Auctions for flight upgrades: How high would you bid?

Cathay Pacific lets customers bid for flight upgrades.

(CNN)Auctions already set prices in art, property and fresh produce. So why not airline seats?

Real-time open auctions are coming to the aviation industry.
They've already been adopted by a handful of airlines for business class upgrades, but could also soon be available for all types of tickets.
These real-time auctions are online, not in a room crowded with people raising their hands -- but the exhilaration of securing a bargain is just as intense.

    A no-brainer?

    At first glance the concept sounds like a no-brainer.
    Let's say you're an airline. One of your flights is about to depart and you still have a few empty seats in business class.
    You might advertise this fact to your economy class passengers and tell them you're ready to accept offers from those willing to upgrade.
    You'll make some extra revenue from seats that otherwise will remain empty, while a few lucky clients get a significantly enhanced passenger experience.
    But is it as simple as that?

    Delicate balance

    The reality's a bit more complex, as airlines need to consider the delicate balance between pricing and brand and the long-term business implications.
    What happens to the perceived value of your product when you repeatedly give it away as a bargain?
    What if regular business class passengers stop paying full-fare because they know they've a good chance of getting a last-minute upgrade on the cheap?

    Transparency trade-off

    Usually this dilemma is solved by trading off transparency for lower prices.
    U.S. company Priceline.com's Name Your Own Price system has users submit a bid for a specific travel itinerary, which may then be accepted or rejected.
    The travel operators and exact schedules aren't disclosed until the booking's been confirmed, and once the offer is accepted you can't change or cancel it.
    Stuart Barwood, managing director of UK-based airline consultancy Travercial, points out that airlines must be very careful about how they dispose of "distressed seats" -- the term for seats at risk of remaining empty.
    He says auctions can work if the airline manages to target the right passenger segments in an elegant way, without cannibalizing the existing business.

    Big data

    It's at this point that big-data customer intelligence solutions become the airlines' best ally.
    One way they can do this is offering the option to bid for upgrades to those passengers that represent the best long-term prospects.
    It might be the small business owner who's a frequent flier, but remains reluctant to splash out on a costly business class fare.
    Or perhaps it's the professional who switches to economy class when traveling for leisure.
    By allowing these travelers to bid for upgrades at advantageous prices the airline not only gets that extra bit of revenue but also significantly improves their passengers' experience.
    This gives them a taste of their premium offerings and fosters loyalty.

    'Everybody likes an upgrade!'

    Let's say you've booked an economy class ticket.
    You can then tell the airline, a few days before your trip, how much you'd be willing to pay for an upgrade.
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    The exact conditions are set by each airline. They can set up a minimum bid price and they can offer some guidance as to the likelihood of each bid being accepted.
    The airline then examines the bids and, with some time left in advance, lets the passenger know whether they've been successful.
    Ken Harris, CEO of U.S. company Plusgrade, whose software powers upgrade auctions at Austrian Airlines, Air New Zealand and Iberia, among others, is also keen to emphasize the experiential component.
    "The bid-based model both engages and empowers the passenger to get a value-added experience at a price they are comfortable with, and maximizes the revenue potential for the carrier.
    "Everybody likes an upgrade!"
    Want some of this? Premium Economy on Air New Zealand.

    Gamification

    At Israeli start-up Bidflyer, this sense of engagement and fun is central to its proposal.
    In addition to helping airlines identify and sell distressed inventory, this technology company -- a graduate of Israeli flag-carrier El Al' Airlines' start-up incubator -- aims to extend the auction mechanism to all types of seat, while adding a gamification layer.
    Skift reports the company has already raised $1 million in funding from an unknown investor.
    Asaf Gedler, Bidflyer's founder and CEO, says it built its software with the social aspect in mind.
    It means people can connect and share their bids via Facebook, see who the other bidders are, and compete with them in real time.
    Every time someone outbids you, the system would be able to send you a notification, allowing you to counterbid immediately.
    This set-up could act as a powerful marketing tool in itself.
    Think of how Ryanair's free flights kept people talking about the airline and strengthened its credentials as a price leader.

    Auctions for all

    While passengers might love the novelty of participating in a live bidding process, it's really just an extension of what already goes on every day at airline revenue management departments.
    There, with the support of specialized software, prices are constantly updated in response to market conditions.
    Travercial's Barwood explains that the roll-out of auctions is part of the general trend of airlines using technology in order to provide their customers with an increasingly personalized experience.
    Auctions, whether to sell upgrades or unsold seats, are a powerful addition to the toolbox of customer-centric airlines.