Airlines' plan would trample fare competition, critics say

Airlines' plan would trample fare competition, critics say

POSTED: Tuesday, April 30, 2013, 1:15 PM

Jeff Gelles, Inquirer Business Columnist

One of the promises of "Big Data" to companies - a deep, empirical understanding of shoppers' buying habits - has always posed an implicit threat to consumers.  If, say, an airline or hotel chain knows what you've previously been willing to pay, why should it ever offer you a significantly better deal? More broadly, if it can predict your relative level of price sensitivity, it has a powerful negotiating edge.

That's one of the key threats that critics see in a proposal before the U.S. Department of Transportation from the International Air Transport Association. Resolution 787, for which the IATA is seeking approval by June from the DOT, is portrayed by airlines as an important modernization of data-exchange systems that are crucial to selling tickets and filling jets in the Internet era.

But that's not all it does, according to critics such as Kevin Mitchell, chairman of the Wayne-based Business Travel Coalition, which has collected more than 200 signatories on a letter asking DOT Secretary Ray LaHood to reject the proposal.

Mitchell says the problem isn't the new technology, it’s the new business model it would impose on the industry that would end open price competition and transparency.

While the IATA calls the new model a "win-win" for airlines and travel agents, because offers can be tailored to customers, the Business Travel Coalition's letter identifies a serious drawback beyond customers' privacy concerns:

Resolution 787 explicitly says that, before fares are quoted, airlines have the right to demand from consumers personal information that “includes but is not limited to” the customer’s name, age, marital status, nationality, contact details, frequent flyer numbers (on all carriers), prior shopping, purchase and travel history and whether the purpose of the trip is business or leisure. There can be no legitimate justification for charging a traveler more or less based on a number of these items of personal information (such as marital status or nationality), and many of them by design can be used to pinpoint and extract higher prices from those travelers who are likely to be less price sensitive, such as business travelers.

Mitchell, whose group represents corporate and institutional travel departments, offered his own experience as an illustration. He recently checked prices for a trip to Phoenix, an itinerary that from Philadelphia is a hub-to-hub route for US Airways, which is the only carrier to fly it nonstop. But when he checks prices on a website such as Orbitz, he sees not only US Airways' $600-plus ticket price, but other carriers' one-stop offers for about half that fare - a pricing constraint on US Airways.

Under the new model known as the "New Distribution Capability," he says, Orbitz won't have the ability to offer the most-competitive prices from other carriers, because carriers that adopt the NDC will have to agree to stop publishing their fares, schedules, and fare rules. Instead, third-party sites will be limited to offering "plain vanilla" rack-rate prices. Mitchell says that's "the equivalent of a price on the back of a hotel-room door - a price nobody pays."

Mitchell says the lack of transparency will shift negotiating power to the carriers, and produce upward pressure on prices.

"If I go to Orbitz or one of the other sites today, US Airways doesn't know who I am, and I see those other prices. Tomorrow, under NDC, I have to provide" access to personal information that includes his own ticket-purchase patterns.  "Now, US Airways knows it’s Kevin Mitchell going out to Phoenix on business, and they know I almost always fly nonstop. I’m going to pay more under this new model."

Are criticisms such as Mitchell's exaggerated? That's the contention of American Airlines, for one, which urged LaHood to accept the IATA proposal. In a comment to the department, American - which is planning to merge with US Airways - said:

In fact, common sense dictates that NDC will result in better fares and more relevant offers for consumers simply because it empowers more choices. Some consumers will certainly choose to remain anonymous in the shopping process, and NDC will do nothing to deprive them of that option. Because airlines operate with razor thin margins, and in a highly competitive environment, American has no interest in disregarding this segment of the market by offering unreasonably high fares to those who want to remain anonymous. Airlines have a long history of vigorously competing for every last passenger, since, in our industry, one or two passengers can determine whether a flight loses or makes money. NDC does nothing to make the airline industry less competitive or render these consumers any less important. American will want to serve every last one if them and will have to compete for the opportunity to do so.

Mitchell and other critics note that companies are always free to experiment individually with new business models. Their argument to LaHood is that the IATA's proposal, because it comes from a group representing the vast majority of airlines, is anti-competitive.

"Any individual firm can try to price discriminate," he says. "But when 240 competitors agree to a new business model, that’s a red flag,"

You can find comments on Resolution 787 posted online at Regulations.gov under Docket No. OST-2013-0048. Comments are due by Wednesday - you can click here to submit one.