Airlines Are Now Auctioning Off Upgrades, And Consumers Are Loving It

Getting moved from coach to the front of the plane is one of the nicer things that can happen on a long flight. If you a lot (especially on full fare tickets), getting upgraded can be a routine occurrence. Of course, that raises the question of why airlines pretty much give upgrades away. Yes, it makes sense to take care of really good customers particularly when moving someone up to business class costs the airline very little. But there is no guarantee that high status frequent flyers necessarily want the upgrade more than some more lowly coach passengers. That is, Mr Executive Platinum may not be willing to pay more than Ms. No Status for the privilege of escaping the cattle car.

Now Ms. No Status may get her chance to score an upgraded if she is willing to open up her wallet as several airlines are starting to auction off upgrades (Flier Auctions: Better Seats, Going Once, Going Twice…Wall Street Journal, Apr 24).

Airlines overseas have started auctioning off upgrades, with travellers in economy or premium-economy cabins bidding against each other for seats that offer better space, food, service and sleep. Bids for premium seats that otherwise might fly empty begin online weeks in advance and typically close 48 hours before takeoff. The company behind the auction technology says it may come to the U.S. soon.

So far, airlines say travellers end up spending more for upgrades in online auctions than they would spend at check-in. Unlike a casual offer at an airport kiosk, the auction system can generate excitement as fliers strategize about how to win.

“You can buy the cheapest ticket and still have a chance of sitting in business class,” said Danny Saadon, North America vice president for El Al Airlines, where the average winning bid for a business-class upgrade is $800. That’s a deal when the airline’s business-class tickets cost anywhere from $3,000 to $10,000 more than coach.

Different airlines run the auction in different ways since the system from Plusgrade, a New York City company, allows flexibility. An airline can choose who can participate in the auction so it may choose to offer the opportunity to bid to all customers or only those that bought in a particular fare class or to those that meet a certain profile. Besides access to business class, El Al also auctions off empty middle seats to those in couch want some extra elbow room.

Clearly, this is an interesting program. In some ways, the only surprising thing is that it is just coming to the market now.

The fact that customer pay on average more than they do when offers are made at check in reflects what I said above. Frequent flyer status does not necessarily reflect willingness to pay. A kiosk-offer designed to move, say, four seats has to be priced at the expected level of the fourth highest value for moving up. An auction, on the other hand, extracts more from those who really want to move. (OK, I acknowledge that is based on some very sloppy logic but it gets at the intuitive idea that a flat price cannot discriminate among people with different values.)

This is made worse by the information asymmetry between the firm and its customers. As is noted in the article, customers don’t how many seats are available, how many other people are bidding and so on. (Note that a similar issue exists for Delta’s program where customers bid to get bumped from oversold flights.)

A final point. There has to be some losers here. The article says that airlines claim that they are taking care of their high status frequent fliers but that can only go so far. A top-tier flier who bought a full fare ticket will be OK but a mid-tier flier who once would have had a hope for an upgrade is likely now stuck in coach.

Now Read: Turning Away Customers Is A Great Strategy For Dominos In India

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