Paying More For Last-Minute Travel Isn't Unfair

A couple of years ago, I was on a Delta flight from LaGuardia to Atlanta, and found myself sitting next to a guy who was obviously very upset. "I hate these bastards," he fumed. "I'm paying 600 bucks for this flight, and last week, I flew all the way to the West Coast for 600 bucks." Then, the conversation went something like this:

"What do you think you should pay?"

"About half that."

"When did you buy your ticket?"

"Yesterday."

"Look around this flight. This is a peak Friday afternoon flight from LaGuardia to Atlanta. This plane is chock-a-block full. Do you see any empty seats?"

"No."

"If Delta had a half-price sale going on and charged 300 bucks for all these seats, do you think they would have had any seats left to sell to you yesterday?"

"Well, I guess not."

"You probably could have booked a deep discount fare two weeks ago."

"My plans changed yesterday."

"You could have gone Saturday morning or later tonight and gotten a discount."

"I didn't want to go tomorrow morning. I wanted to go home today on this flight."

That's the point. He got exactly what he wanted, when he wanted it. He wanted that particular flight. Sure, he paid more than he would have liked, but he got a seat on the flight that he wanted at the last minute. But he was still outraged. He just didn't get the fact that if all of the seats on the flight had been made available at the 21-day advance purchase discount rate, no seats would have been left, and he would not have been able to get a ticket on the flight he wanted. The early bookers who were looking for discount rates had a number of options 21 days ago.

Business travelers are often faced with what appears to be contradictory or discriminatory pricing. But revenue management--the process by which airlines, as well as hotels and car rental companies, determine their prices--is a science. It involves the application of disciplined tactics that predict consumer behavior at the micromarket level and optimize product availability and price to maximize revenue growth. In simpler terms, revenue management is selling the right product to the right customer at the right time for the right price.

To effectively manage its seats, an airline has to decide how many seats to sell on each flight at restricted discount fares, unrestricted discount fares, group fares and most important of all, how many seats to hold back for business travelers who buy their tickets at the last minute--irrespective of price, as long as they get the seat they want when they want it. The price that any traveler is willing to pay is based on the particular traveler's circumstances at that time and place.

Without sophisticated revenue management, the risk is high for the airline. If it holds back too many seats for last-minute, price-insensitive business flyers, it kills the opportunity to sell them at advance discounted fares. If the anticipated last-minute passengers don't book, or if they book seats and then don't show up, the airline takes off with empty seats, resulting in lost revenue.

Revenue management presents a win-win situation for both the airline and the customer. It gives consumers a wider range of options and enables a variety of prices that a wide range of consumers can afford. There can be 10 or more fare classes on a single flight, and passengers have multiple options with respect to time of departure, routing and fare level.

Some people feel that by charging different rates for the same seat, airlines, as well as hotels, engage in unethical price discrimination. However, an airplane seat or hotel room reserved 30 days in advance when the plane and hotel are half booked is not the same as an airplane seat or a hotel room booked at the last minute, when there is limited inventory and peak demand.

What the purchaser is really looking for is not just the physical representation of the product (the seat or the hotel room) but the opportunity to buy the product at the price and under the conditions he wants it. These are the factors that differentiate one airline seat from another in the same cabin on the same flight. These are the characteristics that make each airline seat a different product.

Revenue management is about demand-based pricing, which recognizes the time-value component of a perishable product or service. This time-value component varies according to local market value, day-of-week value, seasonal value and competitive value. These elements change the value of the product or service over time. Companies use revenue management to determine the probable mood of the consumer toward price today, tomorrow and every day into the future.

A major misconception among business travelers is that they are subsidizing discount travelers. In fact, the opposite may be true. If the hotel, airline or rental car company did not sell the slots that go unused by business travelers, they would have to charge a much higher price to business travelers to meet their own financial obligations. As long as discount travelers cover their incremental costs and contribute to corporate overhead and fixed asset expense, they lower the cost for business travelers.

At Marriott International, for example, because of the incremental revenue generated by leisure guests, Marriott has been able to pass some of the benefits on to business guests. A few years ago, corporate rates were lowered at more than 75 percent of Marriott's full-service hotels, and both Marriott and the business traveler benefited. The business traveler got lower rates, and Marriott increased its corporate business.

Business travelers are the least flexible customers in the travel industry. The business traveler has an ever-changing travel schedule that makes it impossible for travel service providers to take all of the financial risk that the seat, room and car reservation will indeed be honored. Yet, business travelers require that these resources be available at a moment's notice. By paying higher rates to have these seats, rooms and cars available at the last minute, the business traveler is assuming part of that risk.

A key to revenue management is understanding the demand patterns for products and services and the price elasticity of various consumer segments. This is an incredibly complicated task that requires the analysis of an enormous amount of data. A typical airline revenue management system has over 300 gigabytes of data. To put this into perspective, if all the data were printed out, it would create a stack of paper higher than the Matterhorn. Daily, it must predict the demand patterns and price sensitivity of up to 40 million passengers who will book seats on over 750,000 flights in the coming year.

Getting this right means tremendous rewards. For American Airlines, revenue management is worth over $500 million a year in incremental revenue. Delta's first year of practicing revenue management produced $300 million in additional revenue. Getting it wrong can spell disaster, as in the case of PeopleExpress.

In order for the travel industry to serve the business traveler well, its airlines, hotels and car rental agencies must stay as healthy as possible and at the same time compete on price against companies that have lower costs and lower prices. The core concepts and sophisticated technology of revenue management enable these companies to discount with discretion to build market share, uncover hidden demand that allows opportunistic pricing and understand consumer trade-offs between price and other product attributes. They help companies increase revenue without increasing products or promotions, identify lost revenue opportunity and use market intelligence as a competitive weapon--a necessity in today's fiercely competitive travel industry. The most important factor, however, is that revenue management provides the insight for companies to establish themselves as revenue-driven organizations focused on profitable growth.

In recent years, these revenue management concepts have expanded way beyond the travel industry into such industries as television broadcasting, because almost every industry is experiencing the same marketplace factors the airlines faced in the post-deregulation environment. Reeling from years of cost cutting and downsizing, companies are looking for new ways to grow without adding significant costs. Virtually every company can benefit from predicting customer demand and optimizing the price and availability of its products. Most new companies employing revenue management techniques see a 4 percent to 8 percent increase in revenue from existing assets, translating into a 50 percent to 100 percent increase in profits.

This is a compelling reason for all companies, whether they are in retailing, telecommunications, utilities, manufacturing, healthcare or fast food, to explore revenue management for top-line revenue increases that can drive bottom-line profitability.


<I>Robert Cross is chairman and CEO of Aeronomics Inc., an Atlanta-based revenue management firm; publisher of Scorecard, a revenue management quarterly; and author of "Revenue Management: Hard-Core Tactics For Market Domination.