It is no secret that the travel industry has made data-driven decisions to create and capture value for many years. Dynamic ticket pricing that takes into account day of the week, time of day, holidays, business vs. leisure customers, competition on routes, and many other factors has long been the norm as airlines fight for customers. Ultimately, the smart use of data should enable companies to build better products, offer better services, make more money, and have happier customers. Why then, is air travel often one of the most painful experiences known to consumers? There is a proliferation of data around airlines, but the sad truth is that most of the third-party use of this data thus far has centered around enabling customers to find cheaper flights, which in turn leads to smaller margins for airlines and often worse consumer experiences as they are forced to cut costs.
Fortunately, one such terrible experience led former HBS student Ethan Bernstein to develop a new way to use data in the air travel space, this time to the sole benefit of the consumer. When a flight back to Boston from the RC Ski Trip in Colorado was canceled last year, dozens of HBS students scrambled to rebook their flights, many arriving a full day later than expected or incurring huge costs. Inspired by this painful event, Ethan sought to create a better experience for consumers when their flights are canceled or significantly delayed.
Ethan founded Freebird, a mobile rebooking tool that empowers travelers to skip the line and instantly book a new ticket – on any airline at no additional cost – in the event of a flight cancellation, significant delay, or missed connection. The core of the product is the advanced machine learning algorithms that assess the risk of any individual flight being canceled or delayed based on data around weather, individual airline operations, and other historical trends. Coupled with data around the expected costs of booking a new ticket when an issue does arise, Freebird is able to dynamically price their product to reflect the risk of offering such a comprehensive, no-strings-attached solution.
Freebird creates immense value for air travelers who do not want to deal with the emotional and financial costs of dealing with a canceled flights – the minimal cost, roughly $20 per flight, is a small price to pay for the assurance of getting to where you need to be when you need to get there. Presumably, Ethan & his cofounder have also figured out the value capture piece, as they just managed to convince prominent VCs to invest $3.5M in the venture. They are likely using regression analyses to predict the cost outcome of a given flight based on the above-mentioned publicly available information and adding some margin. For example, the regression model might predict that the same flight from Denver to Boston had a 5% chance of being canceled or delayed based on historical airline operations and weather data. Coupled with an expected cost to rebook a seat that day of $400, a customer price of $30 for Freebird would net the company a healthy margin. Like insurance products, this model is dependent on revenue from non-events to cover the costs of events, so the success of the business depends on getting to sufficient scale to enable this costs smoothing and accurate risk modeling.
Obviously, this business model is only as good as the analytics powering their pricing model. Freebird must continue to refine the pricing over time with the addition of more data and machine learning techniques. Fortunately with $3.5M in capital, they have some runway to get there.