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Sold! Airlines Begin Auctioning Upgrade Seats

There's a new trend developing among many international airlines that appears to be gaining traction.

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Upgrading a coach ticket into business or first class generally requires a traveler to redeem miles or spend a fixed amount of cash determined by the airline. Elite frequent flyers also receive upgrades for free or by using certificates bestowed on them for their loyalty.

But many international airlines are now offering an "upgrade auction," where fliers bid against each other for a seat in business or first class. It's already available on seven internationalairlines and some frequent flyers aren't too happy.

Upgrade auctions are currently available on Etihad, Air New Zealand, Virgin Atlantic, Czech Airlines, El Al, TAP Portugal and Brussels Airlines. They are powered by a platform created by the U.S.-based company Plusgrade. TAP and Air New Zealand were the first to try the program in early 2011. While no U.S. airline has yet to introduce an auction format for upgrades, it's likely only a matter of time.

It works the way you'd expect, with some minor variations between airlines. Several days before your flight is set to depart, the airline contacts you and asks if you'd like to bid for a seat in the next class of service. The airline sets either a minimum bid, or a bidding range. You put in your offer, wait a couple of days, and if yours was the winning bid, the airline notifies you to complete the transaction. If not, you're not any poorer.

There's no doubt that airlines see this as a potential revenue gold mine — after all, they don't earn money from empty seats. It's not clear at this point exactly how much additional cash is to be made from auctions versus fixed price upgrades, but the former is definitely more profitable than the latter, says Ken Harris, founder and chief executive officer of Plusgrade.

"An offer-based model will always outperform a fixed-price system," Harris told CNBC.com in an email. "With the number of empty seats taking off every day, it's too big of an opportunity for any airline to not have a robust strategy in place."

Nor is it clear how the minimum/maximum bids are set or how winners are chosen as the process is proprietary and decided by each individual airline.

"Once [the airlines] define their strategy, the Plusgrade platform algorithms power the targeting and decision engines which serve and award the upgrades," Harris explained.

Early reactions amongst frequent fliers are mixed on the new system. Some critics see it as just the latest in a string of annoying "ancillary fees" designed to extract even more revenue from fliers, like baggage and ticketing fees. As one commenter on the popular FlyerTalk forumnoted, "I guess they figure any amount over economy is better than nothing."

Others feel that auctions will erode the value of airline loyalty programs, which often give elite (or even non-elite) members first dibs on upgrade seats. For example, reaction was swift and unfavorable when Air New Zealand recently adopted an auction-based system, which replaced the fixed-price system in which its "Airpoints" frequent flyer members get upgrades.

"Now all the Airpoints features can be replaced by cash and they are taking away all the meaningful elite benefits," said FlyerTalk member Xiaotung in a forum.

Under the old system, any Airpoints member could buy an upgrade for a fixed price before a flight, provided a seat was available, and elite members had varying levels of preference depending on their tier. But under the new OneUpauction system, all AirPoints members would have to bid against each other with no guarantee of getting the upgrade. Many members complained loudly and threatened to take their business elsewhere.

Air New Zealand partially backtracked in May 2012 and decided that top-tier Gold Elite members would be exempt from the new rules and would continue to get preference for upgrades.

Harris said the auction system is more empowering and flexible for passengers than traditional upgrade systems.

"The upgrade request process really is an 'everything to gain, nothing to lose' environment," he says. "You offer what you're comfortable with and only get charged if you receive it — otherwise you keep the ticket you have. What's to lose?"

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