21 July 2011

An Airline Seat - A Commodity No Longer

If you will indulge me - I am going to take a little time out to share with you one of my pet thoughts at the moment. As the Professor is formally on holiday - I have had an opportunity to think about the meaning of life. And I have been trying to get my head around the forces at work with regard to the battle for airline distribution.

An airline seat has been considered a commodity for a very long period of time. Brand differentiation has been considered as a loyalty issue. But today there is a very different perspective emerging. The airlines across the world led by the Low Cost Airlines have found that they can differentiate their product and that they can not only discriminate by price (the current exclusive currency) but by product feature.

As regular readers of the Professor's Wisdom know that I am not a fan of airline behaviour to their customers, as a frequent flyer - I am subjected to a litany of abuses at the hands of the airlines. Airline customer service is an oxymoron. But I need to use them and therefore have learned to accommodate some of their quirks.

However I am an ardent capitalist. I believe in freedom of markets along the lines of Milton Friedman. I believe that the owner of a product has the right to do what he wants with it. And if he is stupid with it - then so be it. As long as consumer rights are not trampled on - then the market should be free and open. (of course there has to be some societal constraints particularly for the environment and paying taxes).

Somehow in the past 10 years since 9/11 the airlines got smart. I think someone put something in the wine at Airline conferences to change the way airline execs approach the market. We have moved from the "capacity at all costs" approach to a more true market based supply and demand control model. The web of course has a lot to do with this. The creation of pricing transparency by the OTAs, Search players et al has changed consumer behaviour.

It is time to acknowledge that the world has moved on. There is no god given right to constrain a market and ALL contracts and practices that do so must be declared null and void. Preferred relationships can be allowed providing consumer rights are not trampled on. There still has to be balanced but innovation does not do well when trampled on by oligopolies or monopolies. (Think Google is a free and fair player - of course they are not). There are a large number of arrangements in various parts of the product lifecycle of an airline seat that constrain consumer choice and market freedoms. Airlines being allowed to create JVs – mergers in all but name being one. GDS contracts being another.

We need to acknowledge that the airline product is not a commodity but that it is also a utility. So it has certain responsibilities. Acknowledging the game of obfuscation by the airlines should not be something that is spoken of in hushed whispers!

What I think is going to be interesting is that there is a new issue on the table which needs to be addressed. This is the definition of who has the definitive "right price" for a particular seat on a specific flight. Under the present systems in place - the airlines have long delegated the pricing capability to the GDSs via ATPCo. That means that they are not in control of their own destiny. The obvious answer is to define a single (or controlled few) sources for approved pricing. Some airlines already do that. The LCCs for example have true dynamic pricing so you dont know what the pricing is until you have told the airline what you want. Bespoke pricing is not a new concept but it has always been hard to implement. The new technology developed for web engines however makes that quite normal and an easy low clost for the supply owner to manage. There are a lot of smart pricing engines out there in very complex products. Why not in airline seats?

So while the government's try to regulate ancillary services, in my view they are going about it in the wrong way. I think they should make the airlines publish a price list and then allow the airlines the freedom to define where the definitive pricing is stored and how to access it. It would make the process of regulation easier and by opening it up to all comers it would make the consumer be able to go to a definitive source(s) for information. The current system of different systems of proprietary logic and control is just outdated and needs to be blown away. A very good outcome is that the consumer would know where to go for a trusted and correct price – the definitive lowest fare. The current system creates confusion and also prevents Trust by the consumer.

Ultimately I believe that there should not be any mystery in it, we should think of other Utility markets and manage them appropriately and accordingly. Let all airlines compete freely. Let all consumers access the information fairly. Then let the intermediaries figure out how they can make money from offering services to the supply and the demand sides.

