What will change in the calculation of your airfare?

You may not realize it, but over the next few years, the way in which more and more airlines calculate the price of your plane ticket is going to change radically. Sometimes to your advantage, sometimes not.

The crisis puts airlines under pressure

With the upturn in air travel just around the corner, airlines face a tough challenge: selling as many tickets as possible at the best price. Best price sometimes means the highest possible price, other times low enough not to be a disincentive and to have an acceptable occupancy rate.

You may think that this is nothing new, but in fact it has always been the principle of yield management. The only thing that’s going to change is that everyone will be starting from scratch, that apart from loyal passengers, there will be a high level of customer volatility, and that the airlines will have to offer attractive fares to overcome the last remaining reluctance, to make those who are a little hesitant want to travel again, but fares that will enable them to restore their profitability.

And to achieve this, many are accelerating their move towards a new, more relevant and responsive pricing model.

Revenue management: a manual and somewhat archaic practice

Before going any further, let’s briefly review how things work today, as detailed in our article on fare classes.

Airlines have a number of booking classes to which fares are attached. At some point they decide to put on sale so many seats in such-and-such a class at such-and-such a price, and what the reservation systems do is sell the cheapest tickets and then when that’s done sell the fare class just above and so on.

Of course, the people in charge of determining all this are professionals aided by highly advanced tools, but in the end it remains a human judgment. What’s more, any adjustment to the commercial context (putting a class on sale at a discounted price) requires human intervention.

What today’s airlines are looking for is to be able to offer the best possible fare at any given time, not because the cheapest tickets have all been sold out, but because it’s the best price the passenger is willing to pay. As a result, pricing will be much more granular.

Let’s say we go from a system where the computer offers tickets at €55 and then €75 to one where it offers €55, €57, €62, €69………

This is called dynamic pricing or continuous princing.

Dynamic pricing at a glance

The big difference between dynamic pricing and yield management as we know it is that it aims to optimize revenue where yield management aimed to optimize the filling. Theoretically, the two are very similar, and you’d think they’d lead to the same result, but what’s different is the way they’re achieved. Dynamic pricing uses a larger number of variables (supply and demand, available inventory, marketing and sales strategy, competitors’ rates, strikes or weather, customer loyalty…), is more contextual and, above all, operates in real time and automatically.

Concretely speaking today two customers who want to book the same ticket at the same time are offered the same price (unless the second arrives 1/2 second too late and the first had the last ticket available in a given class), tomorrow they may be offeredtwo totally different prices.

In our everyday lives, there’s a very simple example of dynamic pricing that many people are familiar with: Uber, which applies a variable multiplier to its rides at peak times according to demand. It varies automatically in real time according to location and demand, and in a more advanced version could take competitors’ prices into account or vary according to customer “loyalty”.

But we’ll be talking in more detail later about dynamic pricing and how it will also change the way tickets are distributed!

Convincing results for dynamic pricing

According to Travel Weekly, airlines that use dynamic pricing see their conversion rate increase by 50%, and their revenues by 7%. An MIT study shows that on a given route, an airline using dynamic pricing generates 9.94% more revenue than its competitors using a fare class system.

And – we’ll go into more detail in another article – this is not always to the customer’s detriment. A more gradual price increase eliminates threshold effects (from €50 to €52 instead of €50 to €75, for example). What’s more, this system makes it possible to personalize prices (depending on the loyalty program, for example) to reward and target certain customers.

Who uses dynamic pricing today?

The move to dynamic pricing was a fundamental one, but a slow one. The crisis seems to have speeded things up.

Air France-KLM has just announced its decision to switch to dynamic pricing. Before it, Lufthansa started in 2020, followed by IAG (British Airways, Iberia...). More recently, Qantas also announced that it was seriously considering the idea.

This won’t happen overnight, as it will involve a real revolution in pricing and distribution models, but the revolution is underway.

Image : air ticket purchase by conejota via Shutterstock

Bertrand Duperrin
Bertrand Duperrinhttp://www.duperrin.com
Compulsive traveler, present in the French #avgeek community since the late 2000s and passionate about (long) travel since his youth, Bertrand Duperrin co-founded Travel Guys with Olivier Delestre in March 2015.
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