Airlines Moving Closer to Personalized Pricing for Airfare

The Airline Tariff Publishing Company, the company based out by Washington Dulles airport that collects and distributes airfares for the airline industry, announced at its annual Elevate Conference that it has “enhanced its model” for dynamic pricing, allowing airlines to move beyond existing pre-filed fares with more personalized prices.

Since airline deregulation no industry has done more to extract as much revenue out of each customer as possible for their ticket. When you go to the grocery store, a single product has a published price. There may be coupons available, and there are different competing brands, but the cost is known to whomever wishes to purchase the item.

The same airline seat on a given flight has many different prices, and those prices are changing all the time.

  • In 1977, just before deregulation but while the Civil Aeronautics Board was allowing experiments with price competition, American Airlines introduced the Super Saver fare. Initially on New York – California routes, it was expanded across their domestic route network in 1978 and the airline introduced ‘Ultimate Super Saver’ in 1985, discounting up to 70% to compete against new lower cost carriers that launched after deregulation.

  • The American Airlines insight was that they could beat low cost carriers at their own game through revenue management. They could be a high fare business airline and a low fare airline by offering different prices to different customers.

  • Airlines used restrictions such as advance purchase requirements, change penalties, and Saturday night stay requirements to make cheap fares available to price sensitive travelers and still retain high margins on business customers who booked the most convenient flights at the last minute.

  • Low cost carriers undercut this strategy over the last dozen or so years, as one way fares often took on half the price of a roundtrip and the least expensive fares were available even close to departure. So airlines developed ‘basic economy’ fares to segment business from leisure travelers.

However there’s still potential to squeeze customers for incremental revenue. Put another way, any time you buy an airline ticket you value the ticket more than the money it costs. Often times you even get a deal. A deal is when you got a cheap fare that you’d have been willing to pay more for. As advanced the techniques are airlines use to get each customer to pay the most money possible, there’s frequently money left on the table.

The most valuable personal information is why a customer clicks or transacts with a brand and that information is hidden inside of the best marketing databases.

You don’t have an established set of price levels. Instead, when a traveler shops, you determine the price by selecting it from a continuous range of possible values.

At hotel chains the real insights come from behavioral models: Are you someone that will usually extend a business trip through the weekend if the hotel rate drops to $150? What if breakfast is included? Will you buy up to a higher room category – a better view – for an extra $20 but not an extra $50? Is your spouse the real decision-maker?

ATPCO is working to help airlines use these sorts of models, and they say that with personalized pricing conversion of customers searching for airfare can go up 50%, driving a 10% increase in revenue. Today they’re working on projects like this with at least 88 different organizations.

Customer Relationship Management (CRM) focuses on tracking customer behavior in order to understand and market to customer long-term value. Rather than managing only very broad segmentations, the application of CRM to Revenue Management results in the ability to price at a more granular level: the level of “who is asking.”

Personalization was historically achieved by point-of-sale control and some customized benefits for frequent flyers as a group; however, airlines are contemplating and implementing even further personalization of pricing and product based on customer value and other characteristics. This can be achieved today by leveraging data from CRM systems to drive dynamic pricing by customizing the components of a bundle, as well as the price of a bundle, in a manner similar to how dynamic availability using fare levels operates today.

Research has also suggested that a revenue management methodology that determines availability based on the additional criteria of customer long-term value can result in better customer loyalty and increased revenue.

Sometimes an airline knows you’ll pay more, why offer you the cheap fare? Other times it makes sense to offer you a lower fare because you’re a valuable customer and they don’t want you to jump to a competitor – and possibly not come back.

This future is one where a request for an airfare doesn’t search available prices and inventory buckets, but instead creates a request to the airline’s marketing database “to determine which fares, services, and brands apply to the person requesting the airline products.”

ATPCO’s CEO says that “[t]he promise of dynamic pricing is to increase yield for airlines through targeted offers that meet consumer expectations.” They’re working within exiting constrained systems to deliver on this. Alitalia expresses great enthusiasm. According to the bankrupt Italian flag carrier’s Head of Distribution Strategy,

The journey to personalization in the airline industry has begun, but this is a marathon, not a sprint, and we are just at the starting line. Airlines want more flexibility, but we are somewhat constrained with current systems. To see ATPCO leverage its resources to create a model and framework that gives airlines more choice means each airline can move at the pace it needs. With the help of ATPCO, the next 12 months in pricing should be an exciting one to watch and but be a part of.

While Facebook, Google (and its YouTube subsidiary) executives get called on the carpet for how they use data, and as government abuses data with little protection or constraint, the development of further data-driven personalization proceeds apace in every facet of the economy.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. I can only hope that when people revolt against airlines and other retail goods/service sellers’ personalized price discrimination, the proposed solution involves airlines and other retail sellers and government forced to let people buy/fly domestically without ID. 😉

  2. Assume that APTCO is correct, and the price quoted would increase as the airline goes to its database to find out about you and your preferences. Then, to get a better price, you would turn to anonymous browsers, VPN’s and third party fare apps, to defeat the CRM by making the purchase anonymous until after the fare is quoted.

