Rafi Mohammed

Insuring Your Airline Ticket Price Will Not Rise: An Attractive Idea, But the Devil is in the Details.

Posted on January 26th, 2007 (0 Comments)

Offering insurance as a profitable add-on to your product is one of my favorite versioning pricing strategies. I’m still blown away over the 2003 study by the British Consumer Association that found extended warranties offered by the Dixon’s Group (Europe’s leading electronics retailer) and Comet (a rival electronics retailer) accounted for 47% and 80%, respectively, of their pre-tax profits. Now you can understand why sales clerks at Best Buy and Circuit City pester customers to buy an extended warranty.

As we all know, airline prices are crazy! I’ve seen prices fluctuate by as much as 50% on the same flights – all within the same day. Thus, I was intrigued to hear Farecast.com’s announcement this week that they were going to offer price insurance for airline tickets

The tantalizing press release pledged that for $9.95 (a $3 promotional fee is being offered until February 1), Farecast would guarantee a fare for 7 days. Thus, you look up a fare today, pay the fee, and Farecast will guarantee that fare for 7 days. If the fare rises in the next 7 days, and you decide to purchase, Farecast will pay you the difference between the guaranteed price and the price you paid. Tell me more!

I love playing the airfare game – I watch fares constantly and pounce when a deal comes up. I became interested in Farecast’s insurance program because I’d love to lock in what I think is the lowest possible airfare and have a week to recheck to see if airfares have dropped even lower. In my experience, $100 - $150 swings on advance purchase tickets are common. So, paying $9.95 to have this 7 day checking period seems worth it to me.

A brief background on Farecast. The Seattle based company launched their web service last summer. The value-add they offer is as follows: you input where you are traveling, the dates of travel, and Farecast will then crunch through reams of historical airline pricing data. Farecast will give you their opinion on whether prices on your route/dates will increase, remain steady, or decrease within the next 7 days. This information provides travelers data-backed confidence on whether to purchase now or wait in hopes of a lower fare. Farecast does not charge for this service; if you decide to buy, you can click to purchase directly from the airline’s web site. Farecast presumably earns a referral fee from the airlines. The service currently covers 75 airports and only makes predictions within the next 90 days.

Farecast is a neat idea: it helps consumers navigate the madness of constantly fluctuating airfares. Its innovative service has received kudos from PC World, Popular Science, Time, and BusinessWeek.

I’m less enthused about Farecast’s new insurance product, Fare Guard. First off, it's important to note that Farecast only offers this insurance on fares that it predicts will remain steady or decrease. If fares are predicted to increase, the insurance option is not offered. In my trial, since fares are expected to rise the closer it gets to President’s Day weekend – Farecast did not offer the insurance option on searches around this holiday weekend. Since insurance is only offered on fares that are predicted as being steady or decreasing, Farecast is putting its money behind its predictions – if we are wrong, we’ll pay you. So by purchasing this insurance, you are betting that Farecast’s prediction is wrong…your instinct versus a super computer that crunches through billions of airline pricing points. How lucky do you feel today?

The real issue is that Farecast only guarantees the “lowest fare of the day.” So while I prefer the 5 PM Delta non-stop to Los Angeles and the 3 PM return, if I use Farecast’s insurance, the price it guarantees is the lowest fare on the day I purchase the insurance. This “lowest fare” may well include a 3 hour stopover in Milwaukee. And if I try to collect on the insurance, the price Farecast uses to settle my claim is the lowest price for my travel dates on the day that I make a claim – Farecast’s lowest price itinerary could include a red eye flight. Thus, even if the price on my preferred Delta flights doubles, if the lowest price on the dates of travel does not change – I can’t collect. The insurance just guarantees the lowest price on the dates of travel – I don’t have any control over the flight times or number of connections.

Farecast, I love your price prediction service for consumers – it’s a real value add to consumers. But with regards to your insurance service, I’m dubious…there doesn’t seem to be much upside to betting against your super computers and the fine print of focusing on the lowest price of the day.

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