Airfare ‘options’

October 28, 2012 at 12:00a.m.

By Gregory Karp

Chicago Tribune

Fliers today can find it difficult to keep their options open while trying to get good seats and locking in a good price, especially with airfares changing often and planes more crowded.

Nobody wants to buy a $600 nonrefundable ticket, have their plans fall through and not be able to use it — or be forced to pay exorbitant fees to change flights.

That’s precisely the problem several companies aim to fix by selling, or planning to sell, “options” on airline tickets.

United Airlines offers price lock-in options, while at least three other nonairline companies are starting options services for airfares.

“It could be a value. It’s kind of like an insurance policy,” said George Hobica, president and founder of AirfareWatchdog.com, a fare-alert website.

Airfare options work similarly to a stock option. The seller of the option charges a fee to hold your flight reservation at a certain fare, but you’re not obligated to buy a ticket. If your travel plans change, you can simply let the option expire and you’ve lost only the fee, not the full cost of the plane ticket.

“If you’ve ever coordinated one of those ski trips or golf vacations with a group of friends, you know you can be the sucker who puts down the $500 for the flight and nobody goes,” said Heidi Brown, co-founder of BitBend, a fare lock-in startup in Chicago.

A fare option might work like this: You pay $9 to lock in a ticket at a set fare for three days while you get your spouse or friends to commit to a getaway — or wait for your boss to approve vacation time.

Typically, the longer you hold the fare, the more the option costs. You don’t get your fee back, regardless of whether you make the purchase or let the option expire.

For option sellers, it’s a delicate balance of pricing options low enough to entice consumers, but high enough to make money, considering they may not make the final sale.

There’s also the risk for the option sellers that a fare could go up while a consumer decides, which means, depending on their arrangement with the airline, they’d have to pay the difference in ticket prices.

Years ago, airlines would take reservations and hold a fare for free. But like checked bags and onboard meals, that freebie went away. Now, carriers and online travel agencies have instant ticketing, with 24-hour cancellation periods, which is federal law.

“It’s mainly for people with mushy plans — they don’t know if they want to go at all or exactly what day — and they want to lock in a price,” said Rick Seaney, an air travel analyst and co-founder of FareCompare.com. “I think it’s a niche business. A certain type of person might do it.”

While it might be a niche product, fare options companies argue it’s valuable because plane reservations are often nonrefundable, unlike reservations for hotels, car rentals and restaurants.

Buying an option is an alternative to buying a refundable ticket, which can cost twice as much as a nonrefundable ticket, or paying flight change fees, often $150 per ticket. (A notable exception is Southwest Airlines, which doesn’t have change fees.)

“It’s basically a discount program on refundable t ickets,” Seaney said.

And you can decide not to take the trip for any reason, which makes it different than traditional travel insurance.

Still, some industry watchers aren’t convinced there’s a mass market in options.

For example, Hobica wonders why other airlines in the hyper-competitive industry haven’t copied the idea if it is a money-maker. And the 24-hour cancellation rule helps in many situations where a fare option would be useful, Hobica said. “I’ve never used it, and I don’t think I would use it.”

Another hurdle for the smaller companies is building trust. “If you’re a whole new brand, an unknown brand, I think it’s a tougher sell,” Seaney said, adding that people might not be willing to give their credit card numbers to an unfamiliar company.

“Will it have mass adoption? It doesn’t feel like it would,” Seaney said. “But for a certain number of people, it would be somewhat useful. It just depends on your situation.”