Airlines have had it tough in recent months having to cut fares to keep up with the competition. Keith Mwanalushi looks at how new technologies will optimise fare pricing.

Airline passengers were the clear winners in the fare war that hit the airline industry in 2017, particularly in Europe and the US. Operators cut fares drastically over the past summer because of the pricing skirmish – something much derided by airlines and their investors but happily embraced by the travelling public.

A fare pricing war is characterised by the repeated cutting of prices below those of competitors.  Usually, one competitor will lower its price, then others will lower their prices to match. Fare wars have generally kept ticket prices low and negatively affected airline stock prices.

Airlines are keen to recoup some of this lost revenue and they are looking to new technologies in order to achieve this.

Allison O’Neill, vice president passenger service at SITA reckons being able to accurately monitor and determine the prices in a marketplace can reduce the risk of fare wars and a race to the bottom for pricing. “Not having the right or enough information can lead to false assumptions regarding competitor activity leading airlines [to believe] that their competitors are pricing lower than they really are,” she warns.

O’Neil states that a pricing tool giving the complete picture of what’s happening in the marketplace prevents pricing too low and enables the right prices at the right time.  She explains that ‘Airfare Insight’, a solution developed by SITA, has a unique ‘all in fare’ functionality that provides airlines with a true view of the market pricing from a passenger’s point of view, with a comprehensive fare that includes the base price, taxes, fees and charges for each market.

Airlines are becoming far more sophisticated in how they offer ancillary products and bundles that include not just the ticket price, but other airline optional services and third-party products. By properly bundling and pricing ancillaries based on the personal preferences of the travel customer, airlines have the potential to generate substantial revenue.

For example, Surain Adyanthaya, senior vice president, product management at PROS, Inc says there could be a fare war with ticket prices, but airlines can make that up with ancillary revenue sources.

“The concept of revenue management is no longer just maximising revenue from tickets; it’s about maximising revenue from the total offer that’s being created by the airlines. We call it offer optimisation, and we see others have picked up on the terminology we created years ago.”

Adyanthaya refers to what he hears the airlines calling the ‘second wallet’ concept. He says it plays to the concept that airlines can augment revenue with a new way to attract customers.

Adyanthaya explains: “Let’s say that an airfare is low – say $110 – but in the customer’s mind they have a budget of $400. Psychologically they separate the two. That price differential may mean they’ll use their ‘second wallet’ to purchase extra legroom, a meal or even lounge access. It’s another revenue option for airlines to serve their customers, based on their ‘second wallet’ thresholds.”

Segmentation is another important tool that helps airlines serve their customers by understanding what they’re looking for when they travel and providing the precise offer that best meets their expectations.

“About one-third of business travel is now millennials,” Adyanthaya points out. He says this has created a dramatic shift in how airlines service their customers and how they do business.

“This age group, which grew up with digital commerce, brings radically different buying expectations. They want the companies that sell them products to know them, so personalisation, transparency and frictionless buying is a standard baseline requirement.”

Another factor is that airlines are now beginning to deal with rising fuel prices, which have remained low for some time now. Carriers are evaluating another dynamic market shift, rethinking their pricing and ancillary product strategies to accommodate these changes.

Pricing in the airline business is a complex art supported by some hard science and analytics, says Sergio Mendoza, chief executive officer and co-founder of Airnguru – a company that develops airline pricing intelligence software.  “There are many ingredients to a price, from understanding the consumers’ dynamic needs, purchasing habits and willingness to pay, to monitoring the market dynamics and integrating diverse relevant data sources and contextual and macro-economic variables,” he states.

A combination of factors drives airfares, led first and foremost by the competitive landscape. Airlines are always keenly interested in their competitive price position as they vie for their customers’ business. It’s particularly true across Europe, where low-cost carriers (LCCs) have been ruthless in how they price, as Adyanthaya observes.

He adds: “The airline’s brand is also a distinct advantage into how they price tickets. Carriers that are known for great quality and service can typically command a higher price. It’s also interesting to note that the brand value may change by the marketplace, which also impacts pricing.”

Competitive flight slots play into pricing too. For instance, a 7-8am flight from London to Paris may command a higher premium than the less desirable 11am timeslot.

