Hidden-city ticketing is an interesting airline ticket-pricing phenomenon. It occurs when an itinerary connecting at an intermediate city is less expensive than a ticket from the origin to the intermediate city. In such a case, passengers traveling to the intermediate city have an incentive to pretend to be traveling to the final destination, deplane at the connection point, and forgo the unused portion of the ticket. Hidden-city opportunities are not uncommon nowadays.
In this paper, we establish a mathematical model to shed some light on the cause of hidden-city opportunities and the impact of (the passengers') hidden-city ticketing practice on both the airlines' revenues and consumer welfare. To perform our study, we adapt a network revenue management model. We illustrate that the hidden-city opportunity may arise when there is a large difference in the price elasticity of demand on related itineraries, providing a plausible explanation for this phenomenon. To show the impact of the hidden-city ticketing practice on the airlines' revenues, we first argue that when passengers take advantage of such opportunities, the airlines should react, and the optimal reaction would be to eliminate any hidden-city opportunities. However, even if the airline optimally reacts, the revenue gained is still less than the optimal revenue it could have earned if passengers did not take advantage of hidden-city opportunities. Moreover, under our model, the revenue decrease could be as much as half of the optimal revenue when passengers do not use hidden-city tickets, but it cannot be more if the airline's network has a hub-and-spoke structure. We also show that when passengers take advantage of hidden-city opportunities, the prices of certain itineraries will rise, which is a disadvantage to the passengers in the long run.
Keywords: revenue management; hidden-city tickets; dynamic programming
History : Received: February 2013; revisions received: September 2014, April 2014, August 2014; accepted: September 2014. Published online in Articles in Advance July 9, 2015.
Since the deregulation of the airline industry in the 1970s, airlines have employed increasingly sophisticated pricing strategies to earn more revenue from passengers. Many interesting pricing phenomena are frequently observed. Among those is the hidden-city opportunity in which the price quoted by an airline for an itinerary from city A to city B is more expensive than the price quoted by the same airline for an itinerary from city A to city C with a connection at city B. When such a situation occurs, passengers from A to B have an incentive to pretend to be traveling from A to C, deplane at city B, and forgo the unused portion of the ticket. In this case, we call city B the "hidden city." The practice of using such ticketing strategies by passengers is called hidden-city ticketing. An example of a hidden-city opportunity is illustrated as follows, using prices from the Delta Air Lines website on February 3, 2013:A one-way flight from San Francisco (SFO) to Minneapolis-St. Paul (MSP) on February 4,2013 is quoted at a price of $715.90 by Delta Air Lines. However,...