Robert Silk
In the nearly three years I've been on the Travel Weekly staff, no story I've written has resonated as widely as my Feb. 19 report about the onset of dynamic pricing in the airline industry.
Within two weeks of publication, the story had spawned coverage in sources as wide-ranging as Travel + Leisure, the Chicago Tribune, London's Daily Telegraph and more.
Within four weeks, Senate minority leader Chuck Schumer of New York had penned a letter to the Federal Trade Commission (FTC) expressing concern that airlines would use dynamic pricing in a discriminatory fashion.
Schumer's letter, in turn, garnered quick support from ASTA, which released its own statement asserting, "It is entirely appropriate that both the FTC and the Department of Transportation (DOT) keep a close eye on airline 'dynamic pricing' initiatives and the potential for widespread price discrimination."
For those unfamiliar with the practice, dynamic pricing is the practice of tailoring fares to the individual. An airline identifies the person making a flight inquiry, then mines its data for that person's flying history. People can be identified through a log-in to either an airline website or an OTA, or through less direct means, such as the use of tracking platforms that identify consumers across multiple devices.
Armed with passenger-specific information, the airline combines what it has learned about an individual with the usual factors of itinerary and demand to push out a dynamically generated fare quote. In theory, at least, different people making the same inquiry at the same time would get different fare quotes.
PROS director of product management John McBride told me in February that at least 11 airlines are already using solutions created by the company with its airline revenue management software to generate real-time dynamic offers within direct sales channels, including websites. Those carriers have rolled out dynamic pricing cautiously, he added, focusing the offer on group travel and on routes that compete against low-cost carriers, including against Europe's Ryanair and EasyJet.
Other airlines might also be using personal data to generate individualized fare quotes.
Though confined to internal distribution channels for now, dynamic pricing is sure to spread in the airline industry as distribution technology, aided by the growing use of IATA's New Distribution Capability (NDC), becomes more technologically sophisticated. NDC adoption enhances communication among the IT systems of various airlines and between those airlines and the GDSs. Think dynamic pricing on codeshare and interlines, for example, as well as individually tailored ticket offerings for queries put forward in GDSs.
McBride and other experts say airlines will most likely use the technology to offer discounts to customers with loyalty status and to generate bundled fare offerings that fit a customer's profile. A recent simulation conducted by the Massachusetts Institute of Technology-affiliated research firm PODS (which also prepared a discussion paper for ATPCO on advances in airline industry revenue management) showed that for business travelers, airlines could drive higher revenue by offering bundled packages with perks such as lounge access and bonus loyalty miles at a higher price than a simple ticket. Though bringing in more revenue, such offers would also decrease load factors.
Conversely, for the leisure market, the study showed that airlines would benefit both in revenue and in tickets sold by offering targeted discounts.
In neither case would the carriers need to resort to discriminatory practices to drive higher revenue.
Despite such findings, the fact remains that airlines could use dynamic pricing technology for more nefarious practices, such as penalizing customers who have a history of buying pricey tickets while selling fares on the same itinerary for less to customers with a more thrifty past.
In my report, I was careful to emphasize that the industry experts I spoke with were aware that such tactics would likely backfire, both with customers and, potentially, with regulators.
But in what is perhaps a measure of just how much suspicion airlines engender, it was that worst-case dynamic pricing scenario that dominated many of the stories that followed. "Beware: 'dynamic pricing' gotchas ahead," warned the headline of a Chicago Tribune column by Ed Perkins. The Sun, a U.K. tabloid that isn't known for measuring its words, headlined its story, "That's Not Fare: Airlines could price your plane ticket based on how rich you are using 'dynamic pricing.'"
To be sure, airlines aren't wholly above such rank tactics. After all, this is an industry that for decades has routinely sold more tickets per flight than there are seats on planes. From their perspective, if dynamic pricing is worth implementing, it's worth implementing because of the extra money it could bring in. In fact, I have little doubt that, over time, some carrier, perhaps several, will surrender to the temptation provided by technology to price discriminate.
However, airlines also know that they are constantly under a microscope from consumers and the media. As such, dynamic pricing, if used in the wrong way, is almost certain to be folly.
"No rational customer will choose to provide any self-identifying information if this information results in a higher price quote than an anonymous shopping request," the PODS discussion paper noted dryly.
Aside from sending customers scurrying to competitors, demonstrable examples of price discrimination would have the potential to bring about industrywide scrutiny from federal regulators and Congress. And while U.S. airlines are at present enjoying an administration and Congress that view regulatory oversight with suspicion, administrations change, and so do the makeup of the House and Senate.
Consider that it took only the revelation that some airlines have begun using customer data in the preparation of fare offerings for Schumer to write the FTC with what he called "great urgency as it relates to the use of personal data to maximize profit at the expense of everyday travelers and consumers." That's despite the fact that the media reports to which Schumer referred in the letter made no specific allegations of price discrimination. Also, consider that airlines know it is entirely possible Schumer could be the Senate majority leader come January.
Overshadowed by any concern about the potentially negative consumer ramifications of dynamic pricing are its potential upsides. In a rare column last month that considered those upsides, Brett Snyder of the Cranky Flier blog argued that airlines would be smart with the personal information they obtain from flyers, enabling them to find incremental revenue while also better servicing customers.
For example, Snyder wrote, if United knows a Chicago-based traveler typically uses American, it could attempt to win that individual over by offering a discount when the flyer does a search on United's website. Or, said Snyder, suppose Delta has a customer who takes the same busy flight every week. Meanwhile, a Delta flight between the same destinations that operates a couple of hours later usually has a lot of open seats. Delta could offer that customer a discount to book the later flight.
In presenting alternatives to the doom and gloom that my February story spawned about the coming of dynamic pricing, my point isn't that industry groups like ASTA, legislators like Schumer and the general public shouldn't keep their eyes open to the practice's potential pitfalls. They should.
Like so much that impacts the general public, the key to its honest application will be transparency. To date, the airlines that are experimenting with dynamic pricing have been loath to reveal themselves.
Indeed, any airline that begins to offer fares and fare bundles based, even in part, on individual-specific data, should be willing to reveal their general methodology. More than that, if dynamic pricing is truly going to be used to the benefit of both passengers and airlines, the carriers should want to discuss it as much as consumers are willing to listen. After all, what better way is there to dispel suspicion?
But if airlines choose not to be transparent, the time could come for people like Schumer to have their day.