Is Delta's AI Pricing a Wallet Woe?

Delta's New AI Revenue Management System

Delta has been exploring a new AI revenue management system in select markets to develop a pricing model that creates real-time, "personalized" prices unique to each customer. Instead of a fixed price for each fare class, regardless of who's booking, Delta aims to use AI to determine the price that you're willing to pay for that ticket. This initiative follows the airline's introduction of new fare changes that made booking flights and earning miles more complicated.

During a July 10 earnings call with investors, Delta President Glen William Hauenstein mentioned that the airline currently uses its AI revenue management system on about 3% of domestic flights. The goal is to increase this to 20% by the end of 2025. He noted that the initial results of the limited rollout showed "amazingly favorable" revenue. However, whether this favorable revenue growth translates to higher prices for passengers remains uncertain, though early signs suggest it might not be good news.

The Goal of Personalized Pricing

The underlying goal of Delta is the same as always: fill as many seats as possible at the highest price the company thinks the market will bear. AI is just going to incorporate a lot more data into the decision-making process behind that goal. At its Investor Day event in 2024, Delta emphasized the desire to charge the "right price to the right person."

The "right price" could mean a lower price, as lowering fares can sometimes increase revenue by convincing customers who otherwise wouldn't have bought the fare to make a purchase. According to an analysis of dynamic pricing, dynamically priced fares were 7.5% lower than traditional fare "buckets." For premium seats, prices averaged 15% lower. However, this doesn't account for the trend of bundling or un-bundling, where a lower base price may come with added restrictions like less legroom or no free WiFi.

How AI Pricing Differs from Traditional Methods

Historically, airlines used a bucket system where fares were divided into 26 buckets, each with a fixed price and set of rules. As technology advanced, many airlines transitioned to continuous pricing, allowing prices to fluctuate along a continuum. Dynamic pricing also emerged, using data to identify trends and patterns, creating more complex rules about which price a customer sees and when.

AI pricing takes this a step further by automating the process and using more data than previously possible. It enables airlines to process millions of pricing scenarios in milliseconds. According to a blog post by Fletcherr, the AI revenue management system Delta has partnered with, airlines currently only use about 40% of the data they have to make pricing decisions. AI helps fill this gap by analyzing vast amounts of data quickly.

Challenges for Customers

The shift to AI pricing means the old rules about how to book a flight to get a lower price are likely becoming obsolete. Whether the switch to an AI pricing system means you are paying more or less for a Delta flight is hard to say. However, it does mean the ability to predict and plan for price fluctuations is changing.

Examples from a 2024 Consumer Watchdog report highlight how granular AI decision-making can be. For instance, Target's app displayed higher prices to customers using the app in a parking lot compared to those in another location. Orbitz charged higher prices for hotel stays to customers using a Mac. Uber and Lyft allegedly charged more for the same trip if a customer's phone battery was low. These examples show how difficult it is for individuals to guess what factors are influencing the price they see.

Fletcherr claims it only uses aggregate data, not personal data. However, this can still include detailed information about customers. For example, the GenAI Large Market Model can pinpoint customers who are willing to pay more based on specific conditions, such as weather in their departure city.

The Impact on Consumers

Delta's AI-powered pricing system could mean better deals for some passengers and stealthy markups for others, with no easy way to tell which camp you're in. As airlines adopt increasingly sophisticated pricing tools, traditional money-saving tips may lose their effectiveness. Transparency remains a significant issue in an airfare market that is becoming more personalized and less predictable.

Understanding the factors that influence your personalized price is challenging without clear information from Delta. Questions remain about whether you are being charged more because of the device you're using or the location from which you're booking. Without knowing these factors, it's difficult to ensure you're getting the lowest possible price for your fare.