Captain Kirk's secret

William Shatner aside, what keeps Priceline.com's name-your-fare site flying?

By Don George
July 14, 2000 11:00PM (UTC)
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Once upon a time, when you had to fly to Manhattan in a month, you'd pick up the phone and call your local travel agent. "Fred," you'd say, "I need to go to New York on the 12th. Book me the best ticket you can." Then you'd hang up and carry on, content in the knowledge that Fred would do just that.

Not anymore. Oh, no. The whole notion of "best ticket" has been blown out of the skies.

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Ask 12 passengers on any random flight today how much they paid for their tickets, and you're likely to get 12 different answers.

Why? Well, Fred the friendly travel agent has been joined by a host of not-so-friendly competitors: the name-your-price site Priceline.com, online travel agencies such as Travelocity.com and Expedia.com, the airlines' own Web sites, discount online sites and traditional offline bucket shop discounters. And the plot will thicken this fall when two new players enter the fray -- the absurdly christened, airline-backed Orbitz.com (I'm glad the Justice Department is looking into possible monopolistic illegalities associated with this site, but shouldn't it also investigate whoever came up with that name?) and, launching in September, the lowest-fare-available Hotwire.

With so many sellers to choose from, what's the poor traveler to do?

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Or to put it more plainly: Who has the cheapest tickets?

There is no easy answer to this question, dear traveler. The best we can do is take a close look at the different players to see how they work and whom they work for. Let's begin this week with Priceline.

Priceline launched on April 6, 1998, with a groundbreaking idea, and an equally groundbreaking technological innovation designed to take advantage of two different factors in the airfare equation: consumer flexibility and unoccupied seats.

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As Priceline spokesman Brian Ek explains it, "The airlines fly with up to 700,000 empty seats a day. Naturally they would love to sell those seats if they could without affecting their retail fare structure. What Priceline did was to come up with a system that allowed the airlines to have their cake and eat it too."

How?

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Airline revenue managers -- whose work habits must make stockbrokers look like beach bums -- are constantly juggling fares on hundreds of routes, balancing revenues, capacity and price to make as much money for the airline as possible. If a route is undersold, the manager knocks down the fare. If a route is filling up immediately, the manager inflates the fare. These managers are ultimately responsible for the 12 different fares your neighbors paid on your last flight.

In 1997 Priceline hooked up with one of the industry's principal computer reservations systems, Worldspan, to develop software that would allow revenue managers to make real-time adjustments to their seat fares and restrictions in a special section -- what Ek calls a "partition" -- in the Worldspan database. Each airline had access only to its own area in this database, but Priceline had access to all the airlines' areas. "Because airlines do not see their competitors' prices, this creates a favorable environment for the consumer," Ek says.

This unique area is the crux of Priceline's name-your-fare system. To use the Priceline site, consumers log on and specify a flight date, departure point and arrival point; they then specify the fare they're willing to pay for this ticket and give their credit card number. In doing so, they agree to leave anytime between 6 a.m. and 10 p.m. on the day they have specified, and they agree to buy the ticket -- all sales final -- if Priceline finds a fare that meets their price. (They agree to a number of other conditions as well.)

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When a consumer makes a bid, Priceline takes the offer and then automatically scours its partition database to see if it can find a ticket that costs less than the customer offered. The consumer gets an answer back within one hour. If Priceline finds a ticket at the right price, it buys it immediately and e-mails the customer the good news. Take that, Fred.

The revenue that Priceline makes on each ticket is the difference between the fare price that it paid and the price the consumer offered.

That's it.

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"Priceline is really an opportunity for consumers to put a money value on their time," Ek says. "They can say, 'I don't care when I fly or who I fly on, what counts is the price. Here's what I want to pay. Now what can you do for me?' We allow travelers to leverage their flexibility to get savings they couldn't get before. So Priceline is not great for business people, for example. But it really is great for retired people, college students, families or other leisure travelers that have some flexibility and want to save money."

What's the savviest way to use the site?

"The first thing is to find the best price available on the ticket you want. Check the Web, check your newspaper's travel advertisements, check all the sources you can.

"Next, factor in how much discount you'd have to receive in order to be flexible. Clearly, this will vary according to individual circumstances.

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"Then, put that amount in as your offer and see if you get it. The bid is free."

If your first bid is unsuccessful, is there a penalty for making multiple offers?

"There's no charge to make a second or third bid -- all bids are free -- but each time, you have to change some element of your itinerary: the price, the departure place or the arrival place."

Does the system remember your original bid forever?

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"The system's memory lasts a week, so if you want to make a lower bid on exactly the same route, you have to wait a week before doing so."

But can people really expect their bid to get a match? What's the ratio of failures to successes?

"About 50 percent of reasonable offers -- that is, offers within 30 percent of the lowest price the airlines have ever sold that ticket for, which is typically the 21-day-advance price -- are accepted."

Fifty percent? That's not bad.

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"And now we have a new feature we started just a couple of weeks ago," Ek adds enthusiastically. "If you're short within a certain percentage, enough so that the system figures you're making a serious offer, Priceline will come back and say, 'If you change your price by this much, you have an X percent chance of getting your ticket, and if you change your price by this much, you have a Y percent chance of getting your ticket.' If the consumer sees this message, he has one more free chance to bid on the exact same route. But if that second bid doesn't work, he'll just get the 'Sorry, we couldn't meet your fare' message.

