Pricing In The Airline Industry

The 1980s saw a revolution in airline pricing, spearheaded by American Airlines and its then-president Robert Crandall. Crandall is credited with many modern airline innovations, including the first frequent flyer program and contributions to route optimization and the adoption of central reservation systems. He did, however, also lay the groundwork for yield management, the set of price optimization techniques that came before revenue management. Utilizing price elasticity to maximize revenue growth and profit, revenue management applies disciplined analytics to forecast consumer behavior at the micro-market level.

Most airlines now employ revenue management specialists and systems to sell the right product to the right customer at the right price at the right distribution channel. Dynamic pricing is one of the critical elements of revenue management. Let's discuss the active pricing strategies used today and how they are developing to fit the current airline distribution market.

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Types of Aircraft Carriers

There are two primary business models in the airline industry:

·???????Ultra Low-Cost Carriers - Carriers with Very Low Costs like Indigo, Spicejet, Singapore Airlines, and Deccan Airlines, also known as ULCCs, cater to leisure and budget-conscious travelers. Maintaining the lowest fares is therefore of utmost significance. They have done away with all gratuitous extras and conveniences to achieve this. These airlines will fly out of ancillary airports in major markets to avoid paying higher airport fees. Additionally, they will fly point-to-point to save money on network planning. Finally, they avoid marketing alliances to save cash on joining expenses, revenue sharing and managing loyalty programs.

·???????Network Carriers – They provide fares that appeal to leisure carriers, but their target clientele is the less frugal business traveler. Network carriers compete on the value of their bundled offer, which includes an alliance loyalty program, seat upgrades for frequent flyers, frequent service between hubs and major cities, and complimentary services for high-value passengers like check-in, bags, snacks, and lounge access.

Dynamic And Static Pricing

Airlines have typically and historically used static pricing. Based on demand for reservations, an airline develops a limited number of price points for its fare structure, which is then made public through channels. Every price point has been created with a particular customer segment and market demand.

Airlines develop price points for various passenger segments by considering flight and purchase times, sales channels, and seat class. But this segmentation still only goes so far. Airlines cannot effectively segment passengers beyond the typical "business or leisure" scenario without understanding the competitive landscape, market conditions, fares distribution, and more complex data that can only be obtained through analytics. This is crucial for low-cost carriers requiring more sophisticated and original solutions to remain profitable. Today's revenue management strategies for airlines can deliver genuinely personalized pricing thanks to data-driven capabilities and technological advancements. We now refer to these strategies as dynamic.

Dynamic pricing is a method of setting a product's price in response to the state of the market. Based on recent data, prices are constantly changing: Data on customer booking trends, competitor pricing, weather, and well-known events can affect product demand and necessitate price adjustments to boost profits. The products with limited production capacity that cannot be increased to meet higher demand are the most advantageous for this practice. Products with limited production capacity lose their value after a certain period. Both of these traits apply to airline fares, where high fixed costs and low variable costs result in an extremely high value per flight seat. Airlines must sell the most seats at the highest price to generate the most revenue. They must comprehend the subtleties of passenger behavior and market demand. Dynamic pricing aids in achieving that.

Need For Dynamic Pricing

·???????Limitations on Fare Prices - Airlines can only offer twenty-six fares per itinerary due to legacy IT rules. An airline will offer different cabins (First Class, Business, Economy, etc.) as well as advance purchase choices (30-day, 7-day, etc.) and itinerary requirements within these fares (one-way, round-trip, connecting).

·???????Customers - In general, there are two types of airline passengers: leisure and business. The business traveler is more concerned with convenience than the leisure traveler is with costs. The business traveler is essential for the network carrier's profitability, while the leisure traveler helps defray costs. Leisure travelers are the Ultra Low-Cost Carrier as Indigo and Singapore airline's primary source of revenue.

·???????Supportive Services - Most of the ULCC's revenue and profit come from the sale of bags, aided check-in, extra legroom, etc., because their fares are fiercely competitive. In contrast, the network carrier will include amenities in their private fare because their profitability depends on business travelers.

·???????Network model - ULCCs typically fly short-haul, point-to-point routes in two groups. Because fewer travelers are making connections, there is less baggage handling and IT system overhead, which allows them to keep costs down. Network carriers will use one strategy for short-haul flights and another when a long-haul flight is involved.

·???????Sustainability - It is becoming increasingly crucial for environmentally conscious businesses and leisure travelers. Sustainability comes at the expense of more expensive or fuel-efficient aircraft. Your strategy may be influenced by being aware of your competitors' flight footprint.