    Of course, the loyalty programs would suffer further hits, as it became known that the price would increase if you identified yourself before purchase.

    But there is some evidence for the proposition that this already occurs — in reverse. Currently, logged-in users appear to get shown lower prices. See, e.g., https://millionmilesecrets.com/guides/are-airlines-raising-your-ticket-price-based-on-browser-history/

    And, one can also always eschew the default “Sort by ‘Featured'” (a good idea in any case).

  3. Amazon tried this and the customer reaction was so swift and negative, they quickly changed course. This is not to say that price customization is completely absent from retail; this happens all the time with “discount cards” that periodically generate coupons or special deals based on shopping habits. Of course, airlines are significantly more well-positioned to personalize prices because they already have extensive price dynamism. Consumers broadly accept that each personal on the plane has likely paid a different price. However, I do expect there will be significant blowback the first time someone prices higher logged into their frequent flier account than while incognito.

  4. Yeah, it seems likely that airlines that manage to put in mistake fares in the current, fairly simple, pricing model will be able to properly implement a system with millions or billions of different fares.

  5. I won’t matter at all.
    Most people shop on price only. So if one airline shows you a “personalized” high fare, the customer will just fly with another airline with a lower price. No nothing paying 10% more.
    For those that travel specific routes a lot, they know what a good price is on that routes. So once again quoting a higher fare will just lead to lost sales.

  6. Yeah, no. The first time this leads to someone with a sick relative seeing a higher price, or it’s shown that theeffect is aligned in any way with race, gender, education level, or any other factor (regardless of intent) this will get slapped down faster than a blogger in the Saphire Preferred. Doesn’t even matter if it’s true, a rumour would be enough.

  7. Copying what Alitalia does – excellent strategy. Anyway, I agree with the poster above who suggests that this is likely to lead to legal strategies over discrimination if the impact correlates with certain categories. Also, I suspect that such a system can be gamed. I know I would be looking at how I could manipulate it.

  8. This is as old as commerce. In the marketplaces of a thousand years ago, the seller would eyeball the buyer and set the price based on how much he or she could extract. A peasant in rags would get a better price than a nobleman in jewels because the nobleman could pay more than the peasant.

  9. If an airline has a valid fare from A to B at a specific price point they have to make that fare available for all customers.

    What I think the end goal here is say customer A makes $200K/yr and is willing to pay for extras rather than offering the lowest fare upfront the customer will be offered extra legroom, free drink, priority boarding, WiFi or whatever other “extras” at $500 round trip at the beginning but during the booking process the customer can chose to unbundle everything and only buy airfare at $300. More of rather than upselling in the middle of the booking process or after booking they will up sell at the very beginning. Whereas Customer B who only buys the lowest price will be offered barebones basic economy fares upfront at $300 with the option to add on the bundles during the booking process.

    Bottom line they can get creative on how they market a product to a customer based on data but at the end of the day they cannot price discriminate and offer different prices to different customers for the exact same product. If the current lowest available fare from LAX to SFO is $99 on flight XX599 then that fare must be offered to all customers at some point in the process.

  10. @Farnorthtrader +1

    And we’ll be reading blog posts on how to present ourselves online to get an advantageous price.

  11. In some ways, I find the “your neighbor paid a different price than you” to be a bit overblown. There’s a good chance that my neighbor is flying a different route than me… maybe I’m flying the flight as a non-stop, but he’s connecting somewhere. Two different products.

    And grocery stores and retailers price discriminate a bit more than Gary gives them credit for. The whole “private label” thing is selling the same product under different brands at different stores at different prices.

    I have to agree that the “customized pricing” thing isn’t going to have much of an effect on the advertised price of a simple coach trip from Point A to Point B. Practices like that will lead to the re-emergence of consolidators, bulk fares through travel agents, and opaque fares through Hotwire and the like. And TBH, we could even see the re-emergence of frequent flyer programs, which the airlines are trying to get away from.

    I think @golfingboy has it right. This “customized” environment is going to be about pushing upsells. For domestic travel, I *always* initiate a search for coach. But F fares are displayed in the same display on the airlines’ own websites, and I do buy them outright if they’re cheap enough. Once the airline knows that, the trick is to figure out if they can sell me an F fare at a price I’m willing to pay.

  12. @Retired Lawyer … While this article focus’ on airline pricing, I’m already using anonymous VPN, Ghostery, and browsing with a clean cache / history file when looking at internet pricing, etc. The day to use these tools is today… it is not in the future.

