After delving exhaustively into the intricacies of dynamic pricing in the airline industry in our previous articles, our focus shifts to exploring the origins of pricing in the airline industry as we approach the end of 2023.
Airline pricing has been a very significant player in the pricing landscape of travel for a long time. Even today, it continues to throw in new, complex variables at existing pricing strategies. Adding to the complexity, all air carriers must follow these strategies to thrive in a highly competitive consumer-controlled market.
It all began way back when Robert Crandall, the former president of American Airlines started a revolution in the 1980s that changed airline pricing forever.
American Airlines under his leadership tapped into the potential of the airline industry by changing the scale of revenue management strategies in place.
Crandall pioneered yield management– the set of price optimization strategies that preceded revenue management. He came up with customer-centric solutions like cheap early bookings and advanced seat reservation costs to offer another dimension of choices to the consumer. The now controversial practice of overbooking the flights was also his brainchild. These factors intertwined with the airline industry’s pricing and generated an extra 500 million dollars a year, crediting Robert Crandell’s strategy.
So, dive with us as we travel back in time to dig deeper and understand how pricing in airlines started.
Unveiling the tapestry of time: Historical pricing strategies
In the past, Airline pricing was all about flat pricing where all seats of the aircraft were priced the same throughout the year. These flat prices often only accounted for the airline’s operational costs and their expected profit margins. Being most prevalent in the early days of commercial airline services, flat pricing was applied on smaller airplanes with low occupancy capabilities. There were no inclusions of seasonality charts or demand patterns whatsoever, but just plain old flight schedules.
Turning to the next page in Pricing Legacy of Airlines, was the chapter wherein airlines started accounting for aspects like departure time, time of booking, seat class, consumer profiles, and sales channels to price their inventory. These factors were then incorporated into a strategy to generate price points for the entire year at once. This gave birth to Static Pricing in airlines.
Woes of the past: Challenges in airfare pricing
As the airline’s pricing progressed toward technology, many challenges came to the forefront for air carriers in the shape of modernization and cut-throat competition. This was especially evident in the 1970s-1980s in the US. 1980 was a particularly bad year for the airline industry in America which saw the operating profit and net income fall drastically [as reported by the Air Transport Association of America (ATA) in their Annual report]. This was partly due to inflation soaring fuel prices and the overall economic situation. But the signs were obvious, get dynamic and fresh, or go out of business!
This time around the industry faced challenges that needed to be addressed, some of which were –
Flat pricing of your airline inventory based on the distance of the journey led to much potential revenue going down the drain. It was realized that airline ticket pricing must be done based on certain factors like seat priority, departure date, etc that add or remove value on the ticket’s price.
Airlines cannot singly rely on prices determined one year in advance as they will be subjected to last-minute desperate discounts if full occupancy isn’t accomplished. Agile price points that keep changing multiple times until the plane takes off, had to be the way ahead.
Long waiting hours for annual competition reports to get the real picture of your competition while your airline lagged behind the competition was also a major issue that had to be tackled. Live competition analysis throughout the day until the departure date was the need of the hour to have a real edge over the competition.
The industry yearned for solutions and they found all their answers in one place: Dynamic pricing!
Contemporary Game-changer: The Dynamic Pricing Era
Dynamic or flexible pricing in airline ticket pricing is the practice of generating varied price points at different intervals according to the market condition. As the industry progressed, airlines looked to maximize their revenue by pricing based on patterns and predictions of consumer and industry trends. Sophistication started to slowly make its way into pricing where factors like expected seasonal demand & consumer profile-specific behavior were being backed up by competition data analysis. (for example, will a price-sensitive person prefer a premium to medium seat class at this point of the year or not?)
And finally, the age of the internet gave the airline industry a much-needed boost in the sales channel department. Airlines could now sell tickets online easily which increased their chance of getting maximum occupancy in advance. In the 2010s, the airline industry began to rethink and focus on improving indirect distribution mechanisms.
Airlines were now investigating when to offer products and services during the buying journey, as well as how to highlight the key features and differentiators of these services in comparison to alternatives in the marketplace while retaining the current capability to instantly update these prices in all channels.
For the longest time, dynamic pricing seemed like the only way forward in pricing practices. However, this strategy changed when the internet age matured. The inception of OTAs opened new channels to sell tickets but also exposed everyone to their competition. Additionally, to stay on top of your competition you could not just approach traditional sales channels but you would also have to worry about the digital platforms. Thus, in the upcoming era, visibility on online platforms could make or break your business. Not only this, but real-time continuous price point generation on these OTAs becomes another problem to tackle if one wants to defeat their competition.
A Guide to the Future of Airline Ticket Pricing
The History of airline pricing and problems is not the only intent of this article. We are also here to decode the future of the Airline Pricing Industry for you. Real-time Continuous Dynamic pricing is the way ahead for pricing airline tickets and other ancillary services. It gives air carriers the power to generate better price points and strategically position themselves in the market. This in turn helps consumers gain price benefits, fair prices, more choices and gives them much more power over how the tickets are priced throughout the year.
Dynamic pricing strategies take a whole as well as a realistic picture of the market and services, to generate multiple price points at multiple times (i.e. Continuous Pricing). New Age Continuous Dynamic pricing systems must consist of,
AI-backed models that can accurately forecast multi-modal demand at the right time so air carriers can brace themselves for demand fluctuations.
High-velocity and volume data-based modules to gain actionable insights regarding price recommendations. These modules can capture huge volumes of data at high speeds throughout the day continuously, and churn them to produce actionable insights to save airlines from potential revenue leaks.
Visibility management to make sure your Airline is on the lips of every consumer looking to grab reasonably priced tickets and services.
Thus, continuous dynamic pricing will elevate the airline industry to new dimensions of revenue maximization and will cause a domino effect on other untapped travel industry domains too. Find out more about this from our Travel and Hospitality industry articles.
AirViaje.ai: Revolutionizing Your Strategy with Cutting-Edge Dynamic Pricing in Aviation
Wait up! The journey hasn’t ended yet.
We at Sciative Solutions are pioneers of continuous dynamic pricing strategies and systems and we have the answers this industry needs. We make pricing your airline inventory convenient.
Our AI models capture the real picture of demand for variable factors like seat priority, seasonality, etc in advance to strategize and gain more revenue.
Our system can help you enhance your Search recommendation visibility on OTAs.
We provide smart actionable insights on pricing backed by big data analytics to streamline and simplify your inventory operations procedure.
And much more…….
Stay tuned for our weekly articles and research pieces that are backed by thorough analysis and jaw-dropping data points about pricing in fast-moving industries like Travel (Buses- Intercity coaches revenue optimization; Airlines- Revenue management and optimization); Tourism (Hotel/Property Revenue management); and Retail (Revenue optimization, product visibility and placement in e-commerce domain) to know more.
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