get a passenger to the destination airport within two hours (four hours on international flights), the compensation rate doubles to 200% of the passenger’s one-way fare, with a $400 maximum additional cash benefit. This compensation is in addition to the value of the passenger’s ticket, which he or she can use for alternate transportation or have refunded if not used.
The last time the rule was substantially changed was in 1982, and the last time the maximum additional cash benefit was raised was in 1978. For 2008, the DOT made several changes, the most important was a doubling of the maximum cash compensation to $400 for domestic flights and $800 for international flights."
http://www.airsafenews.com/2008/05/revised-bumping-compensat...
[edited to add the second paragraph, which mentions the 2008 changes, which I somehow failed to get in the first time]
That leaves you with $200-$400, which is not a particularly great ROI. (miles, however, are usually MUCH better comp). Note at that point, a delay could easily be "next flight" which may be the following day -- which could incur another hotel night or extra costs for parking, both which kill the comp.
Finally, note there is no law that applies for domestic flights. For example, see Delta's actual policy for domestic flights: http://www.delta.com/help/faqs/suspended_travel/index.jsp#ha... -- at best, you get money to spend on delta products.
The law definitely applies to domestic flights. It's actually international where it gets trickier.
Whether it's a good deal or not depends on your urgency in getting to your destination. I've probably successfully volunteered to be bumped about 6-8 times in my life, and have been satisfied with compensation offered, which usually is equivalent to a voucher for a free round-trip ticket. It has also included an overnight hotel voucher in couple of cases where it was necessary.
I've never been bumped involuntarily, likely because there is always a volunteer willing to take some offer the airline will make. The highest I've received (international with the next flight in the morning) was an $800 voucher, presumably because the alternative to the airline was $800 cash. But as always, your mileage may vary.
DOT has not mandated the form or amount of compensation that airlines offer to volunteers. DOT does, however, require airlines to advise any volunteer whether he or she might be involuntarily bumped and, if that were to occur, the amount of compensation that would be due. Carriers can negotiate with their passengers for mutually acceptable compensation.
In other words, it's very much down to how you can negotiate with the airline to derive value. :)
This is not really negotiation, but a scripted process of elevation that some know how to exploit for maximum benefit and some don't.
And the opposite nearly happened... My dad, his wife and my half sister were flying down to meet me in Florida a few months ago. In his case, an earlier flight was canceled due to mechanical breakdown. It looked like they would all 3 be bumped and he was a little pleased over the idea of a $1200 windfall. In the end he got on the plane. I suppose there weren't enough Mileage Plus Elite members on the earlier flight that needed seats.
Hah, I've done this before. I was in Orlando and missed my flight back to Chicago, so I had to stand by for the last flight of the day. The list was 100 people long, but since I had the top-tier status, I went to the top. Some family trying to go home from their vacation was stuck in an airport overnight, all because I could not get to the airport in a timely manner. I still feel bad about this.
But only a little.
Those rules require the airlines to pay for hotel costs incurred because of the involuntary bump. The cash compensation is in addition to reimbursement for costs borne by the traveler because of the bumping.
Also, miles only trump cash if you are close to reaching a significant plateau (i.e., upgraded frequent flyer membership). Otherwise, the restrictions on miles make them much worse then cash you can spend anywhere.
Firstly, there are almost never involuntary bumps. Someone will always take money. It's basic economics and it'll always work. The involuntary bumping is really only ever experienced when there is mass delay (e.g. the snowstorm in nyc here recently). This is because there is significant seat inventory (again, think legacy airlines) and usually people can be re-routed with not much more than a few hours delay and a couple hundred bucks in their pocket.
Hotel costs (and food coupons) are only required (for domestic flights) if the delay is overnight or past a certain time-window. Often, again, once you opt-in for voluntary bumping, you agree to be denied access to any other offer that may be made via DOT guidelines.
Finally, miles are almost always worth more, if you're on an airline that values them properly (aa & united especially). Note that Citi have often invested in AA's holding company by buying miles:
"A total of $2.9 billion in additional liquidity and new aircraft financing was obtained. The $2.9 billion consists of: $1.3 billion in new liquidity, including $1 billion in cash from the advance sale of AAdvantage ™ frequent flyer miles to Citibank and $280 million in cash under a loan facility from GE Capital Aviation Services (GECAS) secured by owned aircraft; and $1.6 billion in sale-leaseback financing commitments from GECAS for Boeing 737s previously ordered by the Company." - http://www.aa.com/i18n/amrcorp/newsroom/network_enhancements...
