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As airlines profits increase, carriers have stopped giving away so many first class, business class, and premium economy seats, preferring to sell them, sometimes at discounted rates.
But while they have been creative in monetizing premium cabins, many carriers have avoided auctions, perhaps thinking travelers might be turned off by the process, or that they can earn more revenue in other ways.
That’s beginning to change, mostly outside of the United States, but also at Hawaiian Airlines, which recently announced it would work with a company called PlusGrade to manage auctions for unsold first class seats, and at Virgin America, which works with PlusGrade and another company called SeatBoost. Neither Hawaiian nor Virgin America offers as many free upgrades as American Airlines, Delta Air Lines, and United Airlines, so auctions allow them to profit from seats that might otherwise go empty.
“It’s not something that is earth-shattering and material to the financial results, but airlines remain a relatively low-margin business and this is an opportunity for us to enhance the revenue we generate from the cabin real estate we have, and an opportunity for our guests to customize the experience in a way they can find valuable,” Peter Ingram, Hawaiian’s chief commericial officer, said in an interview.
The technology Hawaiian and many international airlines use does not produce a true auction. Instead, airlines generally contact passengers three-to-10 days before departure, and ask them how much they would be willing to pay for a business class or premium economy seat. Later, the system accepts or rejects the bid depending on parameters set by the airline. It is an automated process, similar to what Priceline implemented years ago for hotels, and price fluctuates according to demand.
“The highest bids win,” said Jaime Fraser, a spokeswoman for Virgin Atlantic Airlines, a PlusGrade customer.
PlusGrade says more than 50 airlines use its technology, though many only make the technology on some flights. Its customers include Lufthansa, Qantas, Aeromexico, Air China, LATAM and Air Lingus. American Airlines tried the service in 2013, but dropped it after its merger with US Airways and does not plan to return, an airline spokeswoman said.
PlusGrade CEO Ken Harris said a “well run” program can account for roughly 0.5 percent to 0.8 percent of a carrier’s passenger-related revenue, though some airlines perform better. And while the bulk of his business comes from upgrades into premium economy and business class, they now offers airlines a program called “neighbor-free flights” that lets coach passengers bid to ensure they will have an empty seat next to them.
The rival service Seatboost is a traditional auction, and so far Virgin America is the company’s main client. Passengers download a mobile app, which they use to place bids starting 90 minutes before departure. Travelers track how much other passengers are willing to pay, and then can bid higher amounts before the app declares a winner. Virgin America is using the platform on flights from San Francisco to Las Vegas, Maui, and Honolulu, and flights from Las Vegas to San Francisco, Los Angeles, New York, and Dallas.
“We have seen it drive a significant number of upgrades to both First Class and Main Cabin Select, and anecdotally, we’ve seen that guests actually have fun with the bidding process,” Virgin America spokesman Dave Arnold said. He added that the airline has implemented the technology without diluting benefits for elite frequent fliers, who receive free, space-available upgrades to Main Cabin Select.
With auctions, airlines run at least two risks. First, if the airline usually offers frequent fliers free upgrades into unsold seats, as American does, the carrier might annoy customers by unloading last-minute seats at cheap prices. Second, airlines that reliably unload premium seats before departure may train passengers not to buy the seats in advance at full price.
But Hawaiian’s Ingram said he is not concerned. He said its program will appeal to more cost-sensitive travelers, who generally will not buy premium seats at booking.
“People who are interested in securing that first class seat in advance are likely to continue to buy to take the risk out of it,” he said. “We think this will provide more options, not cannibalize others.”
At Hawaiian, customers already have several opportunities to buy up before departure. But Ingram said auctions give Hawaiian one final chance to reach customers. While there is a fine line – an airline does not want to annoy a customer – Ingram said Hawaiian believes it has a better chance of selling ancillary products if it contacts the passenger multiple times.
“This provides another way to put the offer in front of someone in a different point in our interactions with us,” he said. “You want to have more touch points to make sure people didn’t just miss an offer that they would be interested in.”