
Airlines using reverse auctions to determine true seat pricing - e1ven
http://cheeptalk.wordpress.com/2011/01/05/be-very-afraid/
======
jrockway
The author seems to be upset by this, but why? If you don't want to sell your
seat back to the airline, don't.

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?

~~~
imajes
The system will never accept more than about 75% of the fare (or, potentially
less). This is also a tactic employed by legacy airlines - the newer ones
don't promise a seat, so you get bumped till later, no comp.

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.

~~~
nkurz
_When no-one takes a deal, or there isn't budget, then it becomes involuntary,
with minimum comp._

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...](http://www.airsafenews.com/2008/05/revised-bumping-
compensation.html)

[edited to add the second paragraph, which mentions the 2008 changes, which I
somehow failed to get in the first time]

~~~
imajes
That's actually not a good deal; again, this replies to legacy airlines. They
don't refund your fare, as it's used to pay for your replacement flight, and
most legacy flights are > $200 R/T.

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...](http://www.delta.com/help/faqs/suspended_travel/index.jsp#handle)
\-- at best, you get money to spend on _delta products_.

~~~
nkurz
Again, I think you are mistaken. This may be partly my fault due to the missed
quote above, but I don't think you understand the way bumping works in the US.
Perhaps this page will be clearer:
[http://airconsumer.dot.gov/publications/flyrights.htm#overbo...](http://airconsumer.dot.gov/publications/flyrights.htm#overbooking)

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.

~~~
imajes
From the DOT page:

 _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. :)

~~~
cookiecaper
I tend to doubt you'd be able to negotiate very far with the gate agent.
Negotiation is rare in consumer-business transactions in the US, and in the
few cases where it is normal practice, consumers absolutely loathe it
(generally because there's no real "negotiation" going on anyway, I guess).
Americans don't like to barter, they just like things automatically as
favorable as possible, and I'd be surprised if your gate agents have any
authority to do anything other than follow a three-step simple elevation
process like: "Will you take $50? $100? $200?" If high number is rejected, the
agent is probably obliged to move on.

This is not really negotiation, but a scripted process of elevation that some
know how to exploit for maximum benefit and some don't.

~~~
nkurz
It is usually done as a uniform price auction, with the airline upping the
offer until they have enough volunteers. All volunteers usually receive the
same (best) compensation regardless of what level they first agree to give up
their seat. At least in my experience, you are right that it is not possible
to negotiate directly with a gate agent, but then again I'm sure those with
superior negotiating skill can negotiate just about anything.

------
johngalt
Seems like a great idea to me. Creating a market where one doesn't currently
exist. As a weekly passenger, I've always wondered why the airline can bribe
someone to take the next flight, but I can't.

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".

~~~
jerf
John Galt, I should hardly have to explain to you that some small number of
people simply hate free markets, and a much larger number have no idea how
they actually work.

~~~
johngalt
I'd say it's more an attitude of entitlement. "The airline used to give you
$200 to rebook, now they give you less!" As if the airline owed them the
opportunity to take the next flight.

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!"

~~~
eru
In reality, like in many markets, speculators will probably lose money more
often than they'll make it.

------
MichaelApproved
I wonder if this could be used as a part time business. You could buy several
tickets on days when flights are usually overbooked months ahead of time. Good
time to do this would be Thanksgiving, Christmas, Memorial Day, etc.

Then show up at the airport that day and sell each ticket for a premium above
what you paid for.

~~~
Natsu
Doubtful: someone else would likely underbid you, so long as the worth of it
to them is lower.

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.

~~~
eru
Shouldn't those tricks actually make you want to fly more often? If the
pricing gets more effective, that can only be good for the customer.

~~~
Natsu
Wait... what? They're making it so that overbooking will happen more often and
so that people will get less compensation for being bumped from their flights.

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.

~~~
eru
The trick will only have the effect described in the article if the airline is
a monopoly. With competition they won't be able to extract all the gains. So
you will have to pay less, eventually, and profit from other people's
willingness to get off an overbooked flight.

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.

~~~
Natsu
If they actually lower their prices, yes, that would make me slightly more
willing to fly. Though, actually, I'd prefer that they lower their absurd fees
(and that all the places to compare flights would give us a way to add up
_all_ the fees up front in order to expose such shenanigans).

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.

------
CaptainZapp
Reckless overbooking can get mightily expensive for an airline in Europe (or,
to the best of my knowledge, non-European operators flying into, or out of an
European airport):

<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.

~~~
eru
So it seems like this could be even more useful in Europe, where getting
volunteers to get off the plane has a higher opportunity benefit compared to
involuntary bumping than in the US.

(I don't know if opportunity benefit is actually accepted terminology. I just
use it for negative opportunity costs.)

------
analyst74
Forgive my ignorance, how does the sell back auction benefits the airline in
an over-booking situation?

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?

~~~
2arrs2ells
The price people pay for seats when the plane is full is usually extraordinary
- 3-10x a "normal fare". Thinking on the margin, the airline would get - say
$700 - for the "overbooked" ticket in your example, and profit as long as
someone will volunteer to be "bumped" for <$700*

* 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).

------
kellysutton
What if you stood up a sign outside the ticketing area that just read: "Delta
1500 LAX->SFO, please enter $5000 as your bid price."

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?

~~~
feral
Game theory analysis of situations like this usually concludes that you won't
get $4999.

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!)

~~~
borism
You're assuming that someone standing with a sign and someone hurrying to get
on a plane are equally interested in playing the game.

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.

------
Splines
Well, I know for certain I am not an economist.

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.

~~~
WildUtah
Legacy airlines have revenue management departments that use sophisticated
mathematical models to price discriminate between passengers to obtain the
maximum yield from each day's operations.

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)

------
swolchok
I'd argue that this system is less efficient when considering the significant
costs of getting _to_ the airport in the first place.

~~~
jrockway
For me, it's $2.25 and 45 minutes. I would imagine that most people who live
in major cities are similarly lucky. (OK, not Tokyo. There it's at least 1200
yen to get from Tokyo to Middle Of Nowhere International Airport. But I
digress.)

~~~
nkurz
At least in the US, I don't think that's true other than for New York, Boston,
and Chicago. Are there other cities that have good cheap public transportation
to the airports? For a long time, it was basically impossible to have a direct
connection due to federal regulations.

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).

~~~
blasdel
What federal regulations are you talking about? Most cities seem to at least
have normal buses to their airports — all those service employees have to get
to work somehow!

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).

~~~
nkurz
_What federal regulations are you talking about?_

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...](http://sf.streetsblog.org/2010/06/22/bart-moves-ahead-with-
oak-connecter-despite-civil-rights-violations/)

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.

------
WildUtah
The reasoning here applies only to monopoly pricing, but airline
transportation is sometimes a competitive situation. In that case, the reverse
auction can impose some price discrimination but cannot erode the total
consumer surplus.

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.

~~~
jemfinch
CVG?

~~~
WildUtah
SLC, but good guess. I suppose ATL is often considered the worst.

~~~
jemfinch
> SLC, but good guess.

Given your username (which I just noticed) it was a downright _horrible_ guess
:)

