On December 16, Delta ran a $479 roundtrip business class fare from New York to São Paulo. It only lasted for a few hours. It was probably a mistake fare, but many people assumed it was intentional because of something very strange that happened next. American Airlines matched the $479 roundtrip business class fare.
One reader asked me about how this could happen. If this was a mistake, why would American’s systems match it? Their fare was around for only a few hours too.
First, a few basic points.
- Mistake fares are much more rare than they used to be, and usually when they happen it’s with airlines outside the U.S. and Europe.
- ATPCO which serves as a clearinghouse for fares offers tools that airlines can use (and U.S. airlines certainly do use) to help prevent mistake fares. This has been the case for a little over a decade. Some foreign carriers never learn how to properly use these tools.
- Airlines do automate fare matching, but within parameters they’ve set.
The low price combined with the speed with which the fare was pulled, by both Delta and then American, suggests that it was a mistake fare that American’s systems matched but doesn’t mean that’s the case. But it is an interesting question, how did the fare match happen in the first place, and former Spirit Airlines CEO Ben Baldanza offers an explanation in the latest Airlines Confidential podcast.
Baldanza says it may have been a mistake fare on Delta’s part, but also perfectly rational on American’s part to match it (!). And he calls out something that Barry Biffle used to say – Biffle is the CEO of Frontier Airlines now, but used to run marketing at Spirit: “those who think my fares are irrational haven’t seen my booked load factor.”
In other words low low prices on planes that are going to fly anyway, and that are empty, make a lot of sense because the money the airline will get exceeds its marginal cost. Baldanza describes the American conundrum in response to Delta’s fare, “Sometimes you see a competitor do something you think is wrong, did they really mean to do that, and if they did maybe I do need to react?”
- Some people might be searching for business class New York JFK – São Paulo
- Given the low price in the market, they’ll definitely choose to give their money to Delta
- American matches the price so they don’t lose the sale – because it’s still more than it costs to transport the passenger on a flight that’s taking off anyway and that will definitely have empty seats.
Here’s Baldanza explaining the rationale further,
No airline right now, at least no airline that I know of, is pricing or managing their capacity against what they would call fully-allocated costs. They’re saying ‘when that plane takes off and after it lands, do I have more cash in the bank than when I started the flight? So do I cover the cost of fuel that I burned and what I paid my pilots, because if the plane sits on the ground I’m still paying the airplane lease, and I’m still paying for my gates at both ends.”
…I can’t say whether Delta’s $479 was a fare they ever wanted, that could have been a mistake, but it’s also possible and also likely in this case that American’s system saw that and it was still above the minimum price they would take to cover their variable cost of having the seat full in a low demand environment.
American probably had their parameters in place to match any fare where revenue is greater than marginal cost which is “different than how they’d behave in normal times.” In a non-pandemic era, if American thought the fare was intentional instead of a mistake, they might retaliate with a low fare in a Delta market. Delta drops fares out of Dallas, American drops fares out of Atlanta. And we’ve seen these two airlines do that with Brazil business class fares before.