Friday, 2 November 2012

IATA announces plan for personalized airline ticket prices

I've been warning for several years that airlines have seemed to be moving away from the concept of a "common carrier" that charges customers according to a "tariff" of fares applicable equally to all comers, and toward "personalized" pricing of airline tickets.

Now it's official: At its World Passenger Symposium last month in Abu Dhabi (attended by, among others, the head of the TSA), the International Air Transport Association (IATA) voted to approve a timeline for deployment of what it is calling a New Distribution Capability (NDC) that amounts to a technical infrastructure to replace tariffs with personalized prices determined in real-time by airlines, based on whatever information they can assemble about each prospective passenger and how much they are likely to be able and willing to pay.

Coverage of IATA's announcement in travel trade journals has focused on the outraged reaction of travel agencies and on how it would affect the balance of power and profits between airlines, travel agencies (online and offline), and information intermediaries like the computerized reservation systems (CRSs).

For what it's worth, it's clear that the biggest winner if airlines succeed in this endeavor (and if governments allow them to do so) will be Google. This is, in fact, exactly what I predicted when Google acquired ITA Software in July 2010:

Here's the essence of the situation:

  1. To move forward on the basis of its current technical strategy, ITA Software's core imperative is to eliminate the separation of fares and availability and the need to query external availability systems, and transform the availability landscape into a flat local database of available tickets.
  1. Google's core business is brokering advertising, and Google's core competency is in individualized, automated, real-time micromanagement of ad placement and pricing.

Put them together, and what do you get? The most obvious way for both companies [Google and ITA Software] to combine their strengths and overcome their weaknesses would be for them to eliminate or bypass the concept of "fares" and a "tariff" entirely for airlines hosted by ITA Software, and offer tickets dynamically priced for each customer by Google's personalized-pricing algorithms.

What's wrong with that?

The problems with personalized pricing of airline tickets relate to its inherent potential for invidious price discrimination and its inherent opacity (I have no way of knowing what price is being offered to anyone else), which precludes meaningful comparison shopping and precludes government or any other external oversight of pricing (and price advertising) practices....

Google's acquisition of ITA Software is a significant step towards the eventual emergence of an industry push -- in the name of "market efficiency" -- for repeal, or at least more general and overt non-enforcement, of the "common carrier" and "published fare tariff" requirements.

Personalized airline ticket pricing is currently illegal. Airlines are required by law in the USA and most other countries, and under almost all bilateral and multilateral aviation treaties, to operate as "common carriers". As such, they are required to accept all would-be customers (a common carrier can't "reserve the right to refuse service"), to publish a tariff of fares, and to charge the same fare to everyone complying with the same set of rules and conditions in that tariff.

Regardless of which companies win and lose within the travel industry, the real losers from a shift to personalized airline ticket pricing would be consumers. The analysis I gave two years ago of why Google's purchase of ITA Software is likely to be a bad thing for travellers applies equally to IATA's latest announcement. There's an additional irony in this initiative being led by IATA, whose original goal an overt, government-sanctioned price-fixing cartel was a unitary interline tariff at the opposite extreme from personalized pricing.

Historically, common carrier rules were among the earliest consumer protection and truth-in-advertising laws. In the USA, they took much of their present form as part of the late 19th-century populist legislative crackdown on monopolist and oligopolist behavior by railroads.

Requiring airlines (1) to have, (2) to make public, and (3) to sell tickets to all comers in accordance with, a tariff -- the essential elements of the definition of a common carrier as that term is used in, among other places, U.S. laws and numerous international aviation agreements -- is critical to protecting consumers against discrimination and other abuses.

By definition, a fare is a price contained in a tariff in which it is associated with a set of rules. In the case of airfares, these rules typically include both rules specifying which routing(s) and which booking class(es) are permitted. (IATA and many tariffs officially refer to a "booking class" as a "Reservations/Booking Designator" (RBD), although only the most pedantic IATA-trained travel agents and airline personnel ever use that term in conversation.)

By convention, and in accordance with IATA norms, each fare in the tariff is assigned a unique fare basis code which appears on the ticket as a pointer to the rules applicable to that fare, and thus as an abbreviation for a full description of the rules applicable to the ticket.

The U.S. Department of Transportation (DOT), in 14 CFR 221.2(d), has exempted airlines operating on most international routes from the requirement for them to file their tariffs with the DOT. But that exemption only extends to the filing of tariffs. The DOT has not exempted airlines from the separate requirement of 14 CFR 221.2(a) that "every air carrier ... shall ... keep open to public inspection, tariffs showing all fares, and charges for foreign air transportation between points served by it."

(1) Not filing a tariff, (2) not having a tariff, and (3) not making that tariff public are different things. The first is now legal, in most cases of international routes to and from the U.S. The second and third are not. The same is true in most of the rest of the world.

