Fare Simplification Simplified Nothing

By: David J. Wardell

Every once in a while the travel industry goes through an air fare "cleansing period," wherein the complexity of ticket pricing become too much to handle and one airline or another will try something else. The effects are usually short-term, although agents occasionally start thinking that these pricing events somehow benefit or hurt them--even though this has never been so in the past.

In 1993, when others were saying that the current round of "simplification" was in full flower, I wrote this piece describing why it wasn't working and predicting that it wouldn't last. I was proven right a few months later.

Remember, you heard it here first.

Amidst an industry facing unprecedented pricing turmoil, it’s easy to forget that all this grief started because some of the largest airlines decided to "simplify" their fares.

Eliminating a complex fare structure, it was reasoned, lowered everyone’s transaction costs and gave the public what it wanted — rational pricing.

Negotiated fares disappeared and yield management (which operates largely through the mechanism of capacity controls) was said to be on the way out, too.

It’s also easy to forget that some unfortunate agents believed that so-called simpler fares would boost their own productivity.

Because "simpler" fares also meant lower fares, I personally found it hard to understand why agents would be in favor of lower fares and consequently lower commissions.

An even more interesting part of this picture is that no one has really benefited.

In the very short term, the traveling public has taken advantage of unrealistic and unsustainable airfares, but the long-term effects upon airline pricing have yet to be seen.

Weakest airlines will get still weaker; some may disappear. Travel agencies are likewise decimated, resulting iii widespread job loss and business disruption as their owners attempt to survive both a weak economy and irrational pricing.

Further, "simplification" is largely illusionary. Capacity controls are still in place, and finding the prices the public expects is still difficult and time-consuming.

USTravel operates a complex automated data management and fare audit system known as Maestro (many other large agencies have similar systems — I illustrate using Maestro because these data are available to me.)

Maestro continually examines reservations booked by USTravel’s nationwide operation and records detailed and complex statistics about each reservation.

Among its many functions, Maestro examines thousands of reservations booked by human agents every day, to verify that the lowest applicable airfare has been booked.

It is important to understand that this is a highly structured and logical process that is applied consistently to each reservation; it does not vary because of any external factors.

Maestro and similar systems are valuable because they apply a systematic and known process to fare searches that, because of the large number of possible choices, humans occasionally overlook.

If there were such a thing as "fare simplification," then logically Maestro’s success at actually finding lower fares (savings rate) should decrease, reflecting the increased ease with which human agents can work through the airline price maze and find the "best fare" without Maestro’s help.

No such positive result was ever realized. Maestro’s savings rate was not decreased as a result of fare simplification; it is presently finding approximately 15% more savings opportunities than immediately before simplification took effect (taking into account all external factors).

Further, the dollar value of the savings found by Maestro per reservation dropped appreciably after simplification (the result of lower fares).

Everyone knows fares are still down, but Maestro’s savings per reservation are on an upward trend — they are approximately 12% above where they were in late April

This is most likely is not a result of rising fares, but is instead further evidence that we continue to be faced with an unfriendly price environment that is difficult for the best of agents to manage effectively

How could this be? How can something intended to make things "simpler" have the opposite effect?

The answer is that few things operate precisely as they are intended. There are many factors and forces driving the extremely complicated airline fares and pricing marketplace.

As in any complex system, the "whole" becomes greater than the "sum of the parts." Because no single entity controls this marketplace, it is difficult to accurately predict the effects of single, limited actions (such as theoretically reducing the overall number of fares) on the "whole" system.

The old adage: "Seek simplicity — then distrust it," applies well here. Over time we’ll learn whether or not the marketplace can rationalize fare simplification into something productive, but the early results are not encouraging.