What Individual Fare Pricing Means to Travel Agents

The travel industry continues to talk about the advent of the IATA New Distribution Capability (NDC) and the concept of “dynamic pricing,” defined as the ability to price an airline service based on the known characteristics of the consumer seeking the service. Sometimes the “conversation” conflates NDC with artificial intelligence (AI) and excitedly predicts the advent of talking machines that can behave like humans and thus, potentially, replace humans in occupations such as … travel agent.

A June 7 article in Forbes by Dan Reed, a long-time observer of the air travel scene nicely summarizes the claims being made about NDC. 

As seen by Mr. Reed, the NDC-enabled travel world will look like this:

“You’ll simply inform one or more airlines, your favorite online travel sales site, or your travel agent where you want to go and then wait for a few seconds to receive a price quote generated specifically for you.

Your price quote will be based not only on the cost of flying from A to B but also on your freshly stated and/or your previously known travel preferences. Your frequent flier status also will likely have an impact on the price you’re quoted. And, if your travel is for business, and if you work for company X, which has in place a sweet volume-of-travel discount deal with one or more airlines, that too will be factored into the price you’re quoted.

As a result, every price quote will be more than a simple “fare” quote. And every such quote will be, at least in theory, unique to the recipient.

So, if, for example, you like sitting in a right-hand aisle seat near the front of the coach cabin where there’s extra leg room, will want one cocktail and a meal featuring fish, plus will be checking two bags and will need a town car to pick you up at your destination airport and take you to your preferred hotel where you’ll require a concierge floor room for two nights, you will get one price quote including all of those services. And that price will take into consideration your company’s volume discount deals negotiated with both the airline and the hotel company, and the deal your company has with a local ground transportation company in your destination city. It won’t be a “fare quote,” per se, but rather a “travel experience” or “journey” price quote. Eventually it could include retail items, like a swimsuit if you’re headed to Cancun, or ski goggles if you’re Aspen bound.”

That sounds pretty simple, as long as the traveler’s preferences for the upcoming trip are the same as they have been in the past and/or she have been somehow informed in advance of what preferences are going to be used to construct her personal offer and thus she has a chance to say “no, that’s not actually what I want,” and as long as nothing changes either on the supply side or in her personal circumstances that requires a change to the travel arrangements.

For example, if you are on a business trip and the meeting site is changed, the previously constructed unique travel itinerary may require substantial changes. And, of course, if the traveler is making arrangements for herself and her husband, whose travel profile may differ dramatically from hers, the NDC-enabled airline commuters that create these personal offers must be able to override what might normally be produced and make an offer based on their joint preferences as articulated for this particular trip.

Concerns about the GDS and internal travel agency systems
Travel can get complicated in a heartbeat. How travel agents still selling air travel will be able to manage all this “uniqueness” is a very important question. The GDSs are now engaged in adapting their systems to NDC processes, but we still don’t know what that will look like or how it will function.

There is also the issue of what changes agents will have to make in their internal systems, and who will bear all those costs, to accommodate a regime in which every offer is constructed individually, there is no “market price” and consumers don’t know what the devil you’re talking about. Eventually, the public that now often researches the internet for fares before contacting a travel agent will come to realize that they may not be seeing equal or similar quotes from different sources.

Those concerns align with issues expressed by ASTA and other distribution sector firms and associations during the hard bargaining that occurred back in 2014 with IATA over its New Distribution Capability (“NDC”). [Disclosure: I worked for ASTA at that time and was involved in the negotiations and the process by which the NDC resolutions were presented to the Department of Transportation for approval, subject to negotiated conditions.]

More than two years have passed since DOT approved the NDC resolutions, conditioned, among other things, on the continuation of anonymous shopping as an option to dynamically priced air travel offers. Since then, ASTA and the World Travel Agents Association Alliance (WTAAA) negotiated a survey and report setting out the concerns of travel agents about the concept of “personalized offers” and how its implementation would impact both agencies and consumers. Those concerns remain largely unaddressed while the airline industry moves unsteadily but relentlessly toward implementation.

Amazon.com’s ability to offer up products based on prior purchases and searches is often cited as an example of how dynamic pricing might work. Everyone is now familiar with the reality that, having searched for some item on one site, ads for that or similar products continue to appear on other websites as one moves around the internet space. “They” know who you are and the ads follow you based on your shopping behavior, or maybe just your curiosity about something, for a long time thereafter.

