Unravelling (some of) the complexities of airline pricing

Most travel agents take for granted that GDSs are accurate 100% of the time and rely on that accuracy in the issuance …

Most travel agents take for granted that GDSs are accurate 100% of the time and rely on that accuracy in the issuance of airline tickets.

However, do the airlines agree with that?

The discrepancy is actually measured through the process of debit memos. This article will shed light on how the process is supposed to work, how it actually works and what is done to ensure compliance.

For definition – an Agency Debit Memo (ADM) is a charge back mechanism when the airline doesn’t agree with the way a travel agent has issued a ticket or other charge on behalf of that airline. For the legalese – check out how American Airlines (the US’s largest airline) handles them.

Last year the US airlines issued through travel agencies (processed and recorded by ARC Corp, the formal clearing bank for neutral industry tickets), more than 143 million transactions, representing about 40% of all US issued airline tickets (author’s estimates and backed by industry reported data)*. Of these, (total agency transactions) just under half a million ADMs were issued – a respectable 0.331%.

In terms of revenue, airline tickets totalled about $70 billion with additional transactions fees and other tax fees making up a further $15.6 billion with refunds comprising $1.2 billion. ADMs comprised $169 million of this with an average value of $305 per ADM.

This would indicate that with an average fare of approx. $350 in 2013 – that a debit memo could add a significant amount to an agency’s cost per transaction.

For a full report of the ARC Corp 2013 amounts – please register with ARC for these free statistics. ARC released a statement on these numbers and this can be seen here.

The process for resolution is swift and the onus sits on the agency to prove innocence in the matter. Typically an agency has only 30 days to combat the ADM and then the money is automatically deducted from the Agency’s bank account.

The statistics were obtained through ARC’s 2007 released product Memo Manger, where the data revealed that nearly two thirds of the memos airlines sent out in 2013 fell into one of three categories: credit card chargebacks; commissions; and fares and taxes.

With the top two comprising more than 54% of the total. Somewhat obvious but shows that the complexity of the airline product can be mind boggling.

Of the outstanding amount more than $115 million were settled within the same year. Typically through carrier/agency resolution (see below) or through the lapse of an agency not fighting the charge. The majority of the balance will be resolved within the next few months. This leaves about 10% of the remainder being a hard core battle between the agency and the airline.

In my opinion based on observation and a little insider knowledge, the airlines will typically write off these amounts after the second year as many of these amounts relate to agencies who are no longer in business. If you are an agency don’t think the airlines will let you off lightly. Even for agencies that go out of business – the liability remains and in many cases its personal liability for the small business owner.

So what causes these inaccuracies that generate the debit memos? According to tradition (GDS to agency aka “subscriber agreements” and airline to GDS aka “PCA” contracts) when a GDS prices a ticket – that is guaranteed.

However, over the years the exception list has grown significantly. Auto-pricing a PNR (passenger name record) is pretty standard but not all PNRs can be auto-priced.

Further, an agency can override the GDS auto-pricing through either a full on manual process (where he takes the responsibility) or by forcing an override using another fare type.

Also airlines – far less these days – can price a PNR for the agent. Thus, if the airline and the GDS disagree – the agent is frequently the one who has the onus to report the discrepancy and fix the problem. Some airlines don’t even bother with guaranteeing the prices of the GDS, agents need to be vigilant in understanding which airlines do or don’t. Caveat Emptor are the watch words here.

Some airlines will issue ADMs for somewhat trivial amounts. For many years in the United Airlines office in Zurich there hung a picture of a debit memo and the payment for one cent provided by the agent. All good clean fun.

Other airlines have been known to use the ADM system for nonsensical reasons on the principle of being able to collect the money first and ask questions later. Fortunately ARC’s Memo Manager has largely eliminated such practices but compliance with the process – which is voluntary still – took many years to become effective.

It must be remembered that ADMs cost a large amount of money to monitor, manage and collect. So, most airlines tread lightly in this area. Typically an airline can issue an ADM not just for the variance between the amount that should have been charged to what was actually charged but the amount of the highest value ticket price in the market and in many cases a penalty for the transgression.

There is a flaw in the core design of airline ticket pricing which contributes significantly to the exposure of different ticket prices using the same rules and fares.

The publication of the airfare price is handled by ATPCo (Airline Tariff Publishing Company, the airline owned fare and rule clearing house based in Washington DC). It does not mandate the actual calculation, that is a variable available to the individual pricer (automated or manual).

The pricing engines of the GDSs are based on different combination and logic elements while all the time in the main using the same data. Finally the audit systems such as offered by Accelya Kale and the interpretation of rules offered all conspire to create potential pricing differences.

In a recent confidential study undertaken by the author – a discrepancy of more than 90% at the pure amount was noted on 5000 fares offered.

The standardization of the process and the move towards eliminating the possibility of debit memos should seem to be a goal for ARC and its airline owners. However with the growth of ancillaries, particularly in relative value to that of the basic tickets, will ensure that ADMs will be around for many years.

The resistance to a standard MSRP (Manufacturer’s Suggested Retail Price) and standardization of the rules means confusion reigns over true, accurate and standardized pricing.

And there you have it. Airline pricing is very complicated and I have probably not done it justice in this short piece. But at least you can now get a bit of a sense of why it’s difficult and complex.

* During the Travelport vs American Airlines lawsuit of 2012, 40% of all US airlines tickets were issued through GDSs by travel agencies. The author estimates that the current percentage of agency issued tickets as a percentage of the total is now in the region of 35%.

NB: Knot image via Shutterstock.