[Mifnet 🛰 73280] Re: Why does anyone think that airline "AI pricing" will benefit consumers?

[Hubert Horan via Mifnet]

 
Gary—quite happy if you wanted to respond to my posts. Theywere intended to 
provoke comments and discussion. It would be a bit more usefulif you had 
actually read what I wrote.

I didn’t say that this new technology would screw consumers.I said the 
opposite. I said that “the central economic/consumer welfare issueisn’t the 
specific “pricing algorithm” that might be used but the exercise 
ofanti-competitive market power.  Thedeliberate, systematic elimination of 
meaningful competition meant thatairlines are free to raise prices with 
impunity and to pursue practices thattheir most important customers (would) 
totally hate. If real competitionexisted would any airline be paying “AI” 
consultants to figure out how a blackbox algorithm might be able to charge 
their best customers higher fares?”

The (hypothesized) use of AI-driven personalized pricingpresumes a variety of 
prerequisites including (potentially) the ability tocapture much more 
information about each customer, the ability to force them tobuy tickets 
through carrier-controlled channels and limiting their access to 
publicinformation about true market fares. As you and others have noted, this 
wouldforce consumers to do things they don’t currently do, with the risk of 
backlashif they discovered the airline showed them higher fares than they could 
havebought elsewhere. Changes like these would not result from AI or any other 
“technologies”Southwest got customers to use their controlled channel for 
decades—but only byproviding powerful tangible benefits for doing so. Airlines 
could only forcecustomers to use private channels that often displayed higher 
fares if theycould exercise anti-competitive market power. You repeated Delta’s 
claim thatAI-driven pricing could produce major changes but never provided 
anyexplanation of what the new systems would do differently, or how they 
wouldactually drive major changes. 

I laid out a number of reasons why I thought it was extraordinarilyimprobable 
that Delta would invest major changes that would have the overallresult of 
lower fares. Delta’s corporate strategy has been highly focused onmaximizing 
revenue from premium customers. The investors Hauenstein wasspeaking to are 
highly focused on increasing profits via higher and higher fares,and see no 
problem with exploiting anti-competitive market power to achievethat. I 
explained that “price discrimination” had produced majorconsumer/efficiency 
gains when first introduced in the 90s because it filledtons of empty seats and 
allowed airlines to grow revenue without adding expensivenew capacity. But the 
“empty plane” problem was solved long ago. I explainedthat to the extent there 
are still a few flights with chronically low loadsthis can be solved using the 
easiest parts of existing revenue managementsystems. You provided no evidence 
that Delta actually thought that theinvestments it was making would lead to 
broadly lower fares, no evidence of whyDelta thought its decades of experience 
with modern revenue managements wasfailing to maximize revenue (keeping fares 
too high in this case), or what newdata or analytical tools the new systems 
would use to make more profitablepricing decisions in the future.  Maybethere 
are good answers to these objections but you haven’t provided any, andjust 
ignored the issues I raised.

Most of your last post repeats conventional wisdom about airlinepricing from a 
quarter century ago. Whenever the airlines get challenged they always start by 
citing positive things they did a quarter century ago.The airlines figured out 
how to raise loadfactors as high as they practically could (mostly via capacity 
cuts; revenue managementwas secondary). The airlines figured out what forms of 
“price discrimination”actually increased unit revenue. You insist that “AI is 
another tool to getmore granular with price discrimination.” You are the one 
claiming this is a "technology" issue but you don’t provide any evidence 
explaining what this "tool" would actually do, and its not clear you understand 
the revenue managementcontext where it would (hypothetically) be relevant.

My initial point was that none of the articles about Delta’sclaims provide 
readers with any useful insights about what Delta is actuallydoing, or why its 
investments might drive a major breakthrough in airlinepricing or a major boost 
to Delta’s profitability. Thus I’ve qualified thingshere as (hypothetical). I 
cannot explain anything in rational terms linked tohow major airlines actually 
price or compete. 

Lacking a substantive explanation of how current systems arewoefully suboptimal 
and how the new “AI-based” tools would generate major efficiency improvements 
it seems reasonable to raise concerns that Delta is contemplating things 
thatcustomers won’t like or benefit from. As with my Uber examples, all of 
thecompanies/industries that have been aggressively trying to introduce 
“personalized”or “algorithmic” pricing are loathe to talk about their practices 
openly.Unlike the airlines of the 1990s who were quite happy to explain their 
newrevenue management practices and document the efficiency gains and lower 
pricesthey drove. Thus my larger concern that any major pricing/profit impacts 
theymight eventually have would depend on anti-competitive market power.

But until we have more hard evidence about what Delta andits software 
consultants are actually doing, all of this is speculative.


    On Tuesday, July 22, 2025 at 05:51:24 PM MST, 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/

  

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