It’s not often that I write about specific websites here on the blog, but Options Away really caught my eye. The idea is very simple. You can pay a small fee up front to lock in your fare for a certain period of time. Then you can buy the ticket at that fare before the time limit expires. If you’re used to flying United, this might sound like FareLock. It is, but it’s much broader than that.
What I found interesting was that the founders of the company aren’t from the airline world at all. In fact, they’re financial-types and that’s why they saw the opportunity. If you’re familiar with the idea of a stock option, this is the same basic premise.
Before we talk about the product, let’s talk about where these guys got their inspiration… on Wall Street.
Let’s say you’re bullish on United’s stock skyrocketing but you don’t want to invest the money to buy the 1,000 shares at $36.98 each (that’s $36,980 total) that you want. Instead, you find a third party that is willing to sell you what’s called a “call option” on the stock. That let’s you pay $5 per share ($5,000 total) to lock in a set price (let’s assume in this case it’s the same $36.98) for you to buy those shares over a fixed period of time (let’s say two years).
Flash forward two years, and United is now trading at $56.98 per share. Since you hold those options, you can now buy 1,000 shares at $36.98 each ($36,980) and then immediately sell them at market price of $56.98 ($56,980). In reality, you never have to shell out any money. You just get $20,000 in your pocket. Congratulations. You’re initial $5,000 investment just paid itself back plus $15,000.
On the other hand, if United’s shares today are worth $25.98, your options are “under water” and are worthless. You lost the $5,000 you invested. But that’s really the point of these options. The investment is much less than buying actual shares, but it limits the upside and sets a fixed price for the downside. You’re paying to reduce your risk, and that’s the idea behind doing this with airline tickets.
Now, instead of thinking about the value of United as a company, think about the value of a plane ticket. You do a search and find that you can buy a ticket from LA to Chicago for $402.38 in September.
You’re fine with the price, but your plans haven’t completely gelled yet. You might have to go out a day later. And on the return, you aren’t sure if you can get a ride at that time of day. You’d hate to see the price go away but on the other hand, you’d hate to get stuck with a $200 change fee. Instead, you decide to pay a little to lock it in now without purchasing the ticket.
As you can see above, Options Away offers call options at varying prices depending upon how long you want to guarantee it. The longer you hold it, the more expensive it costs, as you would expect since it’s easier to predict pricing for a shorter period of time.
The 24 hour hold is easiest. You can always buy a ticket and then get a full refund within 24 hours. This one just lets you hold it without paying (as American will let you do today, but most make you pay). There’s no real risk here so the cost is low.
After that, the pricing is solely at the discretion of Options Away. The airline isn’t taking any risk here. Options Away is the one that has to build a big fancy algorithm that will help determine how it should price these offerings. In the end, the company has to hope that it earns more money off selling options than it loses having to pay the traveler the difference between the locked in fare and the current price. If you buy an option to hold it for 21 days, then you’ll pay $36. And if the price goes up within that time, you can still buy the ticket for $402.38.
You might think that $36 on an expensive ticket is a lot of money. And it is, but you’re guaranteeing the fare for 21 days. A lot can happen in that time and the price has to reflect that risk accordingly. That’s why I tend to think that the 3 day hold for $9 may be the more popular option. People don’t like feeling pressured into buying things immediately, but with airlines, you worry a lot about the price changing. This provides a guarantee that it won’t.
What do you think? Would you ever use this?
I might use it if the fare difference was my money. Since I can bill back airfare as expenses, there is no advantage to me.
It will be interesting to see if the rate per day of hold changes as the number of available seats goes down, or as the flight date approaches.
the 24 hour one is interesting as it preys on ignorance since airlines are required to refund you within 24 hours. Granted, it now makes an implicit 48 hrs, (24 with the option, then 24 after booking).
I do think it is a good idea and a product which has a need. I wonder if the designers are going to need to gain travel agent skills quickly when things start to happen to reservations, complex codeshares, etc.
The pricing algorithm is going to need tuning and I wonder if the cost changes for each itinerary based on price and time out. i.e. 6 months out, the expected price change over 21 days is low. 24 days out, the 21 day price swing will be large.
what happens if a flight sells out in the 21 days?
