Airlines Should Enable Ticket Trading
Today’s air travel marketplace is inefficient & letting passengers trade tickets would help airlines grow revenue
The motto of Rutland, England’s smallest county, is “so much in so little”. It is a beautiful place with rolling hills, babbling brooks, shady glades and shimmering lakes including Rutland Water, England’s largest reservoir by surface area. The village of Wing has an ancient maze. The pubs are excellent.
Towards the south west of the county on top of a hill is a town called Uppingham, where I went to school. Every Friday Uppingham holds it’s fabulous market, first chartered by King Edward I in AD 1281. Like all market towns, Uppingham brings merchants and shoppers to trade in it’s square (pictured). Both church and pub are nearby to nourish those attending.
Since stalls are physically close to each other buyers can easily compare what is for sale and their prices. Merchants watch their customers carefully to see what sells well and adjust their offers for next time.
Economists say that well-functioning markets like Uppingham’s are ‘efficient’, which means that it is hard to see how one buyer or seller could be made better off without. another being made worse off. Transparent prices, low search costs and plenty of choice keep buyers coming, but everything is nicely balanced so sellers can earn enough profit to come back week after week.
Today’s market for air travel is intensely competitive and considering the significant technical challenges of flight seats are remarkably affordable. As a result everyone in the airline industry earns good money except the airlines.
But the market is also inefficient due to three frictions. If plane tickets evolved to become NFTs (see article) passengers could trade their tickets with each other, the market would become more efficient and airlines would achieve more sustainable profits.
Demand failure
The first friction is that today’s air travel market fails to serve some of the demand.
Many buyers, particularly business travellers, are not always sure whether or not they need to travel until the last minute. They do know though that seats are limited and if they do not buy now they may not be able to buy later. Seats may be affordable but they are not cheap – throwing away air tickets wastes a lot of money.
Meanwhile airlines are not keen on refunds because they know that if a passenger cancels at the last minute their seat may not be sold again. It will be ‘spoiled’ as we say in the trade. Airlines overbook to sell more seats that they have because they know some people will not make the flight, but this does not offset all of the risk.
As a result refundable tickets (see article) are typically much more expensive than the rest. Travellers buying these tickets reduce their risk that they will not fly but accept another risk that if they do take their flight they pay much more than the need have.
Take these together and clearly there will be some people who would like to buy tickets but in the end do not. In today’s ticketing environment this demand is lost to airlines forever.
Mismatched expectations
The second friction is that today’s air travel market does not give people what they want.
Many buyers, particularly leisure travellers, are price sensitive. Holidaymakers can be somewhat paranoid about spending money on flights that they could spend on hotels, meals or other experiences instead (see article).
This is because of psychology. When people buy a ticket the pain of sitting in a narrow seat or enduring a long middle-of-the-night connection is weeks or months away but the pain of spending money is immediate. Since our brains prioritise avoiding pain today, some people buy flights that are far from their preferred options for a small or even trivial saving.
Once people arrive at the airport and board the plane the experience is dismal. By that time flights are nearly full and passengers are often competing with last-minute business travellers, who have significantly higher willingness to pay because they buy tickets out of pre-tax revenue rather than post-tax income. There might be better options still available but in practice they are out of reach.
Poor pricing
The third friction is that today’s air travel market fails to set the best possible prices.
Airlines invest heavily in revenue generation through dynamic pricing (see article and article), creating travel bundles (see article), loyalty (see article) and clever ways to get people to pay more at the last minute (see article and article).
But even after tens of hundreds of millions in revenue management opex and capex, figuring out how much to charge for each seat on each flight at each point in the booking window is inexact, difficult and expensive.
Since airlines commit to schedules roughly a year in advance, most of carriers’ costs are fixed in the short term. By that stage, more revenue and more profit go hand in hand.
The questions revenue managers need to ask have no clear answers. Questions like what should fare levels be, how often should the airline have a sale and when should prices go up or down.
Making things even more tricky for revenue executives, each team has competing priorities and different views of the world (see article). Compromises are necessary but often ineffective. Sales may want to achieve higher volume so fewer seats are spoiled. Pricing may want to achieve higher yield so less revenue is spilled.
