Simplified Airfare Pricing Model

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The Airline Tariff Publishing Company, the company based out by Washington Dulles airport that collects and distributes airfares for the airline industry, announced at its annual Elevate Conference that it has “enhanced its model” for dynamic pricing

, allowing airlines to move beyond existing pre-filed fares with more personalized prices. Since airline deregulation no industry has done more to extract as much revenue out of each customer as possible for their ticket. When you go to the grocery store, a single product has a published price. There may be coupons available, and there are different competing brands, but the cost is known to whomever wishes to purchase the item.

The same airline seat on a given flight has many different prices, and those prices are changing all the time.

In 1977, just before deregulation but while the Civil Aeronautics Board was allowing experiments with price competition, American Airlines introduced the Super Saver fare. Initially on New York – California routes, it was expanded across their domestic route network in 1978 and the airline introduced ‘Ultimate Super Saver’ in 1985, discounting up to 70% to compete against new lower cost carriers that launched after deregulation. The American Airlines insight was that they could beat low cost carriers at their own game through revenue management. They could be a high fare business airline and a low fare airline by offering different prices to different customers. Airlines used restrictions such as advance purchase requirements, change penalties, and Saturday night stay requirements to make cheap fares available to price sensitive travelers and still retain high margins on business customers who booked the most convenient flights at the last minute.


Low cost carriers undercut this strategy over the last dozen or so years, as one way fares often took on half the price of a roundtrip and the least expensive fares were available even close to departure. So airlines developed ‘basic economy’ fares to segment business from leisure travelers.
However there’s still potential to squeeze customers for incremental revenue. Put another way, any time you buy an airline ticket you value the ticket more than the money it costs. Often times you even get a deal. A deal is when you got a cheap fare that you’d have been willing to pay more for. As advanced the techniques are airlines use to get each customer to pay the most money possible, there’s frequently money left on the table.

The most valuable personal information is why a customer clicks or transacts with a brand and that information is hidden inside of the best marketing databases. You don’t have an established set of price levels. Instead, when a traveler shops, you determine the price by selecting it from a continuous range of possible values.

At hotel chains the real insights come from behavioral models: Are you someone that will usually extend a business trip through the weekend if the hotel rate drops to $150? What if breakfast is included? Will you buy up to a higher room category – a better view – for an extra $20 but not an extra $50? Is your spouse the real decision-maker?

ATPCO is working to help airlines use these sorts of models, and they say that with personalized pricing conversion of customers searching for airfare can go up 50%, driving a 10% increase in revenue. Today they’re working on projects like this with at least 88 different organizations.

Customer Relationship Management (CRM) focuses on tracking customer behavior in order to understand and market to customer long-term value. Rather than managing only very broad segmentations, the application of CRM to Revenue Management results in the ability to price at a more granular level: the level of “who is asking.”

Personalization was historically achieved by point-of-sale control and some customized benefits for frequent flyers as a group; however, airlines are contemplating and implementing even further personalization of pricing and product based on customer value and other characteristics. This can be achieved today by leveraging data from CRM systems to drive dynamic pricing by customizing the components of a bundle, as well as the price of a bundle, in a manner similar to how dynamic availability using fare levels operates today.

Research has also suggested that a revenue management methodology that determines availability based on the additional criteria of customer long-term value can result in better customer loyalty and increased revenue. Sometimes an airline knows you’ll pay more, why offer you the cheap fare? Other times it makes sense to offer you a lower fare because you’re a valuable customer and they don’t want you to jump to a competitor – and possibly not come back.

This future is one where a request for an airfare doesn’t search available prices and inventory buckets, but instead creates a request to the airline’s marketing database “to determine which fares, services, and brands apply to the person requesting the airline products.”

ATPCO’s CEO says that “[t]he promise of dynamic pricing is to increase yield for airlines through targeted offers that meet consumer expectations.” They’re working within exiting constrained systems to deliver on this. Alitalia expresses great enthusiasm. According to the bankrupt Italian flag carrier’s Head of Distribution Strategy,

The journey to personalization in the airline industry has begun, but this is a marathon, not a sprint, and we are just at the starting line. Airlines want more flexibility, but we are somewhat constrained with current systems. To see ATPCO leverage its resources to create a model and framework that gives airlines more choice means each airline can move at the pace it needs. With the help of ATPCO, the next 12 months in pricing should be an exciting one to watch and but be a part of.

While Facebook, Google (and its YouTube subsidiary) executives get called on the carpet for how they use data, and as government abuses data with little protection or constraint, the development of further data-driven personalization proceeds apace in every facet of the economy.

 

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