The DOT has no authority to exempt airlines from the requirement to have tariffs for all international routes. By U.S. federal statute, no charge may be made for international air transportation except in accordance with a tariff: "An air carrier ... or ticket agent may not -- (1) charge or receive compensation for foreign air transportation that is different from the price specified in the tariff of the carrier that is in effect for that transportation." (49 USC 41510) Essentially identical language is repeated in the implementing DOT regulations: "No air carrier ... shall charge or demand or collect or receive a greater or less or different compensation for foreign air transportation or for any service in connection therewith, than the fares and charges specified in its currently effective tariffs." (14 CFR 221.2(b))

If an airline tries to charge you a fee for any service related international air transportation to or from the U.S., and can't show you the provision in its tariff specifying that fee, the charge is illegal. Dispute the charge, and complain to the DOT.

In addition to serving as a prohibition on price discrimination (by requiring that the prices in the same tariff be applied to all would-be passengers), the requirement for a publicly disclosed tariff serves a similar consumer protection purpose to the requirement for the provision of a ticket (14 CFR 399.83).

The reason to require a ticket is to ensure that each passenger receives written confirmation of which provisions of the tariff -- such as for stopovers, permitted routings, refunds, changes, and so forth -- apply to their ticket. Without a ticket which contains the necessary pointer(s) to the tariff in the form of the fare basis code for each flight segment, the passenger has no way to prove which provisions of the tariff apply to their purchase of transportation. That's why I've urged the DOT to enforce the tariff and ticket requirements, both of which DOT currently ignores.

Tariffs and their incorporated conditions of carriage typically specify the cost to change a ticket in terms of the difference in prices between the original and the new itineraries (plus a specified penalty or fee, unless the ticket was issued at a fare specified in the tariff as refundable or freely changeable). The difference in prices, of course, can be determined from the tariff.

With personalized pricing, what would it mean to say that to make a change in your itinerary you have to pay the difference in the prices? The airline can make up any personalized new price they want, making it impossible to anticipate or put any cap on the cost of changes.

As a practical matter, it's impossible to spell out on the ticket all of the rules applicable to a fare. The only way to provide full disclosure of rules and conditions on a ticket is to incorporate them by reference to the fare rules in a tariff, through fare basis codes on the ticket.

Twenty years ago, if you got into an argument with an airline about how much a ticket or a change to a ticket should cost, it would be an argument about the interpretation of the tariff and the rules of the relevant fares as specified in the tariff.

Today, growing numbers of airline personnel have no idea what a tariff is, much less that they are required to have, to make public, and to follow one. They assume that the price of a ticket can be whatever the airline wants to charge that passenger at that moment, and are nonplussed by a passenger who claims their right to be charged no more than is specified in the tariff. Some of my most nightmarish air travel experiences have involved airlines with this ignorant and/or dismissive attitude toward tariffs, fares, and rules.

On our last trip around the world, we had to make several changes to the routing of a long set of tickets with multiple stops that we'd bought from Emirates Airlines. The fare basis codes for each leg of the ticketed journey -- most of them corresponding to unrestricted, fully refundable, freely changeable fare -- were properly specified on the tickets.

It should have been possible for any Emirates office to determine, from the tickets themselves and from the airline's own tariff, what rules, conditions, and fees would apply for any changes to our tickets. But nobody at any of the Emirates offices we had to deal with on four continents was even willing to look at their tariff.

They came up with prices in different ways: Some used their internal reservation system's robotic auto-pricing software (inevitably error-prone when faced with complex multi-stop tickets like ours). Some queried other Emirates office, such as a sales office in New York which didn't even cover the territory in California where our tickets had been issued.

Whatever price they came up with, they presented it to us without further explanation. This was the price if we wanted to buy. What more did we need to know?

As I wrote in an earlier column about the incident:

None of the people we dealt with at any Emirates office understood their own airline's tariff, and some of them didn't even seem to understand that as a common carrier they have published rules governing things like changes to tickets. For good measure, they tried to blame anyone but themselves: sending us away, referring us to Emirates' offices in other countries and on other continents (which didn't bother to answer queries, or only bounced the problem back), and falsely claiming that our travel agent had undercharged us a thousand dollars which we would have to pay before they could touch our tickets.

At one point, when I asked that our tickets be reissued on a particular new routing, the agent at the city ticket office in Istanbul, asked, "Why would we do that?"

When I answered, "Because that's the price in your tariff", she was shocked speechless. Who was I to tell her what price to put on her merchandise?

This, apparently, is how IATA wants things to work.

IATA's announcement didn't mention the laws and treaties requiring adherence to tariffs and requiring airlines to operate as common carriers. So it's unclear whether airlines will try to get all of those laws and treaties amended or repealed, or whether they expect to (continue to) get away with ignoring the law.

To protect consumers, personalized pricing should remain illegal, and the tariff and ticket requirements should be enforced, not repealed.

Link | Posted by Edward on Friday, 2 November 2012, 11:08 (11:08 AM) | TrackBack (1)
Comments

Everbread/Haystack also appears to be working on a "plug-in" for airlines and travel agencies to replace tariffs of fares with personalized, dynamically generated prices:

http://www.tnooz.com/2012/12/11/news/after-early-hype-and-a-year-of-quiet-everbread-says-it-has-something-baking-in-singapore/

Posted by: Edward Hasbrouck, 12 December 2012, 08:12 ( 8:12 AM)
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