Why You So Rarely See Web Fares In the US

I was talking about mistake fares with someone the other day, and that reminded me of a time when I filed a couple of mistakes myself as a pricing analyst at America West. One, from Phoenix to Baltimore for under $100 roundtrip, did very little damage since it was a web-only fare. We caught it before many had seen the error. That turned the discussion toward web fares in general. You might wonder why you so rarely see them anymore here in the US. There’s actually a reason for that.

When airlines first realized that the internet was a viable option for selling flights back in the 1990s, they saw dollar signs in their eyes. Selling through traditional channels was expensive. The Global Distribution Systems (GDSs) like Sabre charge a whole lot of money to sell through them. Every time a traveler booked a segment (not even ticketed, just booked), that meant dollars out the window for the airlines. At the same time, airlines still paid travel agent commissions to anyone who sold a ticket. It was an expensive proposition.

With the internet, airlines realized they could cut their fares but then cut their costs even more. The end result was that they’d make more money on a ticket even with a lower fare. And with a lower fare, they could convince more travelers to try out the new technology. That meant that the web became the discount channel by default. Airlines touted the increase in the percentage of bookings via their own websites as a major sign of success. They invented all kinds of unique promotions, including those weekly web fares (“Surf ‘n Go” at America West) that helped fill seats on empty flights at the last minute.

While this was happening, the GDSs sat on the sideline anxiously. They saw airlines aggressively trying to shift business away from them, and that meant their big revenue streams were at risk. They had to do something to stop the inevitable shift away. They knew that they still had a lock on corporate travel at that point, so they could use that as leverage. An idea was born.

Web Only Fare

The GDSs agreed to dramatically reduce booking fees for airlines on one condition. The airlines had to publish all fares in the GDS. This deal, commonly called a “most favored nation” clause, was the death knell for web fares. After all, if you could no longer shift share by discounting, why would you offer it at all? That was the point. But airlines looked at the ability to reduce their booking costs and realized they had to take the deal. It was a smart move financially, at least in the short run.

Over the years, we’ve seen airlines get more and more testy about these deals. We’ve even seen American argue in court that they’re anti-competitive. American and others have suggested that the GDSs are using their monopoly standing to force them into these deals because the financial penalties for opting out are too onerous. Others have gotten creative.

Frontier, having signed this deal when it was effectively a different airline, has been trying to reduce costs. It created a equivalent fare that would reduce benefits (carry-on bag fees, for example) for those who booked through third parties. I’m sure that was probably going to end up in court, but Frontier backed away and revamped its fare structure completely anyway. Now the benefits have been stripped from all fares.

Of course, not all airlines have played this game. Southwest largely doesn’t sell through third parties so it never even engaged in this. Spirit, however, does. And the airline is notably more expensive if you don’t book on the airline’s website. You’ll see Hawaiian also is cheaper on its own site. Internationally, the one that stands out to me has always been Air New Zealand. But there are others as well.

Eventually, as GDSs either change or lose their grip, we’ll see these deals come apart. But even if they do, we probably won’t see airlines rushing back into the web fare game as you know it. The days of discounting just to convince people to use the web for booking have long passed. But it wouldn’t surprise me to eventually see airlines have differentiated pricing in different channels. People will hate it if it’s not done right, but that’s a conversation for another time.

16 Responses to Why You So Rarely See Web Fares In the US

  1. David SF eastbay says:

    I think people also found out if they are looking for the lowest fare, going to an airline web site doesn’t always do that. That’s why third party web sites and travel agents are still around. They can see fares for a lot of carriers. Those looking for the lowest fare don’t care if it’s AA/UA/DL/etc, and don’t want to check each airlines web sites since it’s not always the easiest thing to do.

  2. Matt says:

    This whole distribution business is evolving far faster than the technology can. If AA and others can get their direct connect going, it’s possible to create real disruption in the industry by offering new players the opportunity to build something that is competitive to the established players. Third-parties innovate, but its important to control your own data and how/who/where it goes. I see this as the critical step for the airlines to disrupt the traditional GDS model.

  3. Bob Skinner says:

    A few years back, I was victimized by a travel agency that knew there was a significantly lower fare available but booked me into a more expensive one anyway. I suppose that this was to increase their own profit. I was quite angry when I found out that my ticket cost so much more than it should have. I threatened to report the travel agency to the BBB and they – reluctantly – refunded my ticket cost. Now I always check each of the airlines as well as the big sites like Expedia, Orbitz, etc. to see which airline is truly offering the best price.

  4. Wes says:

    Interesting article. I guess this is another arrow in Allegiant’s quiver for keeping costs down. I still don’t get why their fares are cheaper if bought at the airport vs. online with a debit card though.

    • David M says:

      Allegiant tickets are cheaper at the airport because they add a convenience fee for buying online. Sure, it probably costs them less to sell a ticket online than having an agent at the airport do it, but since they know most people won’t go to the effort of going to the airport to buy the ticket and will instead do it online and pay the fee, it’s one more thing they can split out and charge as a separate optional fee to drive the advertised fare down even lower.

      • Nathan says:

        I keep waiting for an airline like Spirit or Ryanair to open a ticket window somewhere remote like on the South Pole. Tickets bought at this location ONLY would not have the online surcharge.

        It would be a great marketing gimmick. Every newspaper would run a story on how horrible this policy was (and how cheap the tickets are anyway).

      • Matt says:

        Credit card fees are lower when you swipe (card present) vs. online. Could be anything between 1 and 3% difference depending on the card type. Smart to offer it this way, but they are primarily looking at cost recovery.

        • I’d be surprised if air carriers have a significantly different spread between card non-present and card present transactions, for multiple reasons… If tickets are purchased in advanced and are fraudulent, the airline likely just hands the money back, cancels the ticket, and resells the seat.

