Pricing & Revenue Management Blog

Mistake airfares: issues and trends in airline pricing

Feb 1, 2016 3:09:15 PM
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Airline yield management and pricing processes use complex calculations and consider several components, such as surcharges, taxes, exchange rates, etc, before submitting airfares for publication. Nowadays, any mistake airfare is quickly seized by online consumers who buy hundreds or thousands of tickets before airlines can even get an alert. For any airline pricing or revenue management team, this has become a nightmare.

The ripple effect of any IT glitch or human mistake can be very costly if the airline is not timely to correct it. Blogs, social media and specialized web sites and apps provide guidance or real time alerts to take advantage of airline pricing glitches. In some cases, airlines honor the mistake price, while in others airlines cancell the tickets, but they may be forced to pay for any subsequent expenses, such as hotel reservations and travel fees. For example:

    • In 2007, United Airlines mistyped a ‘0’ in a set of Los Angeles-New Zealand Business Class seats, offering them for $1062 instead of $10,620.
    • In 2009, Aer Lingus priced across Europe in Business Class for $7. As it was evident that it was a mistake rather than a sale, it did not honor the price.
    • In 2010, American Airlines dropped another ‘0’, charging $1100 for a First Class trip s from the United States to Australia. It did not honor the deal.
    • In 2014, United Airlines failed to price a Washington-Hawaii trip, and only charged $10 for Taxes and Fees.

Consumers in social networks are aware of these mistakes and have developed tactics to seize any pricing error opportunities. Anybody can spot a small glitch in an airfare and quickly spread it out in websites, blogs and social media forums. Others configure email alerts and keyword notifications whenever a given flight has a price drop. Within minutes, hundreds of people can take advantage of that window of opportunity, and quickly buy an e-ticket before the airline even realizes there has been a problem with their pricing system.

Sometimes, it goes beyond individual consumers and becomes a massive hacking and speculating operation. In 2013, customers found a way to pay for a New York - Dublin flight only $49 by making the system think that they were frequent flier program members with enough miles for a reward ticket.  

There are several reasons why airline pricing mistakes are especially costly:

1. The displacement cost is especially high for perishable assets

If an airline has set the price for the next seat to be sold in a given flight at a certain value, it is because, at that particular value, that seat returns at least its expected opportunity cost (what is known as "bid price"). On the other hand, seats in future flights are perishable: the airline can only sell the seats till departure date. Thus, selling a seat at a lower price than the bid price, produces an irreversible economic damage known as "displacement cost": the customer that buys that seat at a low price displaces another potential customer that would have payed more for the same seat.

2. The combination of dynamic pricing and ubiquitous distribution produces high exposure

Airlines use dynamic pricing, that is, prices are built of components that depend on a series of variables and parameters that are computed and integrated "on the fly" by sophisticated revenue management and distribution platforms. At the same time, business rules and price parameters can be adjusted by the pricing teams at will, getting almost immediately reflected globally accross all direct and indirect sales channels thanks to the electronic nature of airline distribution. So, airfares change a lot, change frequently and may change dramatically and globally in a short time. This sometimes makes it hard to differentiate a discount price from a typo or a miscalculation. Terence Law, from the University of Dayton, claims that, as a consequence, “the value of an airline ticket is not ascertainable by a reasonable person” (was she saying airline people are unreasonable??). In the same way, it is harder for airlines to support their claims that a determined airfare was a clear and evident mistake.

3. The complex networked structure of legacy carriers hides mistakes and inconsistencies

Legacy carriers' distribution is highly networked, so, it is likely for airlines to overlook a little mistake that can rapidly spread out, causing unpredicted collateral damage across the network, producing a snowball effect that becomes a huge problem. The existence of third party distribution (travel agencies, codeshare or interline agreements, etc) makes it harder for airlines to maintain full control of tickets and directly communicate with their customers to rectify any pricing or billing error.

One of the most common error fares occur in “open jaw” flights, when the departure airport is different from the return airport. These routes are specially complex and difficult to price as they involve a range of cooperation of different airlines, as well as the calculation of different airport fees and taxes.

4. An airline ticket is a binding air travel contract  

Flights are increasingly booked and payed for online, and the ticket is issued immediately. When an e-ticket with an e-ticket number is issued, both the airline and the traveler have agreed on certain terms and conditions, including refunds, damages and liabilities. This binding contract makes it hard for an airline to void a ticket without any subsequent compensations.

