The emerging options market for non-refundable airline tickets

Fliers today can find it difficult to keep their options open while trying to get good seats and locking in a good price, especially with airfares changing often and planes more crowded. Nobody wants to buy a $600 nonrefundable ticket, have their plans fall through and not be able to use it — or be forced to pay exorbitant fees to change flights.

That’s precisely the problem several companies aim to fix by selling, or planning to sell, “options” on airline tickets.

United Airlines offers price lock-in options, while at least three other nonairline companies are starting options services for airfares.

“It could be a value. … It’s kind of like an insurance policy,” said George Hobica, president and founder of AirfareWatchdog.com, a fare-alert website.

Airfare options work similarly to a stock option. The seller of the option charges a fee to hold your flight reservation at a certain fare, but you’re not obligated to buy a ticket. If your travel plans change, you can simply let the option expire and you’ve lost only the fee, not the full cost of the plane ticket.

“If you’ve ever coordinated one of those ski trips or golf vacations with a group of friends, you know you can be the sucker who puts down the $500 for the flight and nobody goes,” said Heidi Brown, co-founder of BitBend, a fare lock-in startup in Chicago.

A fare option might work like this: You pay $9 to lock in ticket at a set fare for three days while you get your spouse or friends to commit to a getaway — or wait for your boss to approve vacation time.

Typically, the longer you hold the fare, the more the option costs. You don’t get your fee back, regardless of whether you make the purchase or let the option expire. For option sellers, it’s a delicate balance of pricing options low enough to entice consumers, but high enough to make money, considering they may not make the final sale. There’s also the risk for the option sellers that a fare could go up while a consumer decides, which means, depending on their arrangement with the airline, they’d have to pay the difference in ticket prices.

Years ago, airlines would take reservations and hold a fare for free. But like checked bags and onboard meals, that freebie went away. Now, carriers and online travel agencies have instant ticketing, with 24-hour cancellation periods, which is federal law.

“It’s mainly for people with mushy plans — they don’t know if they want to go at all or exactly what day — and they want to lock in a price,” said Rick Seaney, an air travel analyst and co-founder of FareCompare.com. “I think it’s a niche business. A certain type of person might do it.”

While it might be a niche product, fare options companies argue it’s valuable because plane reservations are often nonrefundable, unlike reservations for hotels, car rentals and restaurants. Buying an option is an alternative to buying a refundable ticket, which can cost twice as much as a nonrefundable ticket, or paying flight change fees, often $150 per ticket. (A notable exception is Southwest Airlines, which doesn’t have change fees.)

“It’s basically a discount program on refundable tickets,” Seaney said.

And you can decide not to take the trip for any reason, which makes it different than traditional travel insurance.

Still, some industry watchers aren’t convinced there’s a mass market in options.

For example, Hobica wonders why other airlines in the hyper-competitive industry haven’t copied the idea if it is a money-maker. And the 24-hour cancellation rule helps in many situations where a fare option would be useful, Hobica said. “I’ve never used it, and I don’t think I would use it.”

Another hurdle for the smaller companies is building trust. “If you’re a whole new brand, an unknown brand, I think it’s a tougher sell,” Seaney said, adding that people might not be willing to give their credit card numbers to an unfamiliar company.

“Will it have mass adoption? It doesn’t feel like it would,” Seaney said. “But for a certain number of people, it would be somewhat useful. It just depends on your situation.”

What follows is a sampling of services that offer, or plan to soon offer, options on airfares:

United Airlines FareLock

The best-known option service — and the only one that’s fully functional — is FareLock by Chicago-based United Airlines. It adopted the service from Continental after the airlines merged in 2010; the combined airline began offering FareLock in March.

United’s Farelock, only available if you book certain United or United Express flights at United.com, allows you to hold your itinerary and price for either 72 hours or seven days for a fee. You purchase FareLock, if available, on the “review trip itinerary” page after you’ve selected flights online. The service locks in a fare in a certain section of the cabin, not a specific seat.

“The reasoning behind it was to give customers more flexibility and peace of mind when booking their travel,” said United spokeswoman Mary Clark. “That was something that our customers wanted.” United declined to release sales numbers for FareLock, but “it’s fair to say initial sales exceeded our expectations and have grown strongly since,” Clark said.

Pricing of FareLock options can go as low as $1, but they typically cost $9 and up, based on such variables as flight itinerary, how far in advance the booking is and demand for the flight, she said.

A few foreign carriers offer a similar service. They include Air France and KLM Royal Dutch Airlines, which are owned by the same holding company. Both call it a “Time to Think” option.

American Airlines does not offer airfare lock-ins but “is reviewing the concept,” a spokeswoman said. American still offers a 24-hour hold on most reservations.

OptionIt

OptionIt, operated by Chicago-based Smart Options, currently sells “reserve now … decide later” options on sporting-event tickets and travel packages. It plans to offer options on airline tickets too, company officials say.

“It’s becoming clear that markets are starting to recognize the value of the flexibility and convenience that options offer,” said Geoff Baker, in-house counsel at the company.

The company is in talks with airlines, fare-comparison websites and startup companies to offer the options on airfares, CEO Mac McNally said.

While officials don’t have a date for when the company would start offering airfare options, they said they were in late-stage talks with airlines and other travel-related companies. The company might offer options at a stand-alone website or as the behind-the-scenes engine that offers options on other travel or airline websites.

Similar to its sports-team partners, it would work with airlines to reserve seats for OptionIt customers, ensuring there are tickets for those who exercise options.

The company’s experience in sporting-event tickets shows that about 80 percent of option buyers go through with the purchase, McNally said.

BitBend

BitBend’s co-founders, husband-and-wife team Rob and Heidi Brown, have financial backgrounds — he in futures trading and she in international currencies — and love to travel, said Heidi Brown, chief marketing officer. “We merged our experience with our passion,” she said.

It, too, plans to place a hold — or what it calls a bend — on airfares for a number of days or weeks while consumers finalize travel plans. BitBend.com plans to promote on social media the good fares it finds and suggest people buy options to lock in a price before it disappears. “You can have this group-travel buzz going around — ‘OK, guys, who’s in? Who wants to go?’ ” she said.

The couple started working directly with airlines, but carriers were moving slower than BitBend wanted, Brown said. So BitBend became a travel agency to gain access to airline seat inventory and the ability to book tickets.

If a customer decides to exercise the bend — it doesn’t use the word “option” — the company will buy the plane ticket, making money on the bend price plus any ticket-price difference that falls in its favor. It expects most bends to cost $5 to $25, taking into consideration the airfare, length of the bend and number of days from the departure date, Brown said.

The site is in a “beta” test phase, but the Browns hope to have it available in December. The earliest offerings will be flights from Chicago to 16 domestic destinations.

SteadyFare

SteadyFare is also in beta testing, offering flight options from three airports — JFK in New York, Los Angeles and San Francisco — to 17 destinations.

Perhaps the biggest drawback for some consumers is that they can’t choose flight times or the airline, although the company plans to add that feature, said Jack Connor, a SteadyFare co-founder. He said the company is tinkering with the business model. Not specifying an airline or flight time gives SteadyFare more choices of flights, ensuring it can book the ticket for those who exercise their options, he said.

Unlike others, SteadyFare’s option is essentially a cap on airfare for two or four weeks. You won’t pay any more than your option specifies, but if prices drop, you’ll pay the lower price when you book. Another advantage is the ability to choose a range of departure and return dates.

Connor said he hopes the service will be fully operational by early next year.

(c)2012 Chicago Tribune. Distributed by MCT Information Services.