Travel

For Indecisive Travelers, an Options Market for Airfares


Airfare pricing is complex, to say the least, and flight shopping can be a chore beset by uncertainty: Do I buy or wait? And if I wait, will I suffer that sick feeling later that I dallied too long and the fare shot up?

There might be a different option. Options Away, a startup based in Chicago, is seeking to build a market for options on airfares, a tiny piece of price insurance that can lock in an airfare for a specific period and give a buyer time to deal with the purchase later, after considering travel plans with family and friends. “People are afraid of commitment, and I think people are short on time,” says Robert Brown, a former technology executive who worked in finance and started the company in September with his wife, Heidi Brown, a former currency trader.

The company has five options for buyers of domestic tickets, from 24 hours to 21 days, starting at $4 for the one-day hold. Other prices range from $9 for a three-day hold to $36 for three weeks, but the company doesn’t offer certain options on many flights, with cheaper fares generating the fewest number of selections. The one-day product is perhaps the least useful because U.S. airlines are required to refund any ticket purchase for 24 hours, a federal rule that Options Away doesn’t publicize on its website. Only American Airlines (AAL) places a purchase on hold for one day; the rest of the industry requires a buyer to request a refund. Options Away considers its $4 price for 24 hours a reasonable charge for its customers’ convenience, Brown says.)

If it appears that a particular flight might sell out during a customer’s option period, the company will purchase a refundable ticket on the flight to secure a seat—an expensive ticket that would dwarf whatever sum Options Away earned selling the option. The company, which is licensed as a travel agency, has not had to buy a refundable ticket so far, Brown said. “Airline tickets follow a fairly well-set, well-defined set of rules, which is the revenue-management process,” he says.

The idea is based on the same kind of options you can purchase on shares of stock, which gives the holder the right to buy the stock later at a specific price, regardless of the current market price. “Really, what they’re selling is peace of mind,” says Henry Harteveldt, a travel industry analyst with consulting firm Hudson Crossing.

Harteveldt believes that the ability to lock in a fare is likely to expand across the industry, in time, due to the convenience it offers “people who are planning complex trips, especially if there are a lot of people involved, or if they’re trying to coordinate multiple elements of a trip, like a cruise or a sightseeing option.” It could also help to differentiate the offerings of a large travel agency such as Orbitz (OWW) or Expedia (EXPE), he says.

Options dealers live and die by their ability to price an option correctly, which is one reason Options Away has been cautious about international flights—coming in mid-2014—and deals only in coach-class tickets. Brown says the company experimented with its pricing during the fall, when people shop for holiday trips, and “got burned on a few flights” by pricing options lower than its software model suggested. “The question that’s still open for us is how much will people pay for an option on an international flight?” Brown says. “If we need to be charging $150 for the option, will the consumer be willing to pay?”

Options Away’s business is similar to United Airlines’ (UAL) FareLock, which will preserve a fare for three or seven days, charging $6.99 to $8.99 for most itineraries. That guarantee began at Continental Airlines and was retained after it merged with United, suggesting that it has been considered successful. The airline has never released any financial data on FareLock, and a United spokeswoman says the company won’t discuss other details. Air France (AF:FP) and KLM also both offer a “time to think” option. Air France gives travelers up to a week for $8 to $20, depending on the route; its KLM unit sells waiting periods for as long as two weeks for €10 to €15 ($13.78 to $20.68).

Still selling travelers a way to hold a particular airfare has not caught on across the airline industry, remaining a niche product. Experts say airlines worry that such holds could depress actual ticket sales, turning many potential buyers into mere short-term holders of a travel plan.

Brown hopes to build an enormous trove of data about airline shoppers’ browsing and purchasing habits. The company is negotiating with several major online travel agencies, travel meta-search firms, and airline ticket distributors to use its technology in their booking channels. Eventually, Brown says, such data as whether a certain number of people buy an option for a route but no actual tickets, will indicate demand at a certain price. Such data could then be sold as “a leading indicator” for the revenue management algorithms that guide much of the pricing in the airline, hotel, and cruise industries.

“In 18 months,” Brown says, “I like to think we will have a set of data that is of huge value.”

Bachman is an associate editor for Businessweek.com.

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Companies Mentioned

  • AAL
    (American Airlines Group Inc)
    • $41.68 USD
    • -0.48
    • -1.15%
  • OWW
    (Orbitz Worldwide Inc)
    • $9.0 USD
    • -0.19
    • -2.11%
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