In the 1980s, American Airlines and its then president Robert Crandall started a revolution in airline pricing.
NB: This is an article from Altexsoft
Crandall is famous for many airline innovations in use today, such as devising the first frequent flier program and contributing to route optimization and central reservation system adoption. But he also pioneered yield management — the set of price optimization strategies that preceded revenue management.
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By offering cheaper rates to passengers who book earlier, providing seat reservation at a higher price, and incorporating the now controversial practice of overbooking, Crandall’s AA claimed to generate an extra $500 million a year. The economic impact of yield management strategies utilized by American Airlines is apparent.
Today, revenue management specialists and systems work at most airlines to sell the right product to the right customer at the right moment at the right price on the right distribution channel. (Revenue management strategies in hotels are also common.) One of the critical components of revenue management is dynamic pricing. Let’s talk about the current methods of dynamic pricing and how the techniques are maturing to match the current airline distribution market.
What are dynamic and static pricing: evolution of flight pricing strategies
Traditionally and most commonly, airlines have been using static pricing. An airline creates its fare structure using a limited number of price points based on reservation booking designators (RBD) and then published through ATPCO. Each price point is developed for a specific customer segment and demand situation.
Namely, there are price-sensitive passengers who are not locked in on a date or schedule and will pick the cheapest fare regardless of long layovers. Others must reach a destination on time and will pay any price to travel on a specific day. Considering such factors as time of flight and time of purchase, sales channel, and seat class, airlines create price points for different passenger segments.
This segmentation, though, remains fairly shallow. Without understanding the competitive landscape, market conditions, distribution of fares, and more complex data that can be received only through analytics, airlines can’t effectively segment passengers beyond the typical “business or leisure” scenario. This is especially important for low-cost carriers that need more sophisticated and creative solutions to stay competitive and profitable.
Today, thanks to data-driven capabilities and technology advancements, revenue management strategies for airlines have evolved to consider tons of various criteria in real time and deliver truly personalized pricing, which we know today as dynamic.