At one airline, the new promotional fare with a three-day purchase window isn’t selling. Another is finding that a large tourist boom in Costa Rica isn’t translating into sales of more non-refundable fares. The booking curve, at a third, has elongated, with the booked load factor two weeks out up ten points.
These scenarios are not uncommon. Quite simply because airline fares continue to be rules-based with advanced purchase restrictions, refundability or change fees, and short-term sales. Inventory settings are all based on days before departure, with lower fare buckets closing as bookings come in.
Although pricing is ‘dynamic’ it still represents a rules-based world: for example, the low fares for Flight 121 are made available until they are automatically closed when the flight is booked at 61%, which we expect will occur 28 days before departure. Besides the orientation to days-before-departure, fare rules include carry-on and checked baggage limits, seating restrictions, and boarding priorities.
Fare rules and fare allocations are all behaviour-based. None are based on more traditional customer segmentation: business versus leisure travel, individual versus family, essential versus optional travel. Airlines have always relied on macro rules as a proxy for more fundamental segmentation. However, because of this approach, airlines tend to not really understand their customers and their purchase behaviour very well. This means they often:
- Forecast the number of passengers who fall within each rules-based behaviour group and allocate inventory accordingly
- Study those in each fare category. For example, they may estimate how many passengers who pay $129 – $159 might be willing to pay more (an estimate of elasticity-based sell-up)
- Don’t ‘know’ their passengers
This, of course, is not the way to merchandise most effectively; airlines can’t embrace personalised travel offers based on these categories of passengers. The $129-$159 fare category often encompasses a highly diverse set of passengers with a variety of different travel needs. Frequently, such a mid-tier fare range will include passengers representing a multitude of customer segments.