Clearly they're not worth nothing.
The tipping point however is that it's almost always cheaper for the airline to give you miles than money; the cost of miles can be deferred (and you might not even use them!). This makes them a better deal, as you can almost always exchange them for a greater dollar rate later on (e.g. to get a better hotel rate discount, a free flight elsewhere, etc).
(finally pro-tip, most airlines distinguish between miles claimable for status, and miles spendable on flights/services).
In terms of restrictions, it's much more reasonable to compare to a Z fare (highly restricted first class), which is probably closer to $3-5k r/t.
flyertalk.com is the hackernews of frequent flyer mile optimization, though.
There are people on Flyertalk who churn through those Citi AA Mastercards like crazy, collecting hundreds of thousands of miles from each card's signup bonus (usually 25-75,000 miles depending on the promo used to open the account).
While AA can distinguish between qualifying flight miles for status, when it comes to redeemable miles they distinguish between flight miles and other earned miles from charge cards/etc.
Since you can earn lifetime status on AA by collecting 1MM or 2MM redeemable miles, you can conceivably get status for life this way.
Wow, I don't know why the parent isn't at 40+ karma.
(and you can mod me down for that ... I'll forgive you and I'm over it...)
If I want to get on a full flight and another traveler is willing to sell his seat for [Cost] + $50 and I'm willing to buy it for [Cost] + $75 everybody wins. The traveler gets $50, the airline $25, and I get home a little sooner for a price I'm willing to pay. I don't know why people are casting this as "airline greed".
If anything this will allow the airline to overbook much more aggressively. Giving people the opportunity to take that money more often, and if anything make more than the old method overall. Of course when that happens the story will change to "The rich get to travel whenever they want and the poor are stuck waiting!" Or "Ticket speculators are increasing ticket prices so the poor can't travel!"
Like all a rabid experiments in brutal capitalism, PeopleExpress went bankrupt.
Then show up at the airport that day and sell each ticket for a premium above what you paid for.
Frankly, the more tricks like this they pull, the less I want to fly. At this point, I'm not willing to fly any more than is strictly necessary.
I'm curious as to why you think that's good for me, the consumer? More "effective" pricing means that the price I pay will get closer to the maximum price I'm willing to pay. In short, it means that I'll pay more. The article discusses this, with the airlines taking away as much of the "consumer surplus" as possible--i.e. getting people to pay them more money.
I'm really, really confused right now as to why you think that having to pay more would make me want to fly more? Surely I would want to do things where the benefit to me is higher than the price, not where the benefit and price are as nearly equal as possible. After all, I can do only so many things, so the opportunity cost of doing that instead of something with more benefit (e.g. taking a road trip instead of flying, or taking a cruise at sea) makes flying a losing proposition all around.
Remember: Overbooking is usually not a problem, since a few people don't turn up anyway.
Compare an English auction to a straight sell: In the latter, the supplier just guesses a price, and you can accept it or not, and unless they guess right, there will be surplus left. In an auction with multiple bidders who value the item in question at similar levels, the supplier doesn't have to guess. The bidders will make sure that almost all surplus goes to the supplier; essentially the winner will pay slightly more than the second highest bidder was willing to pay.
Still, auctions are good for buyers, if there's competition between suppliers.
I don't really expect them to do that, though, even with this sort of setup. There would be little reason to get rid of a customer surplus if they planned to give it back to us.
After several attempts by the airline, the cash got high enough that my companion and I practically stood up at the same time.
Each six months for several years we booked, boarded, and got cash. The worst being that we'd make the flight and take the trip we'd intended.
We never made it.
Still, it'd be a nice way to get a bolus of cash for buying, say, December holiday presents.
>Also, if you guess wrong and a popular flight did not fill up -- you have to take the flights!
You don't have to take the flights... Last I flew, there wasn't anybody forcing people to get on the plane. As long as you're willing to eat the loss (which you have to be in a speculative endeavor), you can skip boarding the first available flight and still try to win auctions on the rest of them.
I suspect the real problem with doing this is the relatively large up-front capital investment: depending on the flights, you're looking at the 100-500 dollar range per-ticket which they hold for at least a month.
http://www.airpassengerrights.eu/
Technical reasons is, according to a court ruling, not a reason to deny compensation. The court ruled that airlines are responsible for maintenance and the technical fitness of their equipment to fly.
The only way of weaseling out is an event, which is really beyond control of the airline. And even then they need to care for their passengers.
