Airlines inching closer to dynamic pricing

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Imagine if airlines could tailor fare offers based on who was making the ticket inquiry, rather than strictly on the search criteria.

Well, industry technology and revenue-management experts say those days are fast approaching. 

In fact, a few airlines have already implemented what is known as dynamic pricing on some ticket searches within their own channels, according to the revenue management software provider PROS, which works with some 80 airlines worldwide, including Southwest, Lufthansa, Emirates and Aeromexico.

"2018 will be a very phenomenal year in terms of traction," said John McBride, director of product management for PROS. "Based on our backlog of projects, there will be a handful of large carriers that move toward dynamic pricing science."

Critics of the technology warn of a growing lack of transparency if fares are priced dynamically.

Conceptually, dynamic ticket pricing is simple. An airline identifies the person making a flight inquiry, then mines its data for that person's flying history. The person could be identified if he or she is logged into an OTA or into an airline website through a frequent flyer account.

Much as Amazon does today to remember shopping histories, those sites could also set cookies at login to identify a person (or at least the device being used) for subsequent searches in which the individual is not logged in, said Phocuswright technology analyst Bob Offutt. And there are also technology companies that provide the capability to identify consumers across multiple devices without the need for login information, McBride said.

The revenue-management platform then uses an individual's flight-shopping history to generate a person-specific fare offer that differs from the offer some other shoppers might get for the same fare inquiry at the same time.

Experts say such technology is most likely to be used to offer discounts to customers with loyalty status and to generate bundled fare offerings that fit the customer's profile. But in theory the technology could also be used for different purposes, such as to induce a new customer with an especially affordable ticket or to offer a higher ticket price to someone who is likely to be undeterred by an upcharge.

Dynamic pricing platforms will also generate specialized offerings based on the profile of a fare search, even if they don't have the specific identity of the shopper, said Peter Belobaba, the airline industry program director at MIT who helped author a recent discussion paper on advances in airline industry revenue management and distribution for the Airline Tariff Publishing Co. (ATPCO), the airline-owned corporation that collects and distributes fare data.

For example, if a person were to query a one-night, midweek trip from New York to Chicago, the platform might make the assumption that the inquirer is traveling for business, then prepare fare offerings that fit the profile of a business traveler.

By employing dynamic price offerings, airlines would hope to increase conversion rates while driving incremental revenue increases, in part by showing more travelers that there is value in paying a bit extra for a more comfortable flight.

"I believe a lot of consumers are so focused on the lowest fare that they end up buying a degraded product, then complaining when they don't get a seat assignment," Belobaba said.

But according to the recent ATPCO paper, prepared by PODS Research, moving into a world of dynamic price offerings has proven technologically difficult for the airline sector, in large part due to the legacy distribution system that was put in place after deregulation in 1978.

That distribution system allows for just 26 fare classes, one for each letter of the alphabet. Airlines assign prices and restrictions to each fare class, then file those classes with ATPCO for dissemination to GDSs. At present, carriers are able to update prices in each fare class four times per day on domestic flights and hourly on international flights, said Tom Gregorson, vice president of products and solutions for ATPCO.

But in practice, Belobaba said, most airlines typically keep their set of price points for weeks at a time and mainly manage fare offerings by altering the fare classes that are up for sale at any given time. To move into a world of dynamic price offerings, the airline distribution industry will have to get away from the legacy fare-filing system or institute a hybrid solution, Gregorson said.

Under a hybrid system, airlines would still do fare filings, but then revenue-management programs would be able to offer price changes from those base fares depending on who is doing the fare search.

The key to enabling such technology is the development of a working interface that would enable the shopping engine of a GDS or OTA to communicate with an airline's own pricing engine, which would be doing the adjustment, Gregorson said. He added that ATPCO's Dynamic Pricing Working Group, which reconvenes for three days this week, has implemented a pilot project to work on protocols for such an interface.

In a purer version of dynamic pricing, however, airlines wouldn't file fares at all. Instead, a fare offer would be generated from scratch, in real time, based on who the shopper is, the nature of the inquiry and existing demand and availability for a given flight.

McBride of PROS said that 11 of the company's airline clients are already using its software to generate real-time dynamic offers within direct sales channels, including their websites. Several of those airlines are making the price offers by adjusting from their published fares, while others are generating offers from scratch. 

Though he wouldn't identify the airlines for contractual reasons, McBride said they are mainly major carriers and are based around the globe.

Rollout of dynamic pricing by those carriers has been cautious and segmented, with much of it concentrated on group travel and on routes that compete against low-cost carriers, including against Europe's Ryanair and EasyJet, neither of which files fares with ATPCO.

"Our customers have definitely seen increased conversion rates of up to 50%, and it has enabled airlines to achieve incremental revenue in the 7% to 10% range," McBride said. "Dynamic pricing clearly speaks to the opportunity for airlines to service a wider range of customers with a broader set of fares."

Gregorson said it's unclear when dynamic pricing will become a possibility through GDSs and other indirect sales channels. But he added that ATPCO's working group meeting this week could provide more clarity on that question.

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