Airline yields have weakened substantially ever since air travel has become commoditized. To counter this, airline carriers have been searching for ways to optimize prices without pre-defined pricing points or booking class restrictions. Most airlines are still using the old bucket fares system that functions according to step-function pricing or the ‘alphabet system’, and prices are determined in accordance to step changes based on factors such as, fare rules, seasonality, and demand. Airlines also rely on the pre-determined static price points that are inherent in most existing Revenue Management systems.
A major drawback of this method is that price changes to predefined levels and does not take into account dynamic changes in demand. This also leads to inefficient capacity utilization and eats into the profit margins. The current pricing is heavily dependent on the booking class method that is based on the 26 alphabets from A to Z, due to which the airlines can offer only 26 booking classes or types of fare. Thus the 26 price points are called RBD’s (revenue booking designators). Due to this limitation, fares can only be filed with certain increments causing unnecessary price jumps for the customer rather than smooth transitions.
Continuous pricing takes away these restrictions and allows airlines to offer multiple price point options. Airlines can thus make minute changes to price points as demand changes and bookings increase versus the fixed price points based on legacy technology.
Understanding dynamic pricing
The development of the New Distribution Capability (NDC) for airlines has raised interest in ‘Dynamic pricing,’ where fares offered to customers are not limited to a set of pre-determined price points. IATA’s NDC is also addressing the industry’s current distribution limitations to transform the way air products are retailed to leisure or business travelers and corporations.
The best thing about dynamic pricing is that it calculates exactly what the price should be. It takes into consideration airlines 'competitors’ prices and schedules, and the customer segment from where the request is coming from. Plus, it considers what you could make with that seat later on if you don’t sell it now.
Dynamic pricing looks at past searches and bookings to see what was offered – airlines, schedules, prices – and what the customer chose. It then balances that data in real-time to find the optimal price.
The dynamic pricing model is based on three distinct pricing approaches:
- Optimize Price – Real-time availability of ticket fares with pre-defined price points
- Adjusted Price – Price points are pre-defined with real-time price adjustment
- Continuous Price – Fully real-time (dynamic) price determination
Introducing continuous pricing & its benefits
The future is Continuous Pricing - Having price points on an infinite scale (as opposed to step-by-step prices) enables near-perfect matching of supply and demand and removes inefficiencies. In this model, prices are worked out in real-time, based on particulars of a request and guided by data science, rather than having pre-defined price points.
Continuous pricing aims to:
- Increase the number of price points available in any given market
- Increase the velocity at which these price points are updated
- Increase the frequency at which prices change from transaction to transaction
Continuous pricing allows airlines to offer more competitive prices, as the price jumps between booking classes can be reduced significantly. Instead of jumping from $69 to $99, the next higher fare could be $75 or $79. Conceptually, continuous pricing will allow air carriers to meet the customers’ ‘willingness to spend’ better and drive reasonable fares for those who can afford, while offering lower fares within a given range for price-sensitive customers. Passengers with short-term travel needs are more likely to be accommodated.
Several airlines are now exploring or they are in the pilot stage of implementing continuous pricing as a fundamental replacement to the old technology of booking classes. Mindtree supported a leading European airline group with a continuous pricing model that offers infinite steps with in-between price points. With continuous pricing, every travel partner that’s connected to the airline's direct booking channel can get access to these price points in between, thus helping the customer with a lower available price before going to the next level.
While continuous pricing sounds good, there remains a question as to how can airlines ensure that these real-time fares are being updated consistently. Continuous pricing requires Artificial Intelligence (AI) and real-time processing of information to generate prices that are optimized for the market at any given time.
So, what's the industry status of continuous pricing? Well, the industry has the required data elements, and to take this forward, leading Airline bodies have been engaging in discussions with stakeholders across the industry, like the Global Distribution Systems (GDS), Revenue Management system providers, airlines, etc. The areas that are being explored at this juncture are:
- Continuous pricing with real-time demand learning
- Applying Machine Learning (ML) in behavioral economics and AI algorithms to shape new commerce platforms
- Managing multiple customer channels such as fare information, seat availability, and flight schedules
- The efforts required to leverage systematic and scientific data collection, and analysis processes that are needed to work out the desired offers
In such a dynamic and competitive scenario, running an airline is an expensive enterprise involving high operational costs of varied nature. Given the challenges posed by the COVID-19 downturn, the market is becoming highly competitive and the market will remain supply heavy for the foreseeable future. This calls for innovation in airline strategy not only to attract more passengers but to survive in the new normal. Airlines need to dynamically work out several product bundles, promotions and offers based on a demand curve, as opposed to pre-defined fare steps. While the levels of customer segmentation must be applied, the fare management costs must be limited. Write to our aviation experts at firstname.lastname@example.org if you would like to learn more about what IT strategies can be adopted by airlines to stay ahead in the new normal.