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TRAVEL AUCTIONS

If its proponents are to be believed, online bidding for travel services will one day solve most of the industry’s problems.  From excess capacity to flawed distribution, it would seem that a truly efficient marketplace is as near as an Internet browser, provided an adequate and able market maker is in place and ready to match prospective buyers and sellers.

In its endless quest for lower prices, the traveling public appears ready to make still further compromises in personal service and scheduling in order to take advantage of what the auctioneer has to offer.

The notion that more efficient matching of buyers and sellers might be in everyone’s interest is not new, but the concept that this can be achieved through auctions is, and parallels the public’s wider bidding fascination with everything from groceries to financial services.

There is an intrinsic expectation built into the bidding process, and reinforced by its promoters, which says that bidding somehow equates with competition and competition naturally results in lower consumer prices.

This latest travel-purchasing fad has considerably more life left in it, but I am skeptical that online bidding can deliver more than isolated “wins” for customers who would do anything on the chance of saving a nickel.  Reforming travel distribution and creating enduring market efficiencies through such services is out of the question.

 THE LAW OF COMPENSATION

Bidding works relatively well for the stuff in your attic, for consumer goods, or for products that are true commodities, but not for travel.  At least in its current incarnations, attempts to package travel services so they behave as auctionable commodities are in neither the traveler nor the vendor’s ultimate interest and cannot succeed over time.

Part of the problem involves what I term the “Law of Compensation.”  We live in a capitalist society and in such a world, if free and open markets exist, customers eventually find ways to get at what they want.  This means that sellers and “market-makers” must give some thought to the needs of their customers, if they are to create sustainable enterprises.

Businesses cannot long survive if they fail to do so.  Alternates arise and customers embrace them if the “fit” with their needs is better.  This is not uniformly a cost-driven exercise.

In like manner, business moves forward, innovation occurs, and productivity is enhanced (which is usually the major engine generating lower prices) where reasonable margins are realized through sustainable markets. 

Travel auctions are among the few transactions where both sides of the buying equation are destined to be unhappy.  Buyers and sellers are asked to make compromises, often serious ones, in order to participate.  It is very difficult for business relationships and marketplaces to thrive where all participants lose.

This was a point I made a number of years ago when describing the flaws in travel distribution at the time, which resulted in a marketplace where no one made any money.  This preceded attempts to “rationalize” travel distribution through commission cuts and subsequent pricing confusion of the last five years, the rise of corporate travel departments, agent disintermediation, and other related events.

 Customer Expectations

If auctions deliver lower prices, why are customers losers?

First, those lower prices deserve more scrutiny than they typically receive.  There are a number of companies participating in some aspect of the travel auction marketplace.  Many do not disclose operational details but some of the public ones do.  A careful review of these disclosures reveals that frequently discounts are subsidized from investor capital in order to create artificially low prices and build market share.  It also reveals that often participating vendors are not obligated to provide price advantages to auction participants or even competitive rates.

Frequently the customer labors under the view that the bidding process lends its intrinsic efficiency to the transaction and a superior rate is produced, whereas the actual price might be subsidized (which cannot be sustained indefinitely) and, subsidized or not, may be close to what is available in the marketplace anyway.

Second, a travel auction is not a negotiation.  Most often buyers disclose up-front what price they are willing to pay, thereby losing any vendor leverage they might have later on.  There is no rational “give and take” as buyers explore vendor options that may meet their needs.

Third, as travel products are crafted into commodities so they can be auctioned the customer is left with a frequently unattractive result.  This is realized through unattractive flight schedules and routings, inflexible itineraries, and other restrictions that in a more normal marketplace might be easily accommodated by the vendor.

Vendor Expectations

If vendors participate only in ways and to the extent they specify, why are they losers?

First, it is difficult to rationalize how it is in any travel supplier’s interest to employ a distribution mechanism that generates large numbers of dissatisfied customers.  By their nature travel auctions suppress selection, service comparison, and differentiation between premium and bargain basement providers.  Where the customer has little role determining travel product composition, the result is usually counterproductive, especially in a free market where choices abound.  It is equally difficult to rationalize why vendors would encourage ever-greater commoditization of their products.

Second, the purported ability of the bidding process to fill unused vendor capacity does not address whether that can be done profitably.  The fundamental inefficiencies attending vendor product composition, capacity, and competitiveness are left unaddressed.  Filling capacity without altering productivity usually only encourages unprofitable and unsustainable behavior.

SUMMARY

Bidding and auctions are most likely destined to be marginal elements of travel distribution.  There will always be situations, either natural or contrived, where they can succeed, but overall vendors are better served through more sustainable distribution techniques that can be attuned to customer satisfaction and service delivery.