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
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
"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
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
"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,
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
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