          Also, if the ticket is for the card holder its a pretty tough thing to dispute, given that an ID was checked by the TSA on the way into the airport..

          Airlines also send more info onto the card companies, such as itineraries and ticket numbers.. I’d imagine their charge pipeline is different than your average internet merchant.

          • Matt says:

            Card processing is very complex. What you currently see on your CC statement is VISA Enhanced Data (http://usa.visa.com/large-organization/program-management/intellilink/enhanced-data.jsp).

            The only time a carrier can be fully certain of the validity of payment is in person. Fraud response codes are in realtime and can prompt the agent to obtain ID, …

            If I buy a ticket online, fly tomorrow, no one will be any wiser to the fraud until days later when the transaction fully clears. The TSA never validate payment, ID, and ticket. Frankly, neither do the airlines. This is why they pay a higher fee for the convenience of processing cards online or over the phone.

            Also, having see the retail price sheet from some of the major card processors, I can assure you the charges can vary from 1 to nearly 7% by card and transaction type. All of this would be negotiated by the airline either as a global reduction or individual card types based on purchasing patterns.

            • Agreed, but is there really that much fraud that can and would happen? Its not like air tickets can be resold.

              If there is fraud on a ticket purchase unless the plane is full and they missed out on a premium fare, what are they out besides some marginal costs? (Baggage handling, some paper, a can of soda, peanuts, a few extra liters of fuel…)

              Plus I’m sure with the exception of in person purchases, they’re doing full address verification, and CVV2. (In person gets CVV1.)

    • Oliver says:

      Perhaps so they can advertise a lower fare than most people will pay because few will bother to actually drive to the airport, pay for parking, and stand in line to book there?

  5. JayB says:

    Thanks for the post. There’s such a rich history to this fare stuff, going back to the days of the CAB, into deregulation and then up to where we are today, which, for me, part of the un-tech, is getting a little complicated, to say the least. In any event, I wonder if there are more than a handful of people like you, who have seen most everything, experienced it, been part of it, and, thank goodness have the ability to communicate and explain this all so well.

    As to internet fares, these fares are just one of so many fares that make up the airlines’ pricing system, which customers don’t understand and probably never will. And, do prospective customers really have any power to force airlines to offer any particular fare they might want? Do fares actually make people decide to fly? Or, are they all there simply to prevent people from flying with someone else?

    Are internet fares there to make you want to fly, or are they there just to keep you from flying the competition? Are they bargains? Are UA’s weekly E-Fares bargains? They used to be, but not anymore.

    Pricing in the airline industry, to me, is the most convoluted pricing system I’ve ever seen. Deregulation should have made things simpler, less complex, offered airlines vast opportunities to change prices on a dime while generating business neither they or anybody had. Yes, airlines can change prices on a dime, that is by inventory controls. But, to use deregulaition to generate new business? I don’t see it. And, to me, the worst part is customers are basically totally at the airlines’ pricing mercy, often, I feel, paying far more than what real competition should have brought us.

    Thanks Cranky. A great post, as usual.

    • Paying more than what competition should’ve brought us? Did you miss the fact that in inflation adjusted dollars air fares are still cheaper than they were in the CAB days? Did you miss the several billion dollars that airlines lost, that inevitably ended up in consumers and employee’s pockets?

      Air travel is amazing. It isn’t cheap either.

      • JayB says:

        The CAB had its run. Never a thought to return to anything like that, whatever the fare level may have been during those days.

        I’m just advocating for a better system between buyer and seller that both I and the airline can see is resulting in a fair and reasonable price. I don’t want the airline to consistently fly me at a finacial loss. I don’t expect “el-cheapo” fares for every, or even any of my trips, just something the airline and I can agree is fair and reasonable. And, I don’t dismiss any idea that competitors are often little more than idiots! Life, I guess.

        I don’t see the merits of anyone like the airlines putting hundreds and hundreds of fares out there for me to gawk at. Web fares, too. Why? I guess to make me think anything I take is better than that other great fare.

        Like I and the airline could sit down and just snap our fingers and magically come up with the perfect price? Of course, we’re both honorable, well, sort of, I guess.

        But, couldn’t I call up/click on the airline and ask what it is offering as a price from Podunk to Poughkeepsie? I say, OK, or maybe: “How about?” We think, we agree, or else we continue or just go away. Presto, in a second, we have a deal, or no deal, but we each had our say.

        Right now I just feel the pricing system–myriad of fares, rules upon rules for each fare, a multiplicity of fare classes with inventory managment controls that give me alphabet sickness–is stacked unfairly against the average consumers’ best interests.

        I dream on…!

        • Well.. AFAIK, all these fares in the market are a result of competing against leisure operators, such as Allegiant’s spiritual cousins.

          AA realized that they could price appropriately with time restrictions and compete against the leisure operators, while still serving their core customer.

  6. Billy S says:

    I have never seen an example of deregulation where pricing became clearer.

    In the UK, train fares are a minefield, energy suppliers have been ordered to simplify tariffs and supermarkets are regularly accused of distorted pricing.

    Airlines are no different.

    The likes of Skyscanner and Kayak have brought some clarity to online searching, but many consumers simply don’t want the hassle of doing all that work, so you still have travel agents in the distribution network. Who, like the GDS are not mute bystanders and will fight to protect their market. So airlines, while much more anti-TA than years ago (Travel Agents’ Appreciation Week anyone?) are still trying to please everyone. Which can never work.

    There are too many conflicting interests at work.

    To play devils advocate, I don’t agree with web fares either. I never understood how airlines, offering exclusively cheap fares online, would use that as “proof” of a successful web distribution strategy.

    Level the fares across all channels, make sure your website can deal with any and every request, and see which channel works best.

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