Airline Dynamic Pricing - Using Advanced Data Science for Optimum Pricing Strategies

July 9, 2018

As we look at the major trends in the travel industry, one thing is clear - the future of travel retail will become more and more personalized. Airlines want to leverage the rich customer data they hold. The emergence of new AI technologies combined with new industry distribution standards will allow them to achieve this. AI algorithms and technology platforms mean that more data can be processed in real-time than ever before, generating valuable retailing insights.

New travel industry initiatives such as IATA's NDC will enable airlines to leverage AI-based insights to deliver real-time personalized offers across all digital channels. Pricing these offers will also become more and more personalized as airlines focus more on the individual's 'willingness to pay' rather than the market's average demand at a particular price point. These developments in personalized pricing and offers will be key to driving future revenues for airlines.


In travel, as in many other industry verticals, AI is emerging as a game changer. For airlines, AI-driven commerce is opening up new opportunities as to how they can price and offer their ever-growing range of products. This will allow them to transition from transportation providers with digital sales channels, to true travel retailers selling a range of travel products from a range of travel suppliers. The successful airlines in this new travel retail world will need to be proficient in digital retailing strategies and will need to invest in systems and platforms to execute these strategies in an increasingly competitive marketplace.

So what exactly is dynamic pricing?

Airlines are often acknowledged as the trailblazers of dynamic pricing, since they started to offer the same product at multiple different price points back in the 80s and 90s.  However over the last decade other online retailers have taken dynamic pricing to a new level, leveraging new technologies and defining new strategies.

While dynamic pricing is often thought of as the ability to offer a product at different price points, it is really a set of evolving pricing strategies that enable the price to be dynamically determined in real-time based on various criteria.

Airlines have a high level of maturity in how they price their tickets. But their level of pricing maturity in some new product offerings is much less sophisticated.

This is primarily due to a lack of capabilities in their current systems, which were primarily designed for airline ticket sales and do not typically lend themselves to the pricing of other digital products.

Even on the airline ticket side, airlines are beginning to explore ways to leverage new technologies to enhance current demand-based pricing and experiment with personalized pricing techniques.

Why is dynamic pricing so important to airline revenues?

In the beginning, airline prices were regulated and an airline typically had a single price point for their product. This static pricing meant that a lot of money was left on the table, from additional demand that was priced out of the market, and from customers who bought but would have been willing and able to pay more if needed.

To address this, airlines moved to a dynamic pricing strategy. Based on historical market demand, multiple price points were offered, targeting different customer segments at different times in the sales cycle. This had the benefit of reducing a lot of revenue leakage by capturing more market demand and aligning the price with the market's average willingness to pay. However legacy distribution standards meant that airlines were restricted in the number of price points they could offer and how quickly they could change those prices.

The New Distribution Standard - NDC - combined with more scalable technologies means that airlines will soon be able to leverage an unlimited number of price points that are set in real-time based on data-driven strategies. This will enable airlines to further reduce revenue leaks and further optimize revenue.

The next opportunity in pricing will be the ability to leverage personalized pricing

Today, airlines will typically run promotional sales whenever demand is weaker than expected. Running a market-wide sale is a very blunt instrument and sub-optimal from a revenue point of view. Some customers who were already going to purchase will still get the discount, and others who the airline may have been targeting may not engage if the level of discount was not compelling enough for them to act. This leads to lost revenue from customers who were going to purchase anyway, and lost opportunities from other potential customers.

Personalized pricing will enable airlines to build up a personalized picture of each customer's willingness to pