Personalized Pricing in the Air? Why Consumers Should Be Wary of a New Airline Pricing Proposal

Most air travelers know that the price that one passenger pays may be different from what another pays. In fact, the fare you paid may be vastly different from the one of the person sitting next to you. A business traveler who needs an easily changeable ticket is different from a budget vacationer making a 21-day advance purchase. But we have assumed that the difference in fares, or the dynamic pricing, is based on external factors such as supply and demand of seats, peak travel seasons, and when tickets are purchased. Customers have come to welcome technology and online tools that help them predict prices and comparison shop in search of great deals.

But the game may be about to change. Will airlines now offer us different fares based on our customer profile? Will the price you pay no longer depend on just when you book but who you are? It appears that change may be afoot, and this has attracted the attention of several U.S. senators.

The U.S. Department of Transportation (DOT) has approved a new passenger data collection system. This technical sounding proposal indicates that the airlines want to collect and use customer information to market different products and services to us at different prices. This has caused several senators to ask questions about the potential for illegal price discrimination. In this column, I will evaluate the risks of the new pricing proposal and discuss why consumers should be concerned even if the practices are legal.

Resolution 787: Not a New Plane but a New Pricing System

The International Air Transport Association (IATA), the trade group representing commercial airlines, has been seeking approval from DOT for a new technical standard for data collection and exchange relating to airline customers. DOT gave its approval in August of 2014.

Resolution 787 outlines a so-called “New Distribution Capability” (NDC)—technical jargon for new standards under which the airlines and travel agents would collect and exchange consumer information in order to offer fare quotes. This new system would give airlines and travel agencies the ability to collect personal information about you—such as your birthday, address, marital status, travel history, nationality, and frequent flier status—and then use that data to tailor fares specifically for you. According to the proposal, this allows “more agile pricing and more personalized offerings.”

Such personalized offerings are often referred to as personalized pricing. Personalized pricing is the act of charging each consumer a unique price for airfare based on a combination of seat availability and a consumer’s personal characteristics. This pricing model requires the large-scale collection, use, and storage of sensitive personal data by airlines and travel agents for the purpose of quoting airfare prices to customers.

The NDC will deploy a new, XML-based data transmission standard. When giving its tentative approval, DOT stated that: “Comparison shopping under the current system is generally limited strictly to comparing fares, and it is difficult to make price quality comparisons of different carriers’ product offerings. .The modernized communication standards and protocols and the marketing innovations that [Resolution 787] could facilitate would be precompetitive and in the public interest.”

NDC is designed to enable airlines to use what they learn about travelers to present them with a variety of services and products the airlines think they would be willing to buy.

According to Resolution 787, the new “standards and procedures allow airlines to better manage the distribution of their range of products and services that they wish to provide in an effective way, irrespective of the distribution channel. Enhanced standards are necessary to enable airlines to move to a dynamic content distribution model.”

For consumers, the current ability to compare fares that are available to the general public has been viewed as both pro competition and pro consumer. Transparency has helped travelers to become better-informed consumers. But the IATA proposal is not about different prices based on general criteria—it is about personalized pricing based on unique customer profiles—making it difficult for consumers to know how their own experience stacks up against that of other passengers.

Concerns About Unfair or Illegal Price Discrimination

A group of Democratic senators has taken aim at the U.S. Department of Transportation, asking for greater clarity concerning its approval of Resolution 787. They are concerned that personalized pricing would enable airlines to charge passengers different prices for the same seat—not based on any transparent factor, but based on who they are. The senators are concerned that this may lead to unfair discriminatory trade practices. Senator Edward Markey (D-MA) and his colleagues conveyed their concerns in a letter to DOT Secretary Anthony Foxx

For example, the senators are concerned that airlines could use personal information to provide residents of a wealthier ZIP code with lower airfares because they might travel more with such an incentive. Consumers living in a poorer location might not receive such discounts, since their travel might be less frequent. Conversely, they said, airlines could use that information to charge frequent business travelers higher prices. And there is also a concern that using ZIP codes or other demographic data might lead to discrimination that singles out groups based on their ethnicity, gender, or age for different prices.

The senators concluded that DOT has rightfully prohibited airlines from using information based on “race, creed, color, sex, religious or political affiliation, disability or national origin” to discriminate against customers. But, as the senators noted, DOT did not determine whether using other data, such as income, marital status, address or trip purpose, could be discriminatory or unfair. It left that decision to “future determination.”

The airline industry believes that its process is safeguarded because no fare shopper will be required to provide detailed information. As the proposal notes, “As part of its tentative and final approvals, DOT accepted the conditions proposed by IATA and Open Allies for Airfare Transparency to ensure that no traveler is required to supply personal information to receive an airfare offer (“anonymous shopping”); that the standard remains voluntary and that each airline is free to choose its own data exchange methodologies.”

