Italy is flying in wrong direction with price cap plans Opinion by FT

The Financial Times has published an opinion piece that says Italian airlines’ failure to understand their disgruntled customers is making the policy a vote-winner. Caliber.Az reprints the article.

Just mention the words Italy and price cap and the blood pressure at Ryanair’s head office shoots off the scale. That happened last week when I tried to talk to the airline’s chief executive Eddie Wilson about Italy’s recent proposal to cap fares from mainland Italy to Sicily and Sardinia at 200 per cent above the annual average, and to limit the use of “profiling algorithms” to set prices.

“They think we have algorithms that mean I can tell which people have iPhones and we charge them more. Rubbish,” he said, in one of his calmer moments.

Airfares “are built on demand. If flights aren’t moving we lower fares.” The implication was that, obviously, the reverse must be true if demand exceeds supply. Airfares have risen substantially in the post-Covid era, up 30 per cent this summer in Europe versus last year. Airlines complain of a scarcity of aircraft and labour, as well as higher fuel costs, even as they report bumper profits thanks to increased fares.

But the industry’s net margins this year are still only forecast to hit 1.2 per cent. So if Italy’s prime minister Giorgia Meloni thinks a cap on prices is the way to lower the fares of trips to the summer hotspots of Sicily and Sardinia, she is mistaken — and not just because such a move could contravene EU law. 

Any price cap will almost certainly lead to higher fares across the year. Why would any airline offer rock-bottom prices out of season — when locals may be the main passengers — if they only drag down the average and, by extension, their ability to price according to demand in peak season? Yes, they want to fill the aircraft in the winter months.

But the frequency of flights can be scaled back and extra aircraft used on other routes to drive those prices higher. Italy’s move to limit profiling algorithms also presumes that the aviation industry is more technologically sophisticated than it really is.

“Most airlines run on systems that were designed in the stone age of technology,” says Anand Krishnan, chief executive of IBS Software, a leading supplier to airlines. Essentially, carriers divide a flight into “buckets” of seats with different fares, based on expected demand and what the competition is doing.

When one bucket sells out, customers are directed to the next one.  But as many airlines sell a large proportion of their tickets through global distribution systems, they usually don’t know who a passenger is, what their spending power might be, and what might push them to buy.

As a result, they are often left with empty seats. “Your biggest opportunity to maximise revenue is to sell all the seats and then sell things beyond the seat,” says Krishnan. “The right call might have been to make that sale at $150 instead of $200.”

Very few airlines are remotely close to having the intelligence required to personalise pricing for those not in their loyalty programmes.  Nor is artificial intelligence the answer. “Even if [the airlines] could dynamically create a price point for you, their revenue management, accounting and invoicing systems cannot cope with anything close to the complexity required,” Krishnan adds.  Instead, airlines have resorted to unbundling the fare into its constituent parts — the seats, luggage, boarding priority, etc — asking passengers to pay for what suits their needs.

They are also trying to sell a host of extra services, from cars to insurance to holidays, forcing travellers to wade through page after page of marketing. “It’s a dilemma because you have to maximise revenues in a competitive arena,” says Andrea Giuricin, transport economist. “But it means you are making it more difficult for the customer.” 

That strategy has driven suspicion that airlines are charging more and delivering less. According to a recent survey by the UK consumer right group, Which?, bankers are more trusted than airlines. In the US, a Gallup poll last year found that for the first time in a decade, more passengers had a negative view of the industry than positive. 

Meloni’s government may be cynically tapping into this general discontent to win a few headlines with measures that ministers know are impossible to implement. But the initiative would not feel like a vote winner if airlines understood their passengers in the first place — and were able to deliver a better service.