Options on Flight Tickets – Adventures and Innovations In The Travel Industry
Most airlines in the U.S. charge $150 to change a non-refundable flight ticket 24 hours after it is bought.
For business travelers and others that buy flexible tickets (often, by paying an extra $300 to $700 or more) these change fees don’t matter. But for leisure travelers whose plans change for any number of reasons after you buy your ticket - illness, work schedule changes, annoying friends and relatives that change plans or can’t commit to the group vacation that you had all agreed to, 12 months prior - $150 is a lot of money.
For a family of 4, that’s $150 times 4 = $600 down the drain, enough to encourage such families to drive 10 hours to get to a destination – where, as an added bonus, they get to drive their own car for the duration of their trip or vacation. Then again, if you live in Washington DC and are considering a trip to Seattle, Florence or Bangkok, clearly that’s not going to work.
There is now some relief in sight in the form of “options” or insurance – where flyers can purchase flexibility and insure themselves against such such annoyances, thanks to start-ups such as BitBend and others (note though that (a) United Airlines is one airline that already offers similar protection albeit for 3 or 7 days only, at a time, in the form of its FareLock program and (b) Most airlines offer something called “Travel Insurance” for extenuating circumstances – something I’m not a big fan of…the fine print and the conditions are a turn-off).
On the face of it, this is a no-brainer and many people might pay $10, $20, $30 or even a hundred dollars to buy that flexibility based on the cost of the ticket.
As BitBend’s co-founder (the co-founders seem to have a background in currency/futures trading) eloquently states:
“If you’ve ever coordinated one of those ski trips or golf vacations with a group of friends, you know you can be the sucker who puts down the $500 for the flight and nobody goes,” said Heidi Brown, co-founder of BitBend, a startup fare lock-in service in Chicago.
and to that end, BitBend offers the ability to lock in fares for 3, 7, 14 or 21 days for varying prices.
SteadyFare offers something similar for departures from 3 cities for now, with a more Priceline-like twist:
…Not specifying an airline or flight time gives SteadyFare more choices of flights, ensuring it can book the ticket for those who exercise their options, he (the co-founder) said.
Unlike others, SteadyFare’s option is essentially a cap on airfare for two or four weeks. You won’t pay any more than your option specifies, but if prices drop, you’ll pay the lower price when you book. Another advantage is the ability to choose a range of departure and return dates.
(Above: A snapshot from Steadyfare.com for a JFK-DEN R/T in December)
But both The Economist and the Chicago Tribune (excerpted above) argue that while a market exists for these options, their appeal may be limited and imply that the flight ticket options market may always be confined to a very small niche.
The Economist attributes this to
…The high fixed costs endemic in the airline industry explain why carriers are reluctant to give too much flexibility to passengers…
and the fact that these options collide with airlines’ ability to dynamically price their seats.
What that means is that, as we all know, air fares start creeping up as you get closer to the travel date. So if someone is “sitting on” an option to buy the ticket the airline doesn’t know if that person is going to ultimate buy that ticket (or “exercise that option”) or let the option expire. So that could wreak havoc on their supply-demand-pricing algorithms.
Of course, like with anything else, time answers many things and we will find out soon how well these start-ups do.
Based on that we may actually see the airlines themselves offer these programs thanks to some kind of “Black Scholes for tickets” formula (which will be bad for these start-ups…what will these startups do that the airlines won’t be able to, by themselves, other than an improved formula?). The airlines have little to lose and potentially a lot to gain by letting these start-ups test the market, with the attendant investments and risk.
Meanwhile, in a passenger friendly move, perhaps the airlines should start tinkering with their flat $150 change fee so that the “friendly skies” are a tad friendlier?
There is now some relief in sight in another form: http://www.bbc.com/travel/blog/20121015-new-sites-let-you-sell-unused-trips.
ChangeYourFlight offers a solution to passengers whose plans change for any number of reasons after you buy your ticket.
Might be of complementary interest.