  13. I’d be ok with this if it worked something like this:
    An OPM customer searches from Concur (etc) – pays $2000.
    non-OPM searches from their couch – pays $200

  14. A few years back I learned that Orbitz set higher prices when customers connected to the service with a Mac versus a PC. So I switched to using only PCs. Now I hear the airlines may set different prices based on what brand of PC you use to access their site, so I dug out my Tandy TRS-80 from 1977 and used my modem to get online. Now I am now getting rock bottom prices for Pan Am flights!

  15. I wonder how they will turn this on award pricing as well. For example you are elite mileage earner vs credit card earner. Seems like United already does this a bit with.availbilty.

  16. @RetiredLawyer: “Assume that APTCO is correct, and the price quoted would increase as the airline goes to its database to find out about you and your preferences.”
    That is not what APTCO is saying. They are saying that they will extract your consumer surplus. Why do you assume that means a higher price?

  17. Funny to read we are comparing this to what Amazon tried and thinking the majority of customers shop on price. Maybe a t-shirt is a t-shirt but airline fare is not an airline fare and is not an airline fare. Why would I go for the cheapest bare bone fare when flying with the family – yes, price matters but want us to seat together, I know we’ll have bags to check, etc. If the airline knows what I’m looking for and offering me that option instead of basic economy – that’s cool with me. There just always needs to be a good clarity around what’s included in that personalized price

    @Golfingboy +1

  18. There are several comments related to charging consumers more based on knowing critical data about them, I think this overlooks the point of being more dynamic with pricing.

    Before I get started, some disclosure, I head up R&D at ATPCO, and the future of airline pricing sits in my area, a caveat here is that these are my own thoughts and opinions, they do not necessarily reflect ATPCO’s.

    Anyway, today airlines systems set and decide pricing decisions 24 – 48 hours in advance, in a realtime economy this leads to problems where pricing is reacting to the market in unintended ways.

    A couple of simple examples to look at in the context of Dynamic Pricing.

    1) Disruptions, when the industry faces a disruption (volcano ash, airline going bankrupt, industrial action, weather) the systems in play see an increase in demand and automatically kick in price increments… there is limited capability to step-in and override that stimulus-response action with traditional pricing tools, however with dynamic pricing tools the airlines can react and offer recovery options.

    2) Changes, this week I need to move a flight from a Friday (busy flight) to a Thursday (quiet flight). The systems in play today cannot grasp that I am helping the airline by moving to a less full flight, the dynamic pricing techniques we are working on today will open the door for the airlines to understand more context of my request to encourage me to move to a better option.

    3) Status, I am lucky enough to have status on two airlines, this makes their shopping results ineffective, as their “economy+” type products are essentially available to me at the economy price. I would prefer to have a display that showed me options that presented the economy price with the qualification capabilities I have and with some upgrade options, such as guaranteed first-class upgrades or guaranteed aisle seat, etc..

    In my opinion, the driver is giving the airlines a better ability to take the standards in retailing behavior (ID, Loyalty, time on site and more) data insights that modern digital retail affords to give the consumer options through more choice and options.

    Ready to share any tinfoil hat conspiracy statements with the audience, but when we give retailers more capabilities consumers tend to win, albeit with some fits and starts..

  19. @Gianni: Thanks for your detailed reply. However, one crucial point:

    “There are several comments related to charging consumers more based on knowing critical data about them, I think this overlooks the point of being more dynamic with pricing.”

    The objective to charge more, it is to extract all of the consumer’s surplus. Why does that mean always charging more?

  20. Not @Gianni but as I mention in the post I don’t see it as always charging more. It’ll be possible to offer targeted discounts based on expectation of an individual’s willingness to pay as well, I think that’s how they get to projecting 50% more conversions but just 10% more revenue. They’re clearly projecting conversions at lower than average fare [which doesn’t necessarily mean discounts but seems likely to]

  21. @Gary: Exactly. Their non-dynamic fare currently sends me to another airline, or induces me to not fly. A lower fare induces me to fly, and adds to their profit, since they lower prices only to me.

    Odd how people jump to the conclusion that price discrimination is synonymous with higher prices.

  22. @L3 the consumer surplus is the area under the revenue demand curve where the consumers willing to pay more. The challenge airlines and other retailers face is driving value for that extra willingness to pay in terms of a dynamically bundles offers. Offering the same product for more where there is no related demand driving the price higher would in my opinion be a failing strategy.

    Per the other comments here one thing that is critically missing in this discussion is a mechanism to articulate the value of airline offers. Right now it’s price, schedule a logo and some all caps text telling you what you can’t do written in some abbreviated lawyer speak The next generation storefront is trying to close this gap (sorry more ATPCO callouts).

    NGS and NDC with dynamic offer generation are the tools the airlines will use to define, present and customized offers.

    The next 3-5 years will be interesting!

  23. @Gianni: ” the consumer surplus is the area under the revenue demand curve where the consumers willing to pay more.” Always talk down to people to win friends.

    How much do you capture if your price is above the consumer’s reservation price?

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