Noah – I don’t believe it’s 48 hours. I haven’t done it myself but my assumption is that they issue the ticket right away but then it can be voided out within 24 hours. That’s how we handle things on the agency side. So then it would just auto-cancel if they didn’t confirm. Though again, I don’t have mechanics on this from them.
As for flights selling out, they won’t offer an option if the availability is getting low. They also won’t offer a 21 day option if you’re traveling 22 days from now. Is it possible that they offer a 21 day option and then someone buys all 100 remaining seats between now and then? I guess. But I didn’t get to ask them how they would handle that. Pretty slim chances.
Isn’t this going to wreck havoc with GDS inventory and airline yield management systems??
Eric – This has nothing to do with airline systems. They quote you the price as available when you do the search. Then they honor that fare regardless of what the airline fare is at the time of purchase if it’s within the option window. So if you don’t buy, the airline never knew you had the option anyway. And if you do buy, the airline gets the full amount it wants – just not all of that comes from the traveler.
Interesting concept. From briefly perusing their site, it looks like they offer options on a limited number of city pairs for the moment, and only on domestic flights, but still, the product could have some decent utility for travelers, especially those that need a few days to clear work schedules, coordinate with relatives, etc. It appears they do not allow a 3-day option purchase less than one month in advance, and then stagger it out an additional 7 days for 7, 14, and 21 day holds, so as to prevent gaming the system (i.e. putting a 21-day option on a flight that departs 27 days from now, and then booking at 20 days when the 21-day advance purchase expires). Where the tool would seem to have the most benefit is when airlines announce something like a one week fare sale with a long period of validity, and while you want to jump at the fare, you know you won’t be able to make a decision before the sale expires.
Noah raises an interesting point, though, as to what happens if a flight sells out in the class of service desired during the option period. While I’d think that’s an unlikely occurrence, especially since it appears 21-day holds are only available for flights about 6 weeks out, would Options Away be obligated to let you purchase a coach seat at a first class fare, for instance? Also, what does strike me as interesting is that the option price on a given set of dates on a given set of city pairs seems to be fixed, regardless of current ticket price. As an example, MDW-BWI departing 1/31 and returning 2/2 returns an option price of $4 for a one day hold or $15 for a three day, regardless of whether you option the $57 fare on Delta or the $338 fare on AirTran. I’d agree with Noah that their pricing algorithm needs some fine tuning given those results. Is their methodology sophisticated enough to take advantage and raise option prices during a nationwide fare sale, for example, where the “value” of locking in a super-low fare is theoretically higher?
Sorry, dyslexia strikes in my second paragraph – should read purchase a first class seat at a coach fare.
MeanMeosh – It is on domestic only right now and the focus is on bigger cities to start. There is nothing preventing them from doing it on other routes. They just have to get the algorithm right. So they’re rolling out in phases.
As for pricing, the idea isn’t to price based on the fare in the market but rather to price based on the chance that it will change. If the option is priced the same, then they think those two options both have a similar chance of changing. (And I would assume/hope that pricing will change if the risk goes up – say there’s a big sale fare in the market.)
So if you use a hold option, is the space really being booked? If so wouldn’t the airlines expect payment for that space if the fare had to be paid say within 24 hours and you chose a longer hold. Do these people have contracts with the airlines to hold fare for a certain period of time?
Sounds fishy and a good way to have the airline later on say you didn’t meet the advance purchase rule of the fare and make you buy a higher walk up fare to travel or just cancel your reservation if they notice a head of time.
The airlines doing this is one thing, but a third party sounds very risky.
The way I understand it, from my limited playing around with the website, is that you aren’t actually holding or booking space. Nothing is actually booked until you log back in and hit the purchase button, when they buy it for you (these guys are an ARC-accredited travel agent, according to the FAQ). If the price goes up from $250 to $450 in the meantime, you pay Options Away the $250, and they pay the airline $450 and eat the difference. So, I don’t see any risk of running afoul of airline advance purchase rules – if I’m understanding this right, the ticket eventually purchased will be based on whatever rule is in effect on the date of purchase, and they’re going to receive the correct payment for the seat no matter what.
The real potential problem, as a couple of others have noted, is what happens if the class of service desired sells out entirely. The FAQ doesn’t address what occurs when this happens – do they just have to refund the option fee and tell you that you’re on your own, or are they now on the hook for potentially eating the difference between a first class and coach fare?
