Sunday, January 18, 2015

Airlines to public: please ignore this blog post



THERE’S nothing like a pair of big corporations suing a 22-year-old kid to turn an obscure loophole into a viral internet sensation. On November 17th United Airlines, one of the three giant American carriers, and Orbitz, an online travel agency, filed a federal lawsuit demanding damages “in excess of $75,000” against Aktarer Zaman, a recent college graduate and the creator and owner of the website Skiplagged. The service enabled users to discover cheap airfares that did not appear on competing engines’ searches by utilising a tactic known as “hidden-city ticketing”, which takes advantage of occasional anomalies in airlines’ pricing algorithms.

Ever since America deregulated air travel in 1978, the leading carriers have developed “hub-and-spoke” route networks, which require passengers to connect through a few strategically located airports en route to most destinations. This system has vastly reduced costs by allowing airlines to pack the same number of travellers into far fewer flights. There might only be three people a day who want to go from, say, Albany to Albuquerque, but there are enough people heading from Albany to anywhere else, and from anywhere else to Albuquerque, to support one or two flights a day between those two cities and a central hub. A side effect of this model is that each carrier tends to dominate the market at its hubs, which gives it significant pricing power. Delta, for example, transports three-quarters of passengers at Cincinnati/Northern Kentucky International, a big reason why that airport is the most expensive to fly through in America. In contrast, non-hub cities, as well as markets so big that no airline can afford to ignore them, such as New York and Los Angeles, tend to offer much more competitive fares.

Because the costs of operating a flight (plane, fuel, and crew) are mostly fixed, airlines have a strong incentive to fill their planes. And since most leisure travellers decide which airline to fly based exclusively on price and convenience, airfares have a very high demand elasticity. This leads to brutal price competition. To make the hub-and-spoke system work, airlines usually need to come close to matching the lowest fare from a rival on every route. And when their competitors have a direct flight and they can only offer a connecting one, they often need to undercut it by a meaningful margin.

These straightforward economics sometimes lead to a bizarre consequence. In certain circumstances, airlines charge less for a multi-legged flight than they do for the first leg of the same route by itself. To illustrate with an example, let’s stick with Cincinnati. At the time of writing, Delta’s cheapest one-way fare from Atlanta to Cincinnati on February 6th is $252. However, to get from Atlanta to Dallas-Fort Worth with a connection through Cincinnati—on that same initial flight—costs just $197. This is because Delta is the only airline to fly direct from Atlanta to Cincinnati, which are both Delta hubs, and so it can charge what it likes. Two other airlines, meanwhile, operate flights between Atlanta and Dallas. This limits Delta’s pricing power. For anyone wishing to fly to Cincinnati, therefore, the best bet is to book the connecting flight and walk out of the airport in Cincinnati (the “hidden city”), simply failing to show up for the second half of the trip.

Hidden-city ticketing is no free lunch—in fact, it is both selfish and economically harmful. The passenger merely saves the difference between the direct and hidden-city fares ($55 in the example above). The airline, however, loses both that revenue and the value of the empty seat on the second leg. Travellers might not shed a tear over denying precious income to big bad airlines who pack them in like sardines. But the fact is that these companies still operate on slim profit margins. If hidden-city ticketing became widespread, the airlines’ first response would surely be to raise prices on connecting itineraries, leading to higher airfares across the board.

Still, the practice is not yet particularly widespread, for several reasons. First, opportunities to deploy it are fairly uncommon: an airline has to have significant power over a route (as Delta does with Cincinnati-Atlanta) to make it viable. It also involves myriad limits and risks. Hidden-city ticketers either have to buy one-way fares or save the trick for the second half of a round-trip, since once they fail to show up for a flight any subsequent segments on the same itinerary will be cancelled. What is more, they can’t check luggage, which would be sent on to their stated final destination. In addition, they run the risk of being rebooked on a different route to their official destination in the event of a delayed flight or bad weather. And since most airlines’ conditions of carriage expressly forbid the practice, people who do it often enough to attract the company’s attention can have their frequent-flier accounts suspended, miles voided and any elite status revoked.

Yet despite these obstacles, the savings from a hidden-city ticket can sometimes justify these risks and inconveniences. So perhaps the biggest reason why the practice is not more common is that even though there have been numerous articles published on the topic—Nate Silver wrote a primer back in 2011—it is still something of a trade secret among the most dedicated fliers. This is where Mr Zaman enters the picture.

As a college student, he learned about the loophole from Mr Silver’s article, which told readers that the way to find hidden-city fares was to hunt individually for “phantom flights into airports that are more competitive” than fortress hubs like Cincinnati and Atlanta. Seeing a problem that called out for automation, Mr Zaman set up Skiplagged, which listed hidden-city options alongside conventional fares (with a “NO CHECKED BAGS” disclaimer), and linked to Orbitz to reserve them. The airlines and Orbitz demanded that Mr Zaman stop, and sued him when he did not. In a remarkable display of youthful naïveté, Mr Zaman failed to set up a company before launching the site, meaning that he could be held personally liable for any damages. However, in an equally impressive demonstration of youthful resourcefulness, he has set up a campaign on GoFundMe, a crowdfunding website, and already raised nearly $65,000 for his legal defence.

The airlines’ desire to keep the hidden-city ticketing genie more or less in the bottle is certainly understandable. In fact, it probably benefits everyone in the long run. However, United’s decision to haul Mr Zaman into court now looks spectacularly shortsighted. First, his right to disseminate information about hidden-city itineraries is protected by the First Amendment. The only legal issues at stake in the case are whether he was entitled to use data from Orbitz or airline websites, and to provide direct links to them for purchases.

Moreover, even if Skiplagged vanished from the internet tomorrow, the automated hidden-city lookup tool Mr Zaman sought to offer already exists, thanks to none other than Google. With just a little know-how, it is easy to find hidden-city flights on Matrix, the search giant’s advanced airfare site (see guide below).

As long as sites like Matrix exist, United was never going to prevent determined travellers from finding hidden-city tickets. But by turning Mr Zaman into a martyr for free speech, the airline unleashed a tidal wave of interest in the practice. Since the lawsuit was filed and the media got wind of the case, Google search traffic for “hidden city ticketing” has risen 25 times over. As a result, countless thousands of people who had never heard of the practice will probably try their hand at it. Indeed, had United simply left the harmless Mr Zaman and his rather user-unfriendly, occasionally buggy website to his own devices, the how-to guide below would never have been written.

How to book a hidden-city trip on Matrix

Click on the “One-way” tab and enter your departure city and travel date. Then click on the “Advanced routing codes” link, and in the “Enter outbound routing codes” field, type “X:” followed by the three-letter airport code of your destination city (e.g. “X:CVG” for Cincinnati). Finally, in the “Destination” field, pick an airport that’s centrally located in the region you’re flying in (I use St Louis for the United States), click on “Nearby”, choose “2,000 miles” in the “Within” field, press “Select all”, and then hit “Search”. This will hunt for all trips from your origin to all airports within 2,000 miles (3,200 km) of the fake destination city you’ve listed that include a connection through your chosen hidden city. This process takes about 15 seconds. Once you’ve identified an itinerary, you can book it directly on the airline’s website.

Note: Booking such hidden-city tickets is against many airlines' terms and conditions.

Source: http://www.economist.com/blogs/gulliver/2015/01/hidden-city-ticketing

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