"In essence," Ek chuckles, "once we've got you, we don't want you to go away empty-handed."

OK, you're thinking, but there must be all kinds of restrictions on which airlines you can use. Priceline's official line is that it won't identify the airlines it works with, but when pressed, Ek says, "In the U.S. there are 30 participating airlines, all eight major full-service domestic carriers, plus 22 international carriers. Only two of the important carriers are not in our program -- Alaska and Southwest."

So, how's the system working so far?

"Well," Ek says, "we're selling 80,000 to 100,000 tickets a week -- which must make us one of the airlines' best customers.

"In the first quarter of this year, we had gross margins of over 15 percent -- better than most agent commissions, which are typically 7 or 8 percent. We have a total employee base of 400 people, all working in our Norwalk, Conn., office. And we project revenues of $1 billion for this calendar year.

"In terms of sales, since April of '98 we've sold more than 4 million tickets, and we sold 1.25 million in the first quarter of 2000 alone."

"How many of those did William Shatner sell?" I ask, referring to the eminently lampoonable series of ads starring the former "Star Trek" star.

"The TV campaign kicked off on Jan. 1. In the fourth quarter of 1999, we sold 750,000 tickets; in the first quarter of 2000, we sold 1.25 million tickets. That just shows you what Captain Kirk can do."

Hmm. But Priceline's stock dropped 8 percent or $3.38, to close at $36.81, when Hotwire announced its launch in late June. Even Captain Kirk couldn't stop that. How does Priceline view Hotwire?

"Both Hotwire and Orbitz are offering different flavors of published fares," Ek says. "Priceline's fares are private fares. In essence, Hotwire is a consolidator, and Orbitz is a consolidation of airline sites to allow e-saver fares. Priceline will allow consumers to go below both of those flavors.

"What we'll say to consumers is: Why don't you go to Hotwire, see what the lowest public price is and then take your bid to Priceline."

So is Priceline the only site offering this name-your-price system?

"No," Ek answers, with a slight strain in his voice. "There is one other system out there that we have taken to court."

And what would that be?

"Expedia's Pricematcher. We patented our system in August 1998. Pricematcher launched in September 1999, and we announced our suit in October. Take a look at their site and compare it to Priceline and you'll see why we've taken them to court."

Of course, Priceline isn't just a consumer-friendly site, it's an airline-friendly site, too. Once a week Priceline takes all the fare bids that all of its would-be customers have made and enters them into what it calls a "demand book." At the same time each week (Ek would not reveal when exactly), Priceline sends this information to all the airlines with which it has agreements.

This book becomes one more valuable source of information that revenue managers can use to adjust their fares. "They can see all of the demand, every consumer's price offer for every route, going all the way down to $1," Ek says. "They can see demand and determine going forward what the demand is and what price they want to set to capture that demand. It's a great way for the airlines to privately move inventory that was likely to go unsold through their retail sales channels."

Is there anything wrong with Priceline?

If you want to find complaints about Priceline, a good one-stop shop is the ConsumerAffairs.com Priceline-complaint site. But if you read the complaints carefully, you find that most of them resulted from careless use of the Priceline site: Consumers have to realize that when they submit a bid, they are agreeing to purchase the ticket if one is found for that price. They also have to realize that Priceline is not a regular travel agency with a dedicated staff of customer service representatives.

Here are three other important caveats, taken from the Priceline site.

"Though we always try for non-stop tickets first, there is a chance you may have to make up to at least 1 connection each way. You may elect to make more than 1 connection to improve your chances of getting tickets.

"Tickets issued through priceline.com are not eligible for benefits such as, Frequent Flyer miles and segments, or upgrades.

"Since individual flights may not offer all services, we unfortunately cannot guarantee that your special in-flight needs (meals, etc.) can be accommodated."

Added taxes are another common cause of complaint. Here is the information about taxes on the Priceline site:

Are taxes included in my price?

"Tickets issued through priceline.com are subject to the same taxes as those bought through a travel agent or directly from the airlines. U.S. government percentage based taxes, currently 7.5 percent, are included in the price you name for domestic tickets, but standard airport taxes, passenger facility charges and/or federal segment taxes are additional and will vary based on the cities you're traveling between. A standard $5 charge is added to the final cost of each ticket to cover the cost of processing your tickets.

"The total of these charges typically range from $10 to $38 per domestic ticket. For international travel, these charges may be as much as $85 per ticket (travel to the United Kingdom may run as much as $115), depending on your itinerary.

"Please note: If you're traveling within the domestic U.S., a fuel surcharge of $20 per round-trip ticket may also be applied to your final ticket price by the airlines. This additional charge is intended to offset the rising costs of jet fuel and only applies to certain routes as determined by the airlines."

Obviously, if your goal is to accumulate frequent-flier miles on a particular airline, for example, or if you have to be in a certain place at a certain time, Priceline won't work well for you. And if your plans are subject to change, or if later you discover a cheaper fare on another airline, well, you're stuck with what you've got.

This is what it comes down to for me: In the past, the airline fare game has always been a one-way communication, with the airlines saying, "This is what getting on this flight is worth. Take it or leave it."

Priceline allows consumers to say, "This is what getting on this flight is worth to me."

If you want to try the Priceline system, I highly recommend you read its frequently asked questions section.

Then, as Brian Ek asks, "if you've got the time to trade and you're willing to agree that all sales are final, what have you got to lose?"


Don George

Don George is the editor of Salon Travel.

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