Using Data Envelopment Analysis to Measure Efficiency

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and his investment company.

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SECTION THREE

Steven - I hope you’re well. As you have requested, I’ve written up this briefing note to concisely explain to you the “hidden-city ticketing” phenomenon, the economic reason for it’s existence, and why hidden city ticketing is damaging to us as a company. I’ve gone further to include a snapshot of one of these “hidden city tickets”. The information provided here will allow you to work in agreement alongside the legal-team in convincing our CEO that this lawsuit is crucial and consequential to our company. By the end of this note, if you still have any questions or additional clarifications, please feel free to come see me and I’ll happily help.

A definition for you; “Hidden-city ticketing occurs when a passenger books a flight to one city but purposely deplanes at an intermediate city” (Oxford Dictionaries). In other words, let’s say a passenger wants to travel from Miami to Los Angeles. Instead of simply booking a direct flight from Miami to Los Angeles, It may be cheaper for them to book an indirect flight to another destination, such as Miami to San Francisco, with a stopover at Los Angeles. This passenger could then disembark at the connecting airport (Los Angeles) and completely discard their remaining journey (Los Angeles to San Francisco).

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You may be wondering the economic reasons for the existence of these types of tickets. Essentially, it starts with the “hub-and-spoke” networks developed by both United Airlines, and our competitors. Hub-and-spoke networks “denote a system of air transportation in which local airports offer flights to a central airport where international or long-distance flights are available” (GAO, 2001). The development of these networks has substantially lowered our costs - it allows us to pack the same number of travellers into significantly fewer flights by ensuring seats on any given plane are filled. This is immensely important to us due to our high fixed costs that are involved when operating a flight. The cost of the plane, the fuel, and the crew are fixed, regardless of how many passengers are on the flight.

With an understanding and an awareness of hub and spoke networks, I can now explain (with the help of example destinations) how this may lead to hidden-city ticketing: Imagine a customer wants to book a flight from Miami to Los Angeles. United Airlines dominates the market for air travel both at the Miami and Los Angeles airports - they are United Airlines hubs, we are the only airline who can fly direct between these two destinations. As a result, we have significant pricing power for this journey due to a lack of competition and we can charge higher prices. On the other hand, if a customer wishes to fly from Miami to San Francisco (which is not an United Airlines hub), we are both unable to provide a direct flight, and our pricing power is restricted as other airlines operate flights between these two destinations.

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To travel from Miami to San Francisco, United Airlines can only offer an indirect flight, with the first-leg of the journey being from Miami to Los Angeles, and the second-leg from Los Angeles to San Francisco. Meanwhile, other airlines can offer a direct flight between Miami and San Francisco. Most travellers determine which airline to fly with exclusively based on their price and convenience - we are in a market which has a high demand elasticity and ferocious pricing competition. If we can only offer an indirect flight whilst other airlines can offer direct, we must undercut their ticket price by a considerable margin in order to remain competitive. This is what fundamentally gives rise to the existence of hidden-city ticketing. For someone wishing to travel from Miami to Los Angeles, rather than purchasing a direct flight, it would be cheaper to to purchase an indirect flight from Miami to San Francisco with a stopover at Los Angeles, and then simply walk out of the airport at Los Angeles (the “hidden-city”).

As you can imagine, this is tremendously damaging to our company, and to our already- slim profit margins. Not only do we lose the revenue gained if the passenger simply booked a direct flight between the two United Airlines hubs, we would also lose the value of having a passenger on the second-leg of the trip as they don’t turn up and leave an empty seat. For now, this phenomenon of “hidden-city” ticketing is not widespread, but with websites such as the one in question (www.skiplagged.com) facilitating hidden-city ticketing, this has the potential to become a serious problem for us. Further, if it does become ubiquitous, it would eventually be damaging to our customers too. We would have no other option but to raise the prices for existing airfares, to offset any losses from people taking advantage of this “hidden-city” loophole.

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I will attach an image of one of these tickets for your reference, taken directly from skiplagged.com (Skiplagged, 2015):

In any of the journeys included in this snapshot, the stated “final destination” (Chicago) is not actually the final destination of the flight, and is in actual fact a stopover.

In conclusion, I hope you now have a better understanding of the “hidden-city” ticketing phenomenon, and why it is damaging to us. Hopefully this information will be valuable in convincing the CEO to take action and proceed with the lawsuit against skiplagged.com. As mentioned earlier, if you have any questions or points on which you would like clarification, please do not hesitate to come and see me. All the best.

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Bibliography:

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BusinessDictionary. (2016). What is profit maximization? definition and meaning - BusinessDictionary.com. [ONLINE] Available at: http://www.businessdictionary.com/ definition/profit-maximization.html. [Accessed 07 November 2016].

Emrouznejad, A. (2015). Data Envelopment Analysis. [ONLINE] Available at: http:// deazone.com/en/resources/tutorial. [Accessed 30 October 2016].

Flanagan, A. (2016). ’Leaked’ Man United contract reveals what bonuses the players get for winning the title, Champions League and FA Cup - Mirror Online. [ONLINE] Available at: http://www.mirror.co.uk/sport/football/news/leaked-man-united-contract- reveals-7327015. [Accessed 07 November 2016].

GAO. (2001). AVIATION