The Future of Advance-Purchase Fares

Posted by: Justin Bachman on August 29

Another airline, the trans-Atlantic budget venture Zoom Airlines, shut down this week, the latest casualty of fuel prices. In the U.S., Zoom flew between London and New York, Fort Lauderdale and San Diego. The company apologized to passengers in its Aug. 28 statement, adding that “the price of oil resulted in our fuel bill jumping by nearly $50 million in one year and we could not recover that from passengers who had already booked their flights.” This makes sense since Ottawa-based Zoom was populated almost entirely by budget travelers, who generally plan and purchase far, far ahead of departure. Buy a ticket, the gas bill jumps, and the airline is forced to eat it. Voila, bankruptcy. (That’s one reason Southwest (LUV) narrows its booking window to roughly six months, a shorter span than most legacy rivals.)

Zoom’s dramatic cost-revenue squeeze presents an obvious question: What is the continued utility for the majors of advance-purchase ticket sales? For decades, air travelers have caught a break when planning ahead. But what’s in that proposition for the airlines these days, considering that fuel costs rarely decrease between the sale and the flight?

Historically, a flight is profitable or not based on the sales to last-minute ticket buyers, ie, business travelers, who pay dearly for the last few seats. Those of us in the back of the bus catch a break as the airline works to fill the plane months and weeks before departure. Typically, the difference between the lowest and highest coach fare on the average domestic flight is a factor of five, with some flights as high as ten, says Tom Romary, a former Alaska Airlines (ALK) marketing executive and CEO of Yapta, the fare-tracking and refund service. Any profit comes in the last few days before departure.

This constant monitoring and repricing of the inventory is governed by the complex work of airlines’ revenue-yield managers. They are, to coin the title of my colleague Stephen Baker’s new book, “The Numerati,” who oversee movement of the product. Given the extraordinarily powerful computing muscle employed in modern yield-management operations, every major airline has a very good sense of how many seats it can – or can’t – sell at any given time in any market and at various prices. The patterns are established, the data are set. (For the most part.)

As they shrink domestic capacity this autumn, the airlines will also seek to reduce inventory at the lower fares. Happily for us, fare experts note, this broad capacity cutting injects a new monkey wrench into revenue managers’ computer models – which means they can’t get too extreme about curtailing the lowest fares. Higher fares force two immediate reactions from the public: reduced ticket sales and bookings that shift to later in the sales cycle. (Why not wait to see if an ugly fare gets slightly more attractive?) “That’s probably happening now … but the market self-corrects,” Romary says. Any sales drop will quickly cause a carrier to reverse course if it prices seats too high. “Airlines are creatures of habit,” says another fare-watch expert, Rick Seaney of FareCompare.com. “They have no background information on what’s going to happen when you cut back 15%” on domestic capacity. He also predicts a long life for advance fares.

“The airlines can’t just go out and say we’re going to price every seat above our cost,” Romary says. True. Rare is the industry that can manage that on everything it sells. But the early-buy discounts we saw in past times can certainly be abridged. Given that travelers already have felt sharp fare pinches in 2008, is it likely that the airlines could extend that pinch out to 14 days, 21 days, three months, six? In other words, pummel the break early-buyers enjoy into something we no longer recognize? Possibly, but Romary and Seaney have strong doubts. Maybe I'm a pessimist. I greatly appreciate the considerations I reap from being able to plan personal trips far in advance. I just fear that in a time when everything from pillows to pretzels is disappearing from U.S. airlines, my advance-planning bonus may also.