Paying Fare

HOUSTON, 1 December 2017 —

Airlines have had it tough in recent months, having to cut fares to keep up with 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 – a move much derided by airlines and their investors but happily embraced by the travelling public.

A price 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, believes 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’Neill 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. He 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 leg room, 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. This is 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 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, instead focusing 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 LCCs to introduce smarter dynamics and analytics into their pricing to support a 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.