The Beat Letters: Airline Tickets Not Commodities

Some days, though they are few, I am actually able to recall the lessons from school. In reading the June 26 article by The Eastman Group I am brought back to the days of my science labs. One of my instructors was notorious for saying in a loud and booming voice, as if volume equated knowledge, "Always check your assumptions!"

In his article Mr. Eastman contends that the recent actions of United Airlines to require some TMCs to absorb the merchant fees for the sale of airline tickets is nothing more than the long march to the inevitable commoditization of airline tickets. In explaining his rationale he utilizes a metaphor of strawberries plucked from the field and then sold up the value chain, each time incurring further opportunities to increase the price and value. His ultimate conclusion is that as airline tickets are now commodities then this is the only sensible outcome for "if strawberry farmers don't pay the credit card charges absorbed by your local grocery store as a cost of bringing the strawberry to the buyer; why should airlines pay those charges?" [more]

With due and considered respect Mr. Eastman, in the words of my former instructor, please check your assumptions. If airline tickets were commodities, then there is validity in the conclusions ... but let us be very clear: airline tickets are not commodities. Unless the airlines significantly change their business practices, not only have they never been commodities they are not now nor in the future in danger of being commodities.

Commodities are products (or assets) which are sold in volume at prices well reflected within the marketplace (or exchange board) all for approximately the same price, and once purchased by the buyer all rights and titles are therefore transferred to that buyer. To use the example provided, if I buy a pallet of strawberries from a local farmer I am then allowed to use those strawberries in any way I so deem fit. I can eat them. I can give them to friends and family. I can sell them at a profit (or loss). Or, if the mood so fits, I can let them spoil in my driveway. No matter what I do, though, the farmer has no say in how they are used, and he certainly can't bill me extra if he doesn't approve of the way I used my strawberries.

By contrast, when buying an airline ticket I am still heavily limited in what I can and cannot do with it. I certainly cannot eat my ticket (trust me on this one). Unless the stars are aligned, Congress is in session and someone is feeling generous, I cannot give it to a friend, family, or coworker for them to use. I definitely can't change the pricing of the ticket and try to sell it to someone else, for if I try to do so it will incur a hefty debit memo as well as the possible loss of my plates. And if I decide to let my ticket sit unused because I'd rather stay home and eat fruit, then it is absolutely certain the airline will resell the same seat to another person. By contrast, a farmer that sells the same strawberries to two different people will in time become very familiar with the small room by the Sherriff's office.

If not a commodity, then what is an airline ticket? Simply put, it is a contract of carriage by an airline. In and of itself it has no value as it is non-transferable and a non-monetary instrument. To be fair, bulk tickets and consolidator tickets are more akin to commodities. That is because the airline has forgone most rights to how the product is transferred or priced priced, but these aren't the tickets in question.

This is not merely an exercise in produce and scholastic definitions as the difference is key. If the ticket was a commodity and the TMC had full ownership of the ticket, then there is decent logic that the TMC should pay the merchant fees. Since the ticket is not a commodity the converse also holds true: the TMC should not pay the merchant fees. During the course of the sale what has occurred is the that TMC brokered a transaction between two parties, the traveler and the airline. At no point did the TMC claim title or ownership of the ticket because the airline never transferred title or ownership to the TMC. To continue the agricultural example, the TMC acts as the agent that introduces the strawberry farmer to the grocery store and facilitates the sale between two parties. The agent here does not grow the strawberry nor deliver them, nor does the agent convert the strawberry into a parfait and sell it to its patrons. The agent simply ensures that buyers meet sellers, sellers meet buyers and that both parties hopefully walk away happy.

So what is an airline to do? If it really feels it must make it more difficult for potential clients to buy their products they can provide a cash discount approximately equal to 3 percent to 4 percent of the total ticket price. Like it or not most gas stations--who, ahem, do trade in commodities--price their products this way. Of course, most airlines don't have the mechanism in place to accept large scale collections of cash, but such is life in the digital age.

In summary, please remember that a commodity is a transferable asset. An airline ticket is, well, it's just a promise you'll have a seat.

~ Casto Travel president and COO Marc Casto