5. Travel regulations protect the consumer 

One of the main reasons airlines reluctantly honor price errors is the tight air traffic and advertising legislation. The US Transportation Department specifically prohibits false advertising and “post-purchase price increases”. It states that all airlines must honor any mistake airfare offered, as “it is an unfair and deceptive practice” to increase the price of air transportation, tours, passenger baggage or fuel surcharges, “after the air transportation has been purchased by the consumer” as the “purchase is deemed to have occurred when the full amount agreed upon has been paid by the consumer”.

6. Honor prices vs going to court is a difficult trade off

A massive public outcry –especially when it involves hundreds of consumers for a single flight- can be costly at a court of law. Civil lawsuits can be expensive, and airlines have to strike a balance between going to court and honoring the price. Depending on the case, the decision can go one way or the other. Plus, there is the cost on the airline's image.

The Airline Industry is taking charge

A landmark case occurred in February 2015, when United Airlines canceled thousands $100 first class seats from London to Newark ‘sold in error’ in the Danish section of its website. At the time, the Danish Kroner exchange rate was significantly higher than usual, and people found a way to take advantage. By avoiding logging into a personal United Airlines account, consumers could buy a ticket from the Danish site of the airline by using a credit card without a foreign transaction fee. The pricing system acknowledged that the person was buying a ticket from Denmark, honored the exchange rate and sold tickets for 491 Danish kroner ($75).

The airline quickly responded that it was “voiding the bookings of several thousand individuals who were attempting to take advantage of an error a third-party software provider made when it applied an incorrect currency exchange rate, despite United having properly filed its fares”.

 

The US Transportation Department took note of the issue, acknowledging that “increasingly mistaken fares are getting posted on frequent-flyer community blogs and travel-deal sites, and individuals are purchasing these tickets in bad faith and not on the mistaken belief that a good deal is now available” and began revising its regulation, concerned that “to obtain the fare, some purchasers had to manipulate the search process on the website in order to force the conversion error”.

It later vowed not to enforce pricing obligations so long as the airline “demonstrates that the fare was a mistaken fare”. The airline, though, must reimburse “all consumers who purchased a mistaken fare ticket for any reasonable, actual, and verifiable out-of-pocket expenses that were made in reliance upon the ticket purchase”.

After a refund, the most common answer for an airline is an apology, stating that it will investigate the cause of the problem and prevent it happening in the future. But, how are airlines really doing it?

The Airline IT Trends Survey, co-sponsored by Airline Business and SITA, concluded that “today airlines lack the ability to capture events across all systems and provide real-time data to respond appropriately. Handling disruption proactively means airlines need to improve overall situational awareness across their own organization but also between other stakeholders. This is an area the majority of airlines aim to address by 2017”.

In April 2015, United Airlines announced it was creating a Digital Operations Center to “ensure the airline loses a lot less money when it makes silly mistakes, like selling free or deeply discounted fares filed in error.”  That way, it would use state-of the-art software to “detect commercial impacts, fraudulent activity and end user manipulations." Even though the chance of spreading mistakes over social media would still be present, the window for booking these cheap fares will be much shorter.

Terence Lau states that United staff “will use specialized software and hardware to detect and prevent mistakes like error fares. Airlines can also delay ticketing, so that they only issue tickets after a fare verification process ensures that the right fare has been quoted to the customer.”

Brian Sumers, a correspondent for Aviation Week magazine quotes United spokesmen stating that "proactive monitoring will improve reliability of our digital channels, increase customer trust by proactively managing issues, and avoid costly PR and litigation."

 

It also seems that decades of increasing sophistication and sometimes unstructured complexity are taking its tax from the airline business. Sophistication helps adding value and making smarter decisions, but, complexity makes the business more prone to errors and more inefficient. So, a proative effort to simplify the business, and, specifically, to simplify the fare structures in places where they do not add value, would also help reducing the exposure to mistakes and gaining better control of the business. 

What is your airline doing about this? Is your airline investing in pricing intelligence systems? How is your current pricing platform responding to airfare mistakes?

I'd appreciate your comments below.

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Tags: Revenue Management
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