For LCCs specifically, it’s important to have the flexibility to offer the right fare at the right time depending on changes in the market.

Mendoza suggests that typically, LCCs give secondary importance to market dynamics, but focus on minimising their costs and unbundling as much as they can to make sure the base price they can offer is as low as possible.

“Despite this overall strategy, there is a big opportunity for LCC’s to introduce smarter dynamics and analytics into their pricing to support profitable growth, without a major impact on their costs,” Mendoza says.

Notably, some network carriers have been able to substantially reduce their cost structures and have made advances in unbundling, so they can now more effectively deploy the power of dynamic, advanced pricing against the aggressive growth goals of LCCs.

Airlines determine their fares based on a multitude of parameters, including competitor fare levels, passenger number forecasts or targets, time of year, and target prices for marketing purposes.

For LCCs, SITA’s O’Neil says they typically do not try to segregate their market by creating pricing and fare conditions, whereas traditional full-service carriers exploit different market segments, such as business travellers, through fare conditions and their associated pricing. “This leads to far more dynamic pricing models which can be complicated to manage without the right information or tools.”

O’Neil stresses that airlines must be able to change prices frequently to compete effectively, saying full service, hybrid and LCCs will often change fare levels multiple times on the same day.

She says price determination needs data to be focused and optimised. “Many internal data sources have been used for this, including passengers booked and forecasted passenger numbers together with business objectives.

“However, airlines today need to be aware of, and able to respond to, the actions of competitors at the speed of the internet. They need access to external data, such as information on competitors’ filed fares and those for sale on their websites. For example, SITA’s ‘Airfare Insight’ enables airlines to monitor both these sources of fares information for a complete picture of the marketplace competition, including not only other LCCs but full-service carriers serving the same routes,” O’Neil explains.

Data-driven pricing solutions seem to be the way forward for optimising fare pricing, today. A step-change from the legacy pricing systems.

“We started seeing changes in real-time data science in early 2002, when we introduced real-time dynamic pricing,” observes Adyanthaya. “At that time, the legacy systems were exclusively built on batch data downloads and data processing that changed every 24 hours that gave our customers a distinct advantage in their markets.”

Clearly, we now live in a world of continuous pricing changes. Adyanthaya feels real-time dynamic pricing solutions are highly effective in enabling airlines to apply market strategies with data science that constantly changes pricing to meet their demands.

“The sophistication today is vastly improved, with technology that supports the speed of these changes. The science is far more advanced too, with data analytics that are now possible with cloud-based computing models and commoditised storage.

“We’re on the cusp of an entirely new generation of science and technology that uses machine learning, cognitive computing and other artificial intelligence-enabled capabilities that are more adaptive,” Adyanthaya elaborates.

When commenting about data-driven pricing Mendoza reminds that legacy airline commercial systems, in general, was created in the pre-cloud, pre-big data era. “Some of those systems still in use were even designed in the pre-Internet era,” he suggests.

In the past couple of years, the expectations over the tech industry have been substantially pushed forward by the incursion of cloud, big data, and artificial intelligence. Mendoza adds: “All legacy systems will require a revision if the airline industry wants to rise to the challenge of the new business context, which is fundamentally changing across every industry, every market, every consumer.”

The increasing diversity of distribution channels and consumption contexts that catalyse consumer empowerment, ownership and expectations are trends that also exert pressure on airlines’ pricing strategies, Mendoza hints.

For example, he says an airline can retarget a customer based on her contextual activity on Facebook or Instagram, but it should distinguish this consumer from, say, a customer searching directly on Google.

“Legacy systems were definitely not designed for such level of channel diversity and consumer empowerment. This is partly why online travel agencies became so popular, they were the first bridge between the old paradigm and the new, offering consumers direct control and transparency over their shopping, purchasing and traveling experience,” Mendoza highlights.

The folks at PROS serve airline customers across the globe, and both the LCCs and the network carriers seem keenly interested in finding better ways to create branded fare products and intelligent ancillary offers to maximise both revenue goals and customer satisfaction.

“It’s a great time to be in the airline industry,” Adyanthaya concludes. “We’re on the cusp of dramatic changes that will make airlines even better partners for their customers. The increased velocity of digital transformation is reshaping how they are all doing business.”

Editor’s Note: The post was originally published in January 2018.