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Archive for August, 2011

Name your own price for low cost carriers

It’s a well known fact that Ryan Air, Easy Jet, and other low cost carriers don’t really make money on the tickets but through all the other services sold on and off the plane. This is why the websites have dozens of ways you can upgrade your service, links to many partner sites where you can book cars and hotel rooms, and advertisements besides theirs. They have great margins on the food and products they sell on the flight and they even take the cut of the profits made by stores and restaurants in the terminals as well as the transportation service that took you there. These airlines aren’t really selling seats on a flight, they are selling you and your attention to every other way they could get you to buy something. In a way, they are the Google of the physical world.

Airline pricing is the classic example of price discrimination where companies try to sell all the seats at prices that each individual is willing to pay. This is why the guy sitting next to you who bought the ticket few days ago paid several times more than what you paid few weeks ago. Making tickets non-transferable allows airlines to work magics in pricing.

As it stands, in many of the low cost carriers I’ve been on in Europe, not all the seats are sold out. The incremental cost of an extra passenger is nearly zero in this business model, so there is a huge benefit to companies if they could sell every seat to people at prices they are willing to pay.

Enter the name your own price model. I know Priceline has been doing this in the US for a long time but that was more about new ways of matching buyers and sellers, not necessarily as a way to sell out an entire plane. I would also execute it in a slightly different manner:

A. Users pick a one-way or round-trip flight that they are interested in and make a bid for it. Having the option for round-trip is important because I sense that many people will use this for “I could go to XXXX for the weekend if it’s cheap-enough” trips. At this point the user has to pay for the bid already to make sure that they are bound if the bid is accepted.

B. Few days before the trip (maybe 48 hours?), the airline sells all the remaining seats to the highest bidders. This could even be done in several rounds. For example, 72 hours prior to the flight, the airline sells all tickets to the highest bidders save twenty seats. 24 hours later the next set of ten seats could be sold to the next highest bidders if the there are seats remaining. This would allow for airlines to still make money off the last minute bookers, and they should have a good estimate for how many seats are sold for each flight. Lastly, 24 hours before take off, the remaining seats could be handed out to the highest remaining bidders, making sure that all the seats are full.

C. For the bidders that didn’t win, their bids could be refunded. This may be a problem as it may incur additional costs to the airline in terms of credit card processing fee. If that is the case, one alternative would be to turn the bid into airline credit which could be used to book or bid for future flights. They could even put expiration days on the credit even though that is illegal in parts of the world and not very user-friendly.

Of course for the airlines, there is always the likely hood that these bidders, who originally weren’t planning to travel could be very profitable after booking a hotel through their partner website or spending money at the airport stores. At the same time, there is probably some kind of incremental cost involved in adding a passenger to a flight so a minimum bid might be necessary.

I’m not a big fan of the current trend where these airlines are pushing the limits of user patience by trying to stuff as much fees as possible while charging for everything imaginable. This idea could be another way the airlines could increase their revenue without damaging the user experience which is already horrible.

Another smaller idea:

If these flights are becoming nearly free and the goal is to get passengers to book hotel rooms through their partner websites, why not flip it? Partner with some hotels and offer a free flight to those who book a minimum number of days at a certain price? Perceptually, this may seem like a great deal to the end user, although the end result is really the same: you pay for what you get.

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