Yes - I am advocating a change in the system. I am so motivated by this that I am backing several ventures that advocate this position. In my view it is now time to just acknowledge that market freedoms are critical and that now is the time to do a good job in fixing the current screwed up marketplace that we have now. Today we have a closed system that has resulted in poor pricing transparency, an effective hidden tax to the consumer with innovation trampled on. All in the name of protecting the status quo. Well that needs to change. And clearly evolution is not appropriate. With both the EC in the form or regulation and the US in the form of the DoJ investigation are now looking at the situation.

So they should. But this time as consumers we should be getting a better deal. As capitalists we should let the most efficient way win.


Chris Bird said...

We certainly disagree about who owns the pricing of a product. My firmly held view is that the party from whom you buy the product defines the price you pay. In retail, I choose to buy from Wal-mart or I choose to by from Nieman Marcus. Maybe the same product, but I make my choice. Our industry is confusing because when buying, some of the components are bought directly from the airline - pillow rental for example, and others through an agency. I am buying the hamburger and napkins separately.
I contend that as much as the airlines want to control the price and customer experience that is not healthy. It's a form of resale price maintenance and heavily loaded in favor of the "manufacturer".
I would dearly like to see the market decide completely. Introduce retail outlets that have pricing freedom and see what happens. Loss leaders, bundles, unrelated discounts. Put CostCo mentality into travel pricing and then we mighty have something approaching a free market.

Professor Sabena said...

OK Chris... I dont believe the analogy works - but assuming that it did..let me make the argument that there is a fundamental difference between WalMart and the GDS. Walmart IS the brand the consumer buys from. Also Walmart takes the responsibility for the product.In the USA there is little grey market pricing. The airlines control the price and they control product delivery. If you have a problem with the product the GDS accepts NO RESPONSIBILITY FOR IT. In my view there is no value add to the product that the GDS provides. It is in my view not even a channel but a technology tool. Think internet pipe rather than retail store. Even the retail store such as the travel agency accepts little responsibility for the product - just the processing of the product paperwork. This is completely different from your analogy.

Do I see a branded cow in my hamburger?

That said - in Europe when there is a net fare - the agency IS responsible for the service and accepts a lot more responsibility in return for setting the actual delivery price for the airline.

Will that happen in the USA? I would thoroughly welcome that. But it is not the case today. For a very simple reason. The market is not set up for it.

Now perhaps that is an innovation you might consider. Your former employer keeps making the argument that there is a value add. Yet they refuse to make the product easier to sell, add personalization (like Needless Markup does). All for a large fee that does not justify their activity. Throw in the restrictive and thoroughly outmoded contracting Gordian knots and you have a bad recipe.

Not that the big box stores are much better but they do add real product value. Do we see a GDS branded version of an AA fare like we see a specially priced and unique SKU number for say a Toshiba laptop?

I rest my case


Chris Bird said...

Tim, great response. Thanks. I will continue to hammer a little bit! Eventually I might get a headache though.

Your point about the hamburger is an interesting one - except that we do see things like "we only sell Certified Angus beef". But I agree we do generally no know the actual source. At 5Guys Hamburger joint near my house, it does say that the potatoes were grown by.... But I am unlikely to go back to the farmer because the product 5 Guys is selling has been in some way improved (sliced up and dumped into hot oil).
I wasn't going down the GDS path in my previous comment. I think as the consumer, I don't know a) that I am buying from a GDS, nor b) what a GDS is. I am buying from an agent (whether OTA or brick and mortar). So I see the agent as being the group that I have the contract with.
I would very much like the agents to be something other than a pass through. In essence bundlers in their own right. So I could see one agent saying, "We will include the baggage fees in the price" as some kind of loss-leader like enticement.
Yes the model is set up wrongly in the USA, yes in Europe there is (are) more teeth in the agancy rules.
Let's get the playing field levelled a bit - perhaps direct connections will help that, perhaps not.
Something/someone has to act as mediation point/aggregator in complex multi-destination itineraries- that something could be a regular agent, an OTA, a GDS or an airline acting in the mediation role. I don't really care as long as I, the consumer, have one throat to choke!