Dynamic Pricing: What’s preventing wider adoption by airlines?
The simplest answer to this question is that few airlines currently have the technology capability to do so. By nature, the airline industry demands very complex functions and extremely high reliability from Passenger Service System (PSS) platforms. Managing various price points across a fare ladder and forecasting demand for these price points makes the system even more complicated.
Dynamic pricing systems must provide for an infinite set of conditions and contexts – whether these may apply in practice or not. The price may end up being any value at all, but these are calculated in real time based on the context, while the customer is making the purchase; never looked up from a predetermined list or table as in the traditional model.
This mandates significant investment for a robust system, which can be too heavy on the budgets of many smaller airlines which work on slim margins and limited customer bases. On the other hand, some of the bigger airlines which still depend on their legacy systems continue to work in their established, complex setups of forecasting demand and clustering the same into predetermined price.
Or rather, they employ flexible pricing that has some similarities to dynamic pricing but can hardly be called dynamic.
How can dynamic pricing be effectively implemented?
In theory, absolutely any tangible metric which can be analysed from the passenger data (and has a reasonable connection to passenger demand) is a candidate for the dynamic pricing model. Demand is the most obvious factor. Integrating social networks into the platform gives the airline a large amount of data, which can be utilized to fine tune the dynamic pricing algorithm according to what the customer is likely to pay for his/her fare. Passenger loyalty programs are another goldmine for dynamic pricing; corporate loyalty typically comes with fares that include significantly high margins on account of last minute purchases.
Effective implementation of dynamic pricing must allow an airline to describe the buyer´s context, connect it with the product offering and produce a pricing decision in real time. Technology is not a limiting factor, but the airline must describe the business rules they wish to apply. Size of the group making the booking, day of the week, time of the day, nature of the destination, ancillary purchasing, load factor on the economy cabin, etc. are some examples of what may drive pricing decisions of the products (seats, ancillaries) that an airline may want to sell.
Today, airline companies typically have proprietary algorithms, and the finer details are kept under wraps to preserve a competitive advantage. But at the core is a "pre-computed" approach that simply searches for a pre-calculated fare based on predefined scenarios. Not a truly dynamic one that involves real time calculation.
Will NDC and/or One Order help airlines prepare for dynamic pricing?
NDC and One Order are important initiatives which will have very positive impacts on the airline industry's future. While they are frequently used buzzwords in literature related to aviation technology, the fact remains that their purpose is not to deal with dynamic pricing.
NDC, for instance, enables airlines to gain significant control over how their product is sold and what price can be realized for it; but it is does not touch upon the real-time context-detection or rules that are essential for dynamic pricing. In other words, NDC fixes the transmission/plumbing problem but doesn't fix your "engine".
An operative platform for dynamic pricing
To overcome the dilemma of solid forecasting while maintaining pricing flexibility airlines must look at a combination of a strong revenue management system with an Order Management System (earlier: PSS) that allows the coexistence of demand clustered forecasting (based on expected revenue realization), while at the same time dynamically creating price points within such clusters.
iFly Res, the PSS solution from IBS, allows the airline to adopt very complex dynamic pricing strategies involving several parameters and still be able to configure that effectively into the system with a very granular level of manageability. In other words, the dynamic pricing framework is already built into the platform, but the airline can make adjustments to the logic and implement their own independent strategies. On the other hand, being NDC native, the platform is capable of effectively handling reservation enquiries which demand the PSS to assemble the product as opposed to merely handing over information to the GDS. This means the airline can seamlessly plug into an NDC compliant booking system and gain greater control of the customer data which makes dynamic pricing possible in the first place.
Conclusion
Reports suggest that airlines are even considering the customers' financial status to predict what they may be willing to pay for a seat on the aircraft. Ethical concerns are being raised, but the technological implications are rather interesting. Passengers are typically unaware of the complexities of dynamic pricing, except for its connection to demand. But first and foremost, the industry needs to be much bolder in looking at the fundamental principles of many technologies in place today and its willingness to radically challenge these.
Marco Contento is Vice President of Aviation Business Services at IBS. With around two decades of experience in information technology for the airline passenger services industry, he partners with aviation companies to help future-proof their business through deploying new generation solutions.