Is AI a force for good?
Some people confuse this process with artificial intelligence, in part because firms now like to describe their technology as AI. In fact, however, we are a long way from true AI being employed in the sale of travel services. AI, correctly understood, is not the same as massive or super-high-speed data processing of “big data.” Nevertheless, even though Amazon does not understand that I don’t read romance novels and even though Alexa frequently cannot answer the most basic questions, dynamic pricing appears to be a high priority for airline marketers.

Many “experts” claim that dynamic pricing will be a “force for good,” because alleged high levels of competition in the airline industry and the desire to avoid regulatory intervention will restrain the abuses that an identity-based pricing regime would enable. They envision dynamic pricing as primarily a tool for more sophisticated discounting to various classes of consumers.

No doubt such discounting is one possible use. But there is also the possibility that identity-based pricing would be used to discriminate against consumers whose shopping history suggests they would tolerate a higher price. So far, I have seen nothing that realistically eliminates that possibility, nor the possibility that in cases where the consumer’s profile is insufficiently robust, the price offers will be based on the profile of the fare search itself. In the latter case, the pricing system could, for example, assume from the search parameters that a business trip is being researched. And it could be wrong, as when Amazon offers to sell me a romance novel.

Will a dual regime be needed?
In addition to the problems potentially presented to air travelers, travel agents also face serious challenges in managing a regime in which prices are created dynamically and stored in the airline’s system. Travel agents, it is to be noted, still sell well over 250 million air passenger trips per year raising more than $70 billion in annual fares sold for the airlines reporting through the Airlines Reporting Corporation. The issues surrounding dynamic pricing will affect many travelers.

Among the questions involved in dynamic price creation are whether the systems will generate the same fare each time they are queried, how the stored information (in some dual arrangement between involved airlines and GDSs) can be changed or otherwise managed by the travel agent, who will pay the potentially massive costs that agencies may incur to modify booking, accounting and management systems to accommodate the new regime.

During the negotiations leading to DOT approval of the NDC concept, it was clearly stated that a dual regime would exist in which it would be possible, for example, that a consumer could avoid the entire NDC-enabled system and continue to search for market prices not based on the consumer’s travel history or other traits. If so, how those prices will match up against the constructed NDC prices is another open question. It seems likely that if such parallel regimes are to co-exist, many consumers will want to try both approaches, resulting in more time, rather than less, being involved in either internet research or work by a travel agent on behalf of the traveler.

According to other reports, some airlines, not identified, are already generating dynamically created price and package offers within direct sales channels. It is not clear from what I have seen whether consumers are being told that their prices are created “on the spot” and are unique to them.

Investigating price discrimination potential
The spreading of the word about dynamic pricing has alarmed at least one senior lawmaker. Senator Chuck Schumer, head of the Senate Democratic Caucus, has asked the Federal Trade Commission to investigate the price discrimination potential of dynamic pricing. ASTA has made clear its continued insistence that consumers should have the right to anonymous shopping, as DOT mandated when NDC was approved.

The airlines argue, of course, that competition, the potential for adverse reactions by consumers and the possibility of regulatory intervention will restrain any discriminatory applications of dynamic pricing.

To those assurances, I say six things: 1) consumers do not always behave rationally; 2) the airline industry is dominated by four airlines, undermining the strength of competition as a mitigating factor; 3) consumer reactions have had little effect on airline unbundling of prices with attendant increases in the true cost of air travel; 4) airlines are not disciplines by the availability of a private right of legal action by aggrieved consumers; 5) airlines have used their market power to thwart new entry into international markets; and 6) with endorsement by the airlines, DOT has quashed the multi-year rulemaking that would have added important consumer protections to the travel selling system and it threatens to roll back many of the remaining protections already on the books, so aggressive intervention by it or by the FTC seems remote.

That said, all travel agents must be aware of and thinking about how dynamic pricing will affect their role as sellers of air travel. The concerns I have expressed in this article have not deterred the airlines that appear determined to implement, in the fullness of time, some form of dynamic pricing. One of the significant findings of the survey I mentioned early was that travel agents were largely unfamiliar with NDC and its implications. That was in 2015. Agents cannot afford to remain unaware of this seemingly inevitable and revolutionary development in the way that air travel is sold.