Overbooking can also be an expensive venture, since they must reroute you on demand with another airline on their expense.
(I don't know if opportunity benefit is actually accepted terminology. I just use it for negative opportunity costs.)
Let's say person A and B both bought a ticket for $100, and on departure day, A offers to sell the ticket back for $150 and B offers to sell the ticket for $120.
B sells his ticket and made $20 profit, A takes the plane. The airline made a total of 100-20 = 80 dollar for the seat, although it would have made 100 without the auction.
Am I getting it wrong?
* Actually, the airline would probably profit even if they had to pay $700 to compensate the bumped person - since they're only giving out travel vouchers. Additionally, they can involuntarily deny boarding to someone for a cost lower than $700 (at least in most situations).
You have an opportunity yourself there (assuming everyone plays along) to earn $4,999 if you are naughty.
In such a situation, would an airline actually pay out?
Because another passenger will undercut you at $4998, and take the profit ($4998 - utility of flying) instead. But, of course, you'll anticipate that, and so undercut them for $4997.
And so on, until the price converges to near what its worth to you in the first place. That's what makes it an auction. Its harder to exploit than it first seems.
(Of course, such analysis doesn't always hold true in the real world - but I wouldn't expect to make 5k with that sign!)
Then again, OP assumes that there are no ceilings to payout, which I'm almost certain isn't true.
And then again, as mentioned several times here, it's not like you get the real money - it's vouchers.
I'm curious - is Delta's decision to start such a program premeditated in a similar way? Personally, were I to run a business, I'd be very ill-equipped to handle anything approaching such a level of economic theory.
Airlines without such advanced techniques to rip off less price sensitive customers have a hard time competing. F9 and WN* and the like have much less complicated models and more predictable pricing. To compete, they have to go after loyal bargain hunters like vacationers and small business commuters. They have no effective scheme to squeeze big businessmen with expense accounts. By building a reputation for transparency, they can charge stable prices and make money. It takes time and commitment, though.
DL, on the other hand, makes money by offering to bump regular coach passengers even off very oversold flights in favor of expense-account men on full-fare coach tickets. DL no longer advertises the guaranteed seat benefit for very profitable Platinum Medallion customers on the Delta web site, but you can call the medallion line and get a ticket on any Delta flight any time. It will cost you, but you will get it. Delta will just have to pay to bump someone else at the gate.
Two revenue models. Both survive in the market. Neither happens by accident.
*(Frontier and Southwest)
Not that it's always extremely expensive, but here in the Bay Area where we have better than usual public transport by US standards, it's $8.40 from downtown Oakland to SFO on BART, or $4.75 (with a nontrivial bus transfer) to OAK. From SFO, it's also about $8 to SFO, $7 to OAK (same transfer).
Seattle now has light rail directly to the airport, and Portland has for a while. In the DC area there's National just across the river with a normal subway stop and normal public buses to BWI and Dulles in the suburbs (that stop at subway stations).
I also fly into DTW a lot, same story there.
I was referring to direct subway interconnects to airports being very difficult to fund, but now I'm uncertain. I was always told growing up (80's - 90's) that the reason that reason for the ridiculous off-site airport terminals for subway systems was because of federal regulation prohibited the use of certain funds for air travel. I was always amazed to see how smoothly transport to airports worked internationally, and depressed by the difficulty in the US: Boston, New York, SF.
Since then, all of the cities have changed, and now have better direct connections from their subway systems. I presumed this was a legal change, but now I'm unsure. I can't find anything directly confirming this. Here's one of the closest I can find: http://sf.streetsblog.org/2010/06/22/bart-moves-ahead-with-o...
In this case, it was determined that BART did not comply with the Civil Rights Title VI regulations regarding equity of spending for public funds, and thus was denied the use of federal funding for an Oakland subway extension. I believe this was the basis for the earlier prohibitions, based on the (reasonable?) presumption that the poor do not benefit proportionally from having easy airport access and the rich don't need the subsidy.
I'm in Ann Arbor, where the only efficient way to get to DTW is by car, which means bribing a friend (still not free in terms of friend's time), taxi ($50), traditional airport shuttle (~$30-$40), or shorter taxi plus regularly-scheduled airport bus (~$25). All cited costs are one-way, and a one-way trip is at least half an hour.
Of course, I am a Delta hub prisoner so my flights are in fact priced as monopoly rents. What I wouldn't give for some competition.
Given your username (which I just noticed) it was a downright horrible guess :)