In the end, airlines do their best to balance spill and spoil but it is never possible to get it exactly right.
The idea that the market sets the prices is not true in aviation. In reality air fares are determined by the actions of a small group of people, the distribution technology they manage and the optimisation platforms they use. Compounding the matter, the technology supporting pricing decisions may not be as good as it once was (see article).
NFT technology can help
We reckon the next development in air ticket technology will be a migration from electronic documents to NFTs.
NFT tickets use blockchain to keep a complete and accurate record about the conditions under which airlines first made seats available, who bought them and when, and any changes made since the last transaction. As a result NFT tickets will enable people who do not work at airlines to be sure that a ticket is genuine and valid.
For the first time ever, NFT tickets will enable airlines and travellers to participate in a secondary market for tickets. Airlines can sell a ticket and travellers can exchange them with each other, safe in the knowledge that when they arrive at check in they will be accepted for travel.
Traditionally airlines do not offer name changes. Originally this was done to protect travellers from buying fraudulent tickets. Many airlines believe that it preserves the integrity of their pricing and revenue management. But look closely at the three inefficiencies of today’s air travel market and you will see that enabling ticket trading will actually benefit airlines.
The market fails to serve some of the demand
Since tradable tickets may have resale value, buyers who are not yet sure whether or not they really need to fly enjoy lower risk of buying a ticket. People in this group may buy more seats than before, boosting demand and helping airlines reduce spoilage costs.
The market does not give people what they want
As travel becomes imminent, people may care more about their experience than they did when they first bought the ticket. NFT technology will let people with a reservation in a window or aisle seat, or a seat with extra legroom, offer their seat to someone else for cash. Some travellers may even be willing to downgrade cabins if what they can earn from trading exceeds what they paid for the higher cabin in the first place.
There are two benefits for airlines. First, any NFT ticket trading marketplace will almost surely let airlines take a share of the trading value, say 10%. Second, passengers who enjoy their flight more than they expected may be more likely to book in thefuture, increasing the lifetime value of passengers and the airline’s future demand.
The market fails to set the best possible prices
Revenue managers love to analyse data. Blockchain’s record of changes will provide access to a rich stream of data not available today, like what inventory was available at the time of purchase, and how long it took between an offer being made and the offer accepted.
This new and exciting data will help airlines make better forecasts and set prices more effectively in the future. Spill and spoil costs will both go down.
Secondary market trades will also help airlines understand which of their customers really care about the travel experience as flights become imminent and which do not, beyond what is possible with today’s fare models.
The passengers who do seem to care can be offered special deals and products proactively and when travellers buy, the airline will raise revenue. It will be a bit like the famous upgrade auctions but with more control to the airline.
For the first time passengers will be able to make offers back to airlines too. As travel approaches pricing can be much higher than what airlines expect to receive because the banks and pharma companies buying last-minute seats expect a discount at year end due to the large number of seats they use.
Individual travellers who would otherwise be priced out of a comfy first or business class seat will be able to make the airline an offer. Deciding whether or not to accept based on the difference between price posted and price received will be an exciting opportunity for revenue technology developers. Passengers whose offers are accepted will enjoy better travel, and airlines will sell seats for more than they expected.
Three more benefits of NFT ticket trading
1. We know from ticket marketplaces in other sectors like concerts and theatre that consumers understand ticket trading. A good online air travel NFT marketplace will reduce pressure on call centres, so passengers who do call will have less time waiting. Servicing NFT tickets will be less costly and a better experience for both airlines and passengers.
2. If the industry constructs NFT ticketing schemas to be fully compatible with retailing and offer management trends like NDC and One Order, it should be easy for passengers to mix and match exactly what they want from the range of services available. Consumers will enjoy more choice and more transparent prices.
3. Ticket trading data and insights into offers received from travellers will uncover demand trends that are invisible today. This rich stream of new data will help airlines unlock their inner retailers, fine-tuning schedules, commercial strategies and even their networks with less risk than ever before.
oliver AT ransonpricing DOT com