Key strategies for implementing airline dynamic pricing – Part I

“NDC has opened the door to the implementation of full dynamic offering, i.e. a modern way to price without the constraint of booking classes (e.g. continuous pricing), and to bundle products.”

IATA Modern Airline Retailing, A Business Case, March 2023

Getting ready for airline dynamic pricing

As NDC gains broader industry adoption among carriers of different sizes and business models, dynamic pricing is at the top of executive agendas. In this blog post series we explore key strategies for implementing airline dynamic pricing. Whether you are in revenue management and pricing, or in eCommerce and distribution, the next few paragraphs explore real-life airline dynamic pricing strategies and tactics that bridge the gap between RBDs and the future of class-free pricing.

Understanding airline dynamic pricing

While dynamic pricing is not new, the terminology used by different airlines and vendors differs. As pioneers in airline revenue management PROS defines dynamic pricing as the ability to change offer pricing while considering the customer and contextual information. We also emphasize the real-time nature of these changes and the purpose of maximizing total revenue contributions.

The price change can be applied to all elements of the offer: the flight (or the right-to-fly) price, as well as the associated ancillaries in addition to or as part of the offer.

Read more about what exactly is dynamic pricing in the airline industry in this blog post.

Getting Revenue Management (RM) right by improving forecast accuracy

Dynamic pricing thrives on constant adjustments. Forecasting software helps airlines analyze real-time data like booking trends, last-minute cancellations, and weather events. With this information, airlines can optimize prices throughout the day to maximize revenue while filling seats on departing flights.

Accurate forecasting methodology is crucial for airlines looking to implement dynamic pricing strategies. It helps RM analysts anticipate fluctuations in customer demand for specific routes and times and allows them to adjust prices based on expected passenger volume.

Incorporating willingness-to-pay (WTP) data into forecasting leads to notable improvements in forecast accuracy and better capturing of seasonality trends, which can result in significant revenue increase. Here are a few reasons why:

• Improved Price Targeting: By understanding customer segments with higher WTP, airlines can tailor prices to capture a larger share of the revenue pie without alienating budget-conscious travelers.
• Reduced Discounting: Accurate WTP estimates can help airlines avoid unnecessary discounts on flights where customers are likely to pay a premium anyway. This approach also allows RM analysts to automate prevention of buy-down behavior.
• More Competitive Pricing: Understanding WTP allows airlines to price strategically against competitors, maximizing revenue while remaining attractive to specific customer segments.

Studies show that implementing dynamic pricing strategies based on WTP data can lead to revenue increases anywhere between 1% and 3% on average for airlines, as every 10% increase in forecast accuracy translates into 1% revenue lift. The actual impact depends on the airline's specific market, pricing strategy, and implementation effectiveness.

Overall, using WTP data in forecasting is a step towards more informed pricing decisions. While it does not aim to predict an exact revenue increase, it offers a valuable tool for airlines to optimize pricing strategies and capture a larger share of the travel market.

Learn how an international airline leveraged Willingness-to-Pay and increased passenger revenue.

Preventing revenue dilution with dynamic availability

While Global Distribution Systems (GDSs) provide access to a vast network of travel agents, many airlines consider exiting full content agreements for several reasons, taking action to gain more control and potentially increase revenue while enhancing customer experience.

The value of effective channel pricing strategies

The ability to differentiate the pricing offered across distribution channels empowers airlines to control the experience of passengers while allowing for segmentation that prevents product buy-down when certain discounts or promotions are offered where they make an impact.

For example, by offering restricted product offerings via liquidator specific discounts that are not available through the airline’s website or GDS. Another example is offering corporate discounts through specific booking channels.

Leveraging competitive pricing strategies

There are many ways carriers can respond to competitors’ pricing. Airlines that have strategic definition and the right tools are best equipped to react in a way that is consistent with market conditions, their market share and objective and the relative pricing power to other airlines operating in each route.

Best practices across dynamic availability and pricing include:

• Defining in advance what they consider direct competitors in each route.
• Understanding if they need to match the same prices offered by other airlines or if they can command a premium due to offering a better product, better timings, and more.
• Deciding which flight KPIs are required in order to allow lowering or raising prices to be closer to a competitor’s offering.
• Understanding that what competitors are doing might be irrational, so analysts still need to know their markets and own the control for deploying their pricing strategies.

RM innovation allows airlines to equip their market analysts with AI-enabled tools that suggest pricing strategies that have worked well in the past, while checking that guardrails are respected, and exceptions are documented.

Post-RM dynamic pricing strategies

An alternative to those airlines that cannot replace their existing availability calculators, or a way to complement dynamic availability, is to leverage rule-based pricing adjustments post the RM decision. This can be executed using a shopping engine that can apply real-time fare adjustments (without requiring a new fare to be filed), when certain conditions are met. This approach requires a shorter implementation timeframe and allows analysts to test different pricing strategies that directly change the price without modifying other RM controls, and they can selectively do this for specific distribution channels.

While such post-RM price optimization may not be optimal for revenue optimization at scale, it enables airlines to test out the benefits of dynamic pricing strategies and proceed forward with more scientific approaches once the desired results are in place.

Moving from dynamic availability to dynamic pricing strategies

Airlines typically start their path to dynamic availability by enabling their analysts to apply fare strategies that adjust availability in real-time when certain trip or passenger attributes are present.

To offer science-based dynamic pricing, an airline should work with a trusted partner to ensure that their data collection and analysis practices allows them to understand price elasticity – how sensitive customer demand is to price changes. PROS Willingness-to-Pay Forecasting provides transparency and the ability to influence elasticity. Our techniques allow for complex models that consider various relevant factors simultaneously.

The output controls should be compatible with the airline’s availability calculator or their dynamic pricing solution. PROS Real-Time Dynamic Pricing offers a seamless way to leverage the output controls or transformed fares as a way to adjust availability without requiring analysts to create manual strategies to account for buy-down behavior. The benefits are higher precision, more automation and scalability across channels.

The shopping engine should be able to consume the dynamic price or dynamic discount produced by the dynamic pricing solution. This allows prices to be offered in a way compatible with both - class-based or class-less architectures, as more airlines get ready to support Offer and Order Management as described by IATA NDC.

Lufthansa Group has been an early adopter of continuous pricing and an active promoter of the revenue benefits. Today the airline group is live with dynamic pricing across its direct digital channels, including across their entire metasearch network.

Explore their journey to airline-led offer creation and dynamic pricing in this success story here.

Unlocking Dynamic Pricing Strategies at Outperform with PROS

The ability to price dynamically means instant revenue increases, but unlocking these airline dynamic pricing capabilities isn't always easy. Watch this Outperform session with experts from Lufthansa Group, ATPCO, and PROS as they discuss the steps to chart a path to true airline dynamic pricing. Discover how airlines are transforming their pricing and distribution strategies to drive revenue.

Next: In Part 2 of this blog post we will explore the transition path from class-based to class-free dynamic pricing, how dynamic ancillary pricing helps with ancillary revenue optimization and what the adoption of dynamic pricing techniques means for downstream systems. Follow PROS Travel LinkedIn page and don’t miss out!