·???????Payment conditions - There is a fee for all ticket modifications, cancellations, and seat reservations. A network carrier may or may not charge for the privilege depending on the fare purchased (and the associated revenue). The ULCCs typically charge a fee for that privilege.

·???????Published Fares - The fares mentioned above are, for the most part, open and transparent. Competitors are alerted to price changes made by an airline using indirect distribution, frequently within minutes. The market strategy of an airline is also made available along with that.

·???????Private Fares – Airlines offer fare discounts to Travel Agencies and Corporations in private fares. Unlike published fares, private fares are not transparent to each airline. Savvy airlines are now reducing their dependency on discounts where the seat price is not as important to the traveler (e.g., law and consultancy firms). Instead, they offer complimentary lounge access, priority boarding, and free cancellation perks.

Challenges for Dynamic Pricing

·???????The first issue is using outdated methods to address demand forecasting, one of the primary tasks in RM. To identify demand signals in real-time, IT systems must access numerous data sources and use algorithms, which calls for advanced data analytics and machine learning capabilities.

·???????The second constraint results from sticking with conventional distribution models, which prevent airlines from utilizing priceless data from outside sources. Airlines cannot provide truly personalized experiences as long as they have little control over the offer construction on indirect channels.

·???????An essential portion of the profits made by low-cost carriers comes from ancillary revenues, which bring the industry in at $55 billion annually and have been growing for the past ten years. However, base flight and ancillary products are managed through separate IT systems and processes (revenue management and merchandising systems).

·???????Therefore, additional baggage, seat preference, meals, Internet access, and many other services are priced statically and not considered when implementing revenue management. Customers pay the same price for the same item, and contextual customer information is not deemed during the shopping process. In essence, personalization is absent.

Other Pricing Strategies

Depending on the market and business model, a different pricing strategy may be employed. Leading ULCCs and Network Carriers know that using sophisticated pricing software to make logical, scientific pricing decisions is the surest path to maximizing yield, revenue, and profitability. The following are the various pricing techniques that airlines may employ to meet their ultimate profit target:

·???????Lowest Fare Approach - Singapore Airlines is renowned for its affordable fares. They have made a name for themselves as the least expensive provider in the markets where they compete. Their plan calls for the lowest operational costs and an unwavering commitment to keeping operating prices as low as possible. With the addition of the upcharges for check-in, bags, beverages, and other services, the business model is based on increasing the load factor of the flight, which produces a good flight.

·???????Competitive pricing strategy – It is a pricing technique that involves setting the fares in relation to those of competitors. It is frequently used in markets where no single carrier is dominant. When a carrier is competing with a ULCC, they may decide to raise their prices by a certain percentage rather than matching those of another network carrier.

·???????Penetration Pricing Strategy - By offering an introductory low fare to entice customers to fly their airline, penetration pricing is a pricing strategy used by new entrants to a market to gain a sizable market share quickly.

·???????Value-Based Pricing - It is a method of determining prices primarily based on the perceived value of a good or service by a customer, also referred to as the customer's willingness to pay. It is possible to determine this using shopping data.

·???????Branded Fares: Both categories of carriers use this tactic effectively on both channels. These discounted fare packages include tickets and extras like priority boarding, a premium seat, and the ability to change or cancel a ticket at no extra cost.

Conclusion

In 2021, airlines will continue to rely heavily on traditional fare distribution, resulting in inaccurate projections, ignoring ancillaries, and attempting to modernize ten-year-old technology. The first airline to adopt a new distribution model was Lufthansa. The business started experimenting with dynamic offers on direct and indirect channels in 2020. Amadeus and Travel port collaborated with other significant airlines, including Air France-KLM and Singapore Airlines, to hasten adoption. These examples demonstrate that the idea in the commercial aviation industry will no longer be a theory or a proposition but rather an option, if not a standard.

Pricing must be done primarily in light of competition. Different pricing strategies, like cost-based pricing, are desirable and might be advantageous for the entire airline industry. Airline pricing must be more straightforward to respond to customer annoyance with a fare structure perceived as unfair and irrational. Airlines must stop using specific sensitivity-based pricing strategies where the drawbacks resulting from unfavorable customer reactions outweigh the benefits realized.

Each airline needs to take responsibility for the overall well-being of the aviation industry. Airlines must come to terms with the fact that short-term advantages gained through price cuts almost immediately are matched, and the new, lower price level will hurt the airline itself and all other airlines in the market because competitive considerations are of primary importance in the pricing formulation process. Individual airlines must abandon short-term price cuts as the industry begins to show concern, as doing so creates unhealthy competition and disadvantages for all airlines operating in the market.