[Mifnet 🛰 73245] Re: Why does anyone think that airline "AI pricing" will benefit consumers?

[RWM--- via Mifnet]

If the objective of price discovery and pricing strategy is to capture the maximum consumer surplus from each individual in the pool of available demand, then there are higher price points (people all across the demand spectrum who were willing to pay more than the fares displayed that they decided to purchase) and lower prices (people rejecting even lowest prices displayed) that might improve maximum surplus and revenue capture. Available technology (own website as well as GDS) allows the display of a discrete number of price points, with associated terms, such as advance purchase, length of stay, refundability, etc. Mire these days than in the past, but nothing close to a continuum. Conceptually, an informed, continuous, individualized set of instant offer prices could maximize the capture of consumer surplus.  So far, technology has been a limiter in maximizing capture. If ‘AI’ is more than just a stock price pumping mention, and it is better informed, likely through aggregation of credit card relationships and broad retail spending data, about individual consumers’ demand profiles and willingness to pay, in the moment, then it could offer higher as well as lower price offers that would improve revenue at departure and RASM. - Bob Mann  On Jul 22, 2025, at 20:50, Gary Leff via Mifnet <mifnet@lists.mifnet.com> wrote:  Karl,   You may not think much of me – fair enough – as long as my wife does I’m a happy guy.  But I promise that not everyone who disagrees with you is evil or stupid!   Hubert Horan says that airlines are out to screw customers.  To some extent that’s right but it doesn’t mean that this new technology allows them to do it.  My suggestion is that the mechanism by which it will help airlines generate incremental revenue is greater price discrimination, better tailoring whom to offer the lowest fares.  And maybe that’s screwing the customer – perfectly fair to hold that view.  I think I’ve been pretty non-normative in thinking through this.  I’m not saying “AI is good for you” I’m saying, let’s think about the economics of the product and what AI will accomplish in the near-term.   As we all know, an airline seat that takes off empty can never be sold again.  And carrying a marginal passenger comes at extremely low cost to an airline.  Most of the expense of a trip is baked in – the plane, fuel, crew.   Airlines have gotten much better at filling seats.  And they try to maximize revenue – yet the real cost of a ticket has fallen over time, inclusive of fees.  That’s no accident.   Airlines will sell that marginal seat for almost any amount they can get for it Except they don’t want to offer a lower fare to someone that would buy the seat anyway, at a higher fare And so airlines go to great lengths to price discriminate, segment customers.   There have been lots of tools for this over time, like Saturday night stays and advance purchase requirements to separate price-insensitive business travelers from more price-sensitive leisure travelers – in order to offer the lower fares only to the latter group.  That’s what basic economy is all about, offering cheap flights that are just annoying enough they won’t be an option for businesses who will spend more.   AI is another tool to get more granular with price discrimination.  And so it seems reasonably likely that it’ll be used to figure out whom to offer those lower fares to, filling more seats at even lower fares but only offering those prices to people who wouldn’t buy at all at a higher price.  Airlines can fill seats and generate incremental revenue without cannibalizing existing higher yield traffic.   And what of the fear that an airline will know your aunt died and you are highly motivated to attend her funeral?  That ticket will generate valuable incremental revenue to whichever airline gets it.  So if one airline (in this case, say, Delta) offers you $2,000 when they’ll sell the ticket to someone else for $600… then United will offer it at $1,800… and American at $1,500 and Southwest at $1,200 and Spirit will come along, desperate for any revenue after a first quarter in which they generated a -27% margin and offer it to you for $500.   Our best defense against AI pricing of the parade of horribles sort (besides our own personal AI!) is competition.  Which is a whole separate topic that I very much worry about, but not necessarily for the same reasons that are most commonplace.   Best, Gary   p.s. I’d love to hear why you believe I’m mistaken – that’s an opportunity for learning – and not just that you think I’m an idiot 😊     From: Karl L. Swartz via Mifnet <mifnet@lists.mifnet.com> Sent: Tuesday, July 22, 2025 4:27 PM To: Mifnet <mifnet@lists.mifnet.com> Cc: Karl L. Swartz <k...@kls2.com> Subject: [Mifnet 🛰 73239] Re: Why does anyone think that airline "AI pricing" will benefit consumers?   Your points just reinforce my view of Gary Leff, which is that he does a lightweight job of reporting with minimal substance. He’s better than Simpleton Flying, but that’s a very low shadow to surmount.    -- Karl   On Jul 22, 2025, at 1:28 PM, Hubert Horan via Mifnet <mifnet@lists.mifnet.com> wrote:   Gary Leff published a follow up to the Delta “AI pricing” article [1] previously posted on the Mifnet. As with the first article, it includes Glen Hauenstein quotes claiming that this he was anticipating “a full re-engineering of how we price, and how we will be pricing in the future” – Delta was working to “get inside the mind of our consumer and present them something that is relevant to them, at the right time, at the right price.” But unlike the first article Leff claimed that AI pricing at Delta would be a wonderful thing for consumers because it would mean “lower prices, rather than higher prices and agreeing to AI pricing could even become a requirement of airline elite status.” This makes absolutely no sense to me. Leff didn’t support this claim with any explanation of how Delta’s “AI pricing” would actually work, or what the overall effect of “AI pricing” might be. He didn’t quote anyone with direct experience with today’s pricing/yield management practices or anyone familiar with LLCs in consumer pricing. Can anyone explain how one might conclude that Delta’s “AI pricing” would produce lower overall prices? Why would Delta undertake a major project if it thought the net result would be lower fares? Maximizing its share and yield from “high-end” passengers has been central to Delta’s strategy for the last decade. Why would it highlight the project to investors, who are only interested in evidence of the market power needed to extract higher and higher fares? Delta (and its competitors) already have very high load factors. Figuring out how to sell more cheap tickets makes no sense unless you have tons of empty seats, and even then airlines understand the solution is to cut capacity. And selling more cheap seats is the easy part of revenue management (if you are departing with lots of empty seats don’t shut off discount sales so soon). Figuring out how to grab a few more dollars from the last seats on high-demand flights is the hard part. Hypothetically “AI systems” might be of some value in pricing tickets to very frequent/higher-yield passengers although no one has explained what exact information about these passengers an LLC might use, where the new info would come from, or how it would be used to change the fare displays those customers might see. But most domestic pax are very infrequent flyers. I vaguely recall a Scott Kirby quote saying something like 80% of his traffic only bought one ticket a year. What info would an LLC be able to collect on these more price-sensitive passengers, and how would it determine that a customized deeper discount would get this person to buy but not this other person? Leff’s point about trying to force Delta customers with elite status into an AI-driven sales channel might be correct, but I suspect there’d be backlash, and as Leff notes most of these folks would know how to determine whether they are getting the market fare. But this falls into the “forcing our best customers to pay even higher fares than they do now” category, not the offer consumers lower fares category. I understand that “forcing our best customers to pay even higher fares than they do now” may be a strategic priority at Delta given the lack of obvious other ways to quickly juice profits. But that approach would logically focus on forcing them into captive, controlled channels, and preventing them from being able to readily access information about competitive alternatives. All of which should be seen as pure evil by anyone who thinks “market competition” is a good thing. Again it is not clear what the LLC vendors are offering that could actually make Delta’s higher-yield frequent flyers more willing to use captive, controlled channels. There is a bit of a parallel here with ongoing Mifnet discussion about ATC/airline reliability issues. No one stops to explain what they think the deficiencies of longstanding airline pricing/revenue management systems are. What is preventing these weel-developed systems from maximizing network unit revenue today? We jump immediately to an announcement that we are throwing big bucks at consultants offering a fancy sounding “technological” solution without ever explaining exactly what the new technology does (that the current technology couldn’t) and how it will solve the defined problem. Since no one (including airline investors and executives) takes that approach, reporting is dominated by PR hackery based on transparently false claims. Airline “AI pricing” is just the same type of “price discrimination” we’ve seen for decades (as Hauenstein says it’s an attempt to radically reengineer traditional pricing). Like traditional revenue management it will drive major efficiency/productivity gains (none of the conditions that allowed traditional revenue management to improve overall efficiency in past decades exist anymore). It will hugely benefit consumers by lowering prices (a sure signal that the real objective is to screw consumers).   [1] https://viewfromthewing.com/several-airlines-now-quietly-let-ai-set-ticket-prices-surprisingly-thats-great-news-for-your-wallet/   -------------------------------------------------------------------------- Revised: 20250507 You are receiving The Mifnet because you requested to join this list. The Mifnet is largely a labor of love, however the infrastructure isn't exactly cost-free. 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