AIR TRANSPORT – FARE MADNESS

February 04, 2024

Air travel was built on two fundamental principles: first, to move passengers and cargo from one point of the world to another safely. This is what he has managed to do, because he strives for excellence. Plane crashes and even incidents are becoming increasingly rare. In 2023, scheduled airlines recorded only one fatal accident: Yeti Airlines whose pilots made gross mistakes on approach to Pokhara from Kathmandu. This is a performance that should be commended. The second principle is the universality of the principles that govern this activity. In other words, the same rules apply to each of the countries and those who do not follow them have their carriers banned from flying in the other countries. This is enough of a deterrent for governments to make every effort to follow the procedures laid down by the international authorities that govern the activity, I have named ICAO and IATA.

At the time of the construction of air transport and its real development, roughly between 1960 and 1980, airlines had no room for manoeuvre in pricing. The prices were agreed, admittedly between potentially competing carriers, but under the aegis of IATA, which enforced them under the threat of very strong economic sanctions. In 1960, the only two booking classes were "first" and "economy." In the mid-1970s, "business" class was added before the arrival of a "first economy" in the early 2000s, all corresponding to the expansion of aircraft. The Boeing 707 had 130 seats and it has been replaced by very large jets that can carry 400 passengers.

The fare revolution really began with the "Deregulation Act" signed by President Carter in 1979, establishing on the territory of the United States the total freedom for airlines to operate any route of their choice at the fares of their choice. This facility has gradually been extended to Europe, then to Asia, and fare flexibility has become the rule, which has allowed the arrival and growth of "low-cost" carriers. This evolution has also been made possible by the enormous IT advance that has been at the origin of distribution via GDS and "Yield Management".

But in the DNA of airline managers, safety is first and foremost, and almost all of their energy is devoted to ensuring its perfection. Moreover, with the support of their governments, the managers of carriers have not acquired a culture of competition as has been the case in other sectors of activity. However, this has come as a blow to them and the "low-cost" carriers have further destabilized their approach to customers by putting fares on the market that are impossible to compete with the structure of regular airlines. So they tried to find a solution by using what they called "Yield Management" which made it possible to display very low prices, let's say at a level comparable to that of "low costs" while limiting their access to buyers. And tariffs have multiplied under the impetus of the brains who have flocked to the pseudo trading floors, which has robbed the directors of the companies based in the countries where they operate of the ability to negotiate with their potential customers. On the one hand, an infinite number of fares have been created, none of which are decided by the direct approach of the markets, but by computer engineers who manage lines or networks and whose mission is to maximize the revenue from each flight.

As a result, tariffs have multiplied. Thus, we could see several dozen fares on the same flight in the same class of service. And the customer doesn't understand anything anymore, and even the airlines' sales managers are struggling to explain the algorithms that are the basis of pricing. And we've complicated the price offer at leisure by cutting up the service. To display lower and lower prices, while they don't pay the costs, we had to find additional revenue by selling the drop-off of luggage in the hold or in the cabin, access to wi-fi and many other small pieces of product on the ground or in the flight.

However, now that airlines, freed from GDS constraints by the generalization of NDC (New Distribution Capability), will be able to further refine their price range, in other words make it even more complex. This is called "Continuous Pricing" and "Dynamic Pricing". Aren't we losing common sense? How will customers be able to trust companies that are unable to offer stable and understandable rates?? Can we imagine restaurateurs applying the same ways?

I bet that the first company to return to a simple price range, announced several months in advance, while commissioning the distribution channel at least for the highest prices, will have a considerable competitive advantage.

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