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Australia’s largest airline, Qantas, recently put a deal on its website offering heavily discounted first-class tickets for return flights between Australia and the US. Customers alert and lucky enough to capitalise found themselves paying 85% less than the usual first-class fare, which is upwards of A$20,000 (£10,300).
The problem? The offer was a mistake due to a coding error. The airline soon realised this and took it down. It then decided to switch the roughly 300 customers who had made the purchase to business class at no additional cost (the discounted fare was a fraction of the usual business class prices as well).
Did Qantas make the right decision? It’s important to keep in mind the terms and conditions of the contract would have allowed the airline to cancel these tickets with full impunity). But I think the key question from the perspective of airline decision-makers who want repeat business is: what is a good decision in terms of recompense for their customers?
Consider the comparison with a similar mistake by Cathay Pacific in 2018. When it accidentally sold US$16,000 (£12,100) business-class seats for just US$675, the airline honoured the sales. Singapore Airlines had previously also honoured tickets sold for less than half the correct price.
In contrast, British Airways refused to honour tickets from Dubai to Tel Aviv sold for £1 instead of £200 in 2018 – after United Airlines had cancelled transatlantic tickets sold for less than £50.
These decisions range from being uncompromising in their commitment to a sale, to reneging with no compensation.
In contrast, Qantas seems to have adopted a middle, more pragmatic way. On the one hand, it did renege on the original mistaken offer – customers who bought the tickets will not be flying first class. On the other, these passengers will still fly business class for a fraction of the usual price.
This middle way seems to recognise that an honest mistake was made, with neither party trying to take undue advantage.
As a result, Qantas is better off not having to accommodate 300 passengers in first class. These “premier passengers” are always costly for airlines – business and premium economy tickets are both more profitable.
The lucky passengers are better off too – had Qantas applied the strict terms of the sale contract and cancelled the ticket (with a full refund), they would have lost all advantages of the purchase.
Finally, first-class passengers who have paid the full price are also better off, in as much as the value of their ticket has not been discounted for other first-class travellers. Business-class passengers would be hard pressed to make the same argument, as these tickets are sometimes cheaper than economy fares. Indeed, it is not unusual for a passenger flying economy to be upgraded to business class – but the same cannot be said about first class.
Protecting its reputation
Viewed in this way, Qantas’s decision seems perfectly reasonable and should leave everyone happier – which can translate into repeat business. Moreover, the reasonableness of the decision protects its reputation – and that matters a lot, because repeat customers are very important for airlines (or any business).
Barring a few select routes, air passengers almost always have options which can often include low-cost carriers. So, a very common way airlines try to retain their customers is to use loyalty programmes. The idea is to make it more attractive for passengers to choose that airline because they are rewarded for it – although there has been a recent decline in interest in such schemes from customers.
In theory, the more rewards accrued, the more likely it is that passengers will choose that airline again, because it becomes more expensive for them to go with an alternative. Airline miles, credit card loyalty points and VIP status with the airline can all be redeemed for preferential treatment, including priority boarding, access to lounges and other “goodies”.
Typically, such rewards have only been available for non-budget airlines – but recently, low-cost carrier Wizz Air took a leaf out of this playbook by offering its own version via a discount club. These discounts are tiered based on frequency of travel – the programme seeks to foster loyalty by making it more costly to fly with a different airline.
An economist might say that airlines are trying to get passengers to make “asset-specific investments” that make it costly for them to transact elsewhere.
Interestingly, airlines are facing the challenge of engendering loyalty and repeat business at a time when overbooking remains common. This practice, whereby airlines mitigate against no-show passengers by selling up to 50% more tickets than they have seats, most certainly has the opposite effect and puts customers off. Data about the worst-offending airlines is freely available.
The public has also been snubbing low-cost airlines that are notorious for poor customer service. Indeed, the future of some of these airlines is in the balance.
Many years ago, legal scholars such as Stewart Macaulay and economists including Paul Rubin highlighted the importance of relationships for businesses. Understandably, airlines have been trying to buy these relationships by providing rewards that make it more “expensive” for consumers to take their business elsewhere. But Qantas’s decision reminds us there is a different “middle” way, using a combination of fair play and commercial logic.
Akhil Bhardwaj does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.
