Travel

When to Buy Fare Insurance on an Airline Ticket


When to Buy Fare Insurance on an Airline Ticket

Photograph by Robert Nickelsberg/Getty Images

There are lots of theories about the best time to book a flight. The cheapest tickets go on sale on Tuesdays at 3 p.m. East Coast time, or Wednesdays at 1 a.m. in the time zone in which the airline is located. Maybe the best time to buy is 21 days before the flight, or possibly 54 days before it. It’s an exercise in futility, really: Airlines use the same kind of complex formulas as rocket scientists to make sure they are charging the most the public will pay. Who are you but an eager traveler with some fare alerts?

Here’s an additional tactic. British Airways (IAG:LN) recently joined Iberian Airlines, United (UAL), and a company called Options Away in offering fare insurance, a call option on an airline ticket. For a small fee ($5.99 on United), you get the option to buy a ticket at the fare you see today for the next three days. For an additional $2, you can lock in a fare for seven days. Cheap tickets to popular destinations sell out quickly; some planes fill up entirely. Fare insurance buys you time to transfer miles (reward travel options are a little more expensive), resolve your travel plans, or wait to see if prices fall.

As call options go, these have unusual features. For United, the option price is independent of the price of the ticket and the time of travel. It costs $5.99 whether you’re locking in a $13,000 flight to Sydney in March or a $300 ticket to Cleveland in November. Three-day options are available only up to 17 days before travel and seven-day options 21 days before. You can’t resell the option or the underlying air ticket on the market—if you could, this would be a no-brainer. Given that restriction, here are three questions to ask before you buy options on airfare.

How volatile are prices? Options are insurance: They’re worth more when there’s more risk to hedge, and there’s more risk during a week in which airfares are bouncing around like popped corn. The price of a flight seven months from now probably won’t change much this week. As you get closer to a travel date, fares tend to increase and become more volatile daily. The figure below, from Kayak.com (PCLN) gives various prices offered over the previous 90 days for a flight from New York to Los Angeles on Aug. 28.

Typically the option becomes a better deal if you buy it within 30 days of travel, when prices predictably rise. Prices usually increase 30, 21, 14, 10, and 7 days before the flight. If the dates of your option coincide with those days, odds are you’ll want to exercise it. The seven-day option at the 21-day mark, which covers two probable price increases, is the best value.

How much is the fare? The higher the price of the underlying security (in this case, the airline ticket), the more valuable the option. Fare insurance is a better buy on international flights, which tend to be more expensive and have larger fluctuations in dollar terms. But if the high price reflects flexibility—a refundable or changeable ticket—the option has much less, if any, value.

You know you’re buying convenience, right? You have 24 hours to cancel your flight for no fee. Travel guru Points Guy suggests buying the ticket and returning it the next day every day for seven days. That is essentially synthesizing a free option, but it takes time and dedication. For $7.99, I prefer fare insurance.

Schrager is an economist and writer in New York City. Follow her on Twitter: @AllisonSchrager.

Best LBO Ever
LIMITED-TIME OFFER SUBSCRIBE NOW

Companies Mentioned

  • IAG:LN
    (International Consolidated Airlines Group SA)
    • $373.0 GBp
    • -1.00
    • -0.27%
  • UAL
    (United Continental Holdings Inc)
    • $49.56 USD
    • -0.85
    • -1.72%
Market data is delayed at least 15 minutes.
 
blog comments powered by Disqus