Personal Business

Flight into cyberspace

A growing number of U.S. airlines are using the Internet to find buyers for empty seats

Ross Laver September 2 1996
Personal Business

Flight into cyberspace

A growing number of U.S. airlines are using the Internet to find buyers for empty seats

Ross Laver September 2 1996

Flight into cyberspace

Personal Business

A growing number of U.S. airlines are using the Internet to find buyers for empty seats

Ross Laver

When it comes to complicated pricing structures, few industries even come close to the airline business. On any given scheduled flight, chances are that only about 10 per cent of the passengers have paid full fare, most of them last-minute business travellers. Everyone else will have received some degree of discount, paying on average just 35 per cent of the regular fare. To an outsider, that may seem nonsensical, but there is a compelling economic reason for the wide discrepancy in ticket prices. Aviation is a business with high fixed costs—for planes, fuel, flight crews and ground facilities—and low marginal expenses, meaning that it costs almost nothing to add one more passenger to a flight, in a seat that would otherwise go empty.

For years, airlines have tried to maximize revenues by using computers to predict demand and establish the right mix of fares for each flight. But even with all their experience and expertise, airlines are still left with huge numbers of unsold seats. In the United States last year, the industry operated at an average 65.7 per cent of capacity—better than at any time since the Second World War, but still far from ideal. In Canada, the break-even point is around 60 per cent of capacity averaged over the year. For many carriers, the sale of just one or two extra seats per flight can make the difference between profit and loss.

What the airlines really need is a convenient way of selling off some of those empty seats at the last minute without diluting the revenue from passengers who are prepared to pay more. In the past few months, several major carriers have come up with a method of doing just that, using the Internet to communicate directly with bargainhunting customers.

Hong Kong-based Cathay Pacific Airways was the first airline to offer cut-rate fares for Internet users. Last September, the airline gave visitors to its World Wide Web site a chance to bid for 50 round-trip businessclass tickets on its Los Angeles-Hong Kong route. The winning bids averaged $2,000,

roughly half the standard fare. Since then, Cathay Pacific has staged two more cyber auctions, the most recent one involving 387 first-class, business and economy tickets— the equivalent of a 747 jumbo jet filled to capacity—from Los Angeles or New York City to Hong Kong. Between May 15 and July 31, when the auction closed, the airline received 14,760 submissions. Proceeds from the three sell-offs are expected to total $440,000.

American Airlines has also experimented with silent auctions over the Internet, offering vacation getaways to selected U.S. destinations from any city served by the carrier in the 48 contiguous states. In addition, visitors to the airline’s Web site can sign up for a free e-mail service, which notifies them every Wednesday of last-minute deep discount fares for trips leaving on the upcoming Saturday and returning the following Monday or Tuesday (sample round-trip fares include New York-Washington for $69 and Boston-Miami for $159). Since it began in late February, American’s NetSAAvers e-mail program has attracted more than 170,000 subscribers; the company expects to reach the quarter-million mark by year’s end. Recently, American’s e-mail newsletters have also included last-minute discounts from Hilton Hotels and Avis Rent A Car, two other companies that are looking to unload excess inventory. In fact, the idea has proved so successful that Northwest Airlines, USAir and Continental Airlines have all weighed in with similar subscription e-mail programs in the past few weeks.

So far, neither Air Canada nor Canadian Airlines International has used the Internet to fill unsold seats, although both companies say they are monitoring the U.S. experience and could follow suit. They may have little choice: one influential U.S. analyst, Julius Maldutis at Salomon Brothers, says that on-line ticket sales represent a “third revolution” for the airline industry, comparable in significance to the introduction of jet aircraft in the late 1950s and deregulation in the 1970s and 1980s. If so, this is one revolution in which both sides—the airlines themselves as well as price-conscious travellers—are likely to emerge as winners.