David SF – MeanMeosh is right. This won’t break any rules – space isn’t held in advance. In fact, they’re trying to be airline-friendly here and I thought it was kind of strange. For example, they say name changes aren’t allowed. But in reality, why not? It’s not like the space is being held or the ticket issued. They could allow name changes when it comes time to issue the ticket, but they aren’t because they don’t want to go against airline rules. So they’re trying to be airline-friendly.
I imagine that the company forbids name changes to prevent people from reselling the options on a secondary market.
Cranky – if you are long a call option (your UA stock example) in general you have unlimited upside and the seller unlimited downside (think of UA going to a million a share in your example). In this case as I understand it, the buyer is long the call on the price of an airline ticket, however neither they have unlimited potential gain nor the seller potential loss since at some point the flight just sells out. You don’t have Brownian motion over all the real numbers as your asset price model. Actually, there are a lot of factors here that make the math reasonably simplified, but since I didn’t come up with the idea I am done thinking about that now…
Anyway, that also gets to my reply to David SF – I see no reason why they have to work any deal with the airline at all. All they have to do is watch for the availability of tickets to sell for a flight. Even then the seller is only exposed if the flight sells totally and the option holder wants the ticket. Delta hedging might (probably does) tell the seller whether to invest in the ticket the day of expiry if the holder hasn’t yet exercised. Lack of a secondary market really simplifies things for seller here as well…
DAB – You’re right that if the flight sells out, there isn’t true unlimited gain. But they won’t offer the option if it’s something in the realm of possibility. That doesn’t mean it’s impossible for it to sell out, but it’s going to be unlikely. And yeah, the airlines aren’t involved (though they could be if they wanted to get into the game).
!. In the first place, why are ticket prices so volatile?
2. Why can’t tickets be re-sold, that is, after I bought whatever I bought?
Looking at the lowest fares on UA BWI to LAS, one-way, for the next four weeks beginning tomorrow:
The fares, F-S-S-S-M-T-W-T:
Sorry, for my fat-finger, but why would any industry, any company feel the need to price like this? Prices like this are nuts, and options seem so…well, whatever.
I think it is an interesting idea especially for expensive international flights. I had to hold back on a recent international ticket purchase due to some issues with dates and ended up having to pay 500-600 more per ticket due to holding off. A service like this would have been great to have known about and I would have saved significant money.
That said, unlike your options discussion there is simply no upside for OptionsAway as the best they can hope for is that someone comes back and there is little or no change on the price. The reason why options on the stock market can be lucrative for the seller is that there is the potential for the stock price to crater and for them to make a significant profit. There is not that same level of volatility anymore on ticket prices where routes change and move where they can say, make a 100 or 200 dollars on a ticket price going down.
Sean S – The upside risk for the seller (Options Away) is the same as it would be elsewhere. They get to keep the cost of the option and don’t have to pay anything out. It’s the same thing elsewhere for a call option. If you sell an option that lets somebody buy stock in United at $30 and the price has tanked to $20, nobody is going to exercise that option. They’d just buy it on the open market for $20.
The problem still remains however of the potential for large prices fluctuations. Even if they have great algorithms at the end of the day they can be priced out quickly. Even in my own personal example, it could have easily been a situation where they were out 2-300 a ticket, if not potentially more depending on the timing and situation of when I booked. As indicated in this last recession, there can be situations where people providing effective insurance against losses (which is essentially what OptionsAway is providing) can find themselves very short.
In the financial markets the only people who consistently make money with option trading are those who write the options…..why…..because the vast majority of options bought will expire worthless. Option trading is for professionals only who have strategies in place to pair them, offset them, hedge them or otherwise limit their loses. The average trader who buys an option is going to lose his money.
Options Away is no different…..these guys are not going to write an option that they will lose on. Look at the example provided on a flight 9+ months out……..there is very little chance that between now and 1.16.14 (21 days) that flight price is going to change much so the option will expire worthless and they pocket $36……..the probabilities are with them.
Take the same flight parameters and move it up to those same 2 flights leaving 1.22.14 and returning on 1.26.14 and you will see that they will only write you an option for 24 hours…..nothing longer……..because they know there is a much higher probability that fares will increase from now and 1.22 and they will have to eat it…..so they will not offer you an option any longer than 24 hours.
These guys are pros and know what they are doing and the vast majority of the time they are going to pocket the fees……..so save your money.