In its own messaging, IATA notes: “Since Resolution 787 was adopted by the Passenger Services Conference, IATA has emphasized that NDC will be a voluntary standard and that no passenger will be required to divulge personal information to receive an offer.”

But the senators have asked questions about whether allowing customers to refuse to provide data is enough. They worry that Resolution 787 doesn’t do enough to protect consumers who opt not to share personal information from being penalized with higher prices. “We are concerned that airlines could penalize consumers who do not provide personal information, as well as engage in discriminatory pricing with customers who do share their information,” they wrote.

The senators have also asked questions relating to how DOT will ensure that customer data is properly safeguarded in terms of privacy controls.

Can Airlines Lawfully Charge Different Prices Based on Individual Customer Behavior

The answer is yes, unless the airlines use a prohibited basis as the grounds for their price discrimination—such as race, ethnicity, gender, or religion. But in general, it is legal for private entities to discriminate on the basis of other factors as long as their activities do not amount to some type of fraudulent or deceptive practice. An example of a deceptive practice might be an airline saying that it does not offer different prices when in fact, it does. I have written about this issue before with respect to e-commerce sites such as Orbitz (for hotels) and Amazon.com.

But why does the possibility of an airline charging us different fares seem even more offensive? The reason is that while we have lots of choices as to where to buy a toaster oven—even many ways to book a hotel—we have fewer choices when it comes to getting from point A to point B. Today, we are often dependent on air travel for many important life events, from seeking medical care, to attending a wedding or graduation, to a getting to funeral or a job interview. And in many cases, it is the passenger who is footing his or her own bill. Airlines are like common carriers, providing a necessary and essential service. So allowing them to customize pricing may have a significant economic impact for consumers.

Based on these risks, it is a good thing the senators are asking for greater clarity. At a minimum, consumers need to know clearly that they are being impacted—and also to what extent they are or are not eligible for lower fares based on their profile. Transparency in how airlines decide who is valued would be important for passengers, just as we benefit from knowing that airlines treat frequent fliers differently for the purpose of calculating rewards.

Airlines see Resolution 787 as a much-needed evolution of their business practices. But consumer advocates warn that such a system might be used to extract more profits from passengers and limit their ability to comparison shop. Put simply, consumer advocates worry that the market will become more opaque and thus prices will be distorted due to information asymmetry. Customers will be at a disadvantage when they can’t meaningfully compare fares—or at least not without divulging a substantial amount of personal information—since everything will be dependent upon a person’s individual profile or status.

The White House recently published a report on big data and differential pricing. The report found that consumers tended to benefit only when there was transparency in the system, and in opaque markets, consumers were left with imperfect information. As the report states, “Ultimately, whether differential pricing helps or harms the average consumer depends on how and where it is used. In a competitive market with transparent pricing, the benefits are likely to outweigh the costs. For example, while there is lots of differential pricing in airline ticket sales, the Internet has made it relatively easy for many travelers to compare prices and itineraries across airlines and to select the best deal for any given trip” (footnote omitted).

The same report notes, however, that:

Ultimately, differential pricing seems most likely to be harmful when implemented through complex or opaque pricing schemes designed to screen out unsophisticated buyers. For example, companies may obfuscate by bundling a low product price with costly warranties or shipping fees, using “bait and switch” techniques to attract unwary customers with low advertised prices and then upselling them on different merchandise, or burying important details in the small print of complex contracts. When these tactics work, the economic intuition that differential pricing allows firms to serve more price-sensitive customers at a lower price-point may even be overturned.

The White House report makes a distinction between differential pricing—charging consumers different prices for the same goods or services (e.g., giving senior citizens or students a discount)—and personalized pricing, which is based on specific customer data. And there, the report is strong in its conclusions. It concludes that discriminatory pricing can pose difficult trade-offs and present serious concerns about fairness, especially when consumers are unaware of how sellers are using information about them, or when pricing is based on factors outside of individuals’ control. As an antidote the report proposes transparency “giv[ing] consumers increased visibility into the types of information that companies collect, and more control over how it is used, as proposed in the President’s Consumer Privacy Bill of Rights.”

When we start pricing things that are more essential to our well being—such as food, necessities, and even transport—based on our behaviors and other traits, we run the risk of discrimination and also of pricing some people out of the market. The airlines tell us to trust the model, but it is wiser for us to rely on Congress to ask hard questions about Resolution 787. And once we have answers, we should evaluate whether this is really in the public interest. It may be that we need to require certain transparency to be built into the system, such as certain types of published fares for each flight—or other disclosures—so that passengers understand the implications of personalized pricing. One can also hope that other airlines will develop more innovative and transparent pricing models to win over consumers who don’t want to be shown a fare based on who they are, whether they are married, and whether they live in a particular ZIP code.