Sunday, September 14, 2008

Price of everything, value of nothing

I could be in the air right now. Southwest had a seat on the flight at 11:00, several in fact. I was there at 10:45, physically ready to make a miracle 20-minute connection despite a concourse change. Those seats were undoubtedly empty when the plane departed.

Instead, I'm sitting in BWI waiting for the 12:25 flight after a bad Starbucks mocha latté. Why am I still here?

The exchange at the counter went like this.

"Could I get on this flight?"

"Yes, I think so. Oh, you'd need an upgrade at some cost."

"How much?"

"Let's see. Seventy-six dollars."

"You know that makes no sense."

"Yes it does. You booked one-week advance purchase."

What I thought was that she had been working in the industry too long if she thought it made sense. The woman behind me, flying on a free ticket, was pleased to get a free upgrade, too. She was also amazed that I couldn't get on the physical plane.

Southwest shares a pricing model with most other airlines. Each seat is assigned a particular price, and when they're gone, they're gone. In essence, the Wanna Get Away seats are on priced as if they're on a different airplane. To get onto the ­Anytime airplane, I would have had to pony up another $76, and this particular 1:25 wasn't worth that much to me.

What's wrong with that? Southwest set the rules and their price for an exception, and I wasn't willing to buy one. The market worked!

As if. Those empty seats were wasting assets, and now they're wasted. There was value to be provided to me, and there was demand for it from me. Instead, Southwest derived zero marginal revenue.

Here's an idea. I'm offering it free, since I have no way to derive benefit from it.

Some canny, economically literate airline will enhance their bottom line with a cross promotion with eBay. They can set it up however they like - auctioning the seats as the clock winds down would best match eBay's business model. But shrinking the upgrade price automatically as time ticks down would be easier to implement. Say, 15 minutes before flight time, when absent tickets become stand-by tickets by rule, $20. Ten minutes, $15. Five minutes, $10.

For $20, I would have upgraded. I'd be better off. Southwest would be better off. The market missed this opportunity.

Sure, there are start-up costs. The eBay cross-promotion should cover those and provide a tidy profit, too. But business, which free market true believers generally account as rational, has to be smarter.

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