One use for the site would be to enter the flights and dates you are planning and see how far out they will offer an option……..if they offer 21 days then you can feel comfortable in waiting to book…..if they only offer 24 hours then get back on the airlines site and jump on that ticket right now.
Jack – This isn’t about making money for the traveler. This is about locking in a price for a certain period of time. It’s about peace of mind for people who aren’t ready to make a decision, and that has a monetary value for people.
Except alot of carriers will warn you about low availability anyways on their own websites. While I’m unsure the number at which they warn you, I have most definitely seen warnings on delta.com and other sites that tell you “Only 4 left at this price!” or other similar exhortations to buy.
If OptionsAway is a full travel agent, won’t that mean you have to go through them to make any changes rather than through the airline? (Or have the airline charge extra to take back the ticket and change it)
One other thing I noticed from the website is that they will only offer the longer hold options for flights that are 2 months or so in the future, which does make good business sense since prices are likely to rise the most, but also the sorts of tickets that people are more likely wanting to hold. Maybe in the future they’ll improve their algorithms to allow holds for those (at a higher price ofc)
Jason H – Yes, you probably would have to make changes through them directly. But I don’t know that for sure – good question.
I really like this idea, although I hate that it has adopted the financial industry lingo of “option”. Options like this are a good deal like insurance, except that they’re not insurance. Since they’re not legally insurance (but act a whole lot like it) they don’t have all the reserve requirements of insurance. This was one of the problems leading upto the 2008 financial crisis.
But, back to OptionsAway. At least they’re providing a real product that directly benefits end users, with increased peace of mind..
I’ve bought some a bit ago, except that we’re almost at the point of making a decision, and the fare has been pretty stable…
It’s too bad you can’t buy and sell these options as you would stock options.
Thanks Cranky Flier for such a thorough piece – you really have a handle on what we are trying to accomplish here at Options Away. Our team also really enjoyed the quality of comments and questions raised, and the fact that you answered most of them exactly as we would have! At Options Away we focus on providing the consumer flexibility and peace of mind – and we have found that folks are willing to pay for this convenience. For example, a one-way 24 hour hold is only $2 and we cover multiple carriers. Sure, on airline sites people can book a ticket, have their credit card processed and apply for a refund should they change their mind, but our approach is to provide something cheap and easy. Even more popular however are longer holds that allow people to research and plan on their own time, without the risk of a fare increase.
I should also mention that our soon to be released mobile application will allow people hold a flight on their smart device without the risk of making a costly error purchasing a ticket on the go. We are also now allowing customers to enter the traveler information anytime up to the time of exercising their option.
We are a new company and are learning everyday and your feedback is invaluable so feel free to reach out to us directly.
And as for the $57 Delta flight mentioned in the comments? We had protection in place that prohibited an option being sold on that fare. I think we had a better day than our friends at Delta. And unfortunately, I was not one of the lucky ones to score a $70 RT to Honolulu!
@Heidi B, what happens if the tickets sell out before the option expires? Is your company on the hook to upgrade the customer or find another acceptable alternative?
Hi Iain, Options Away would indeed provide an upgrade should that be the only seat available at the time of ticketing. Our system is constantly monitoring the availability for the flights that our customers have held so it is very unlikely that we would not be able to provide the chosen itinerary. In the remote event that a flight did sell out before we could purchase a ticket, then we would find an acceptable alternative for our customer.
Seems to me like more absolutely useless middle man nonsense. The lack of transparency in these matters is beginning to be very disconcerting.
How’s about this? I’ll give you an option. Stay out of our bank accounts or go to prison.
No airline is “required” to refund any money in 24 hours. Maybe some airlines do this as policy, but there is no rule that requires this. American Airlines refunds nothing 30 seconds after you make a purchase.
L Andrews – There is absolutely a rule. The requirement by DOT is that airlines must either let you hold a fare for 24 hours with a guarantee it won’t change or let you cancel without penalty within 24 hours of purchase. American has opted for the former while pretty much every other airline has opted for the latter. So on American, you can’t cancel once tickets, but you can hold the fare without any chance of a change for 24 hours beforehand. That’s actually more generous than the others.
Is a two day hold a full 48 hours from the time the Hold is made?
Cathy – Looks like 3p Central or could be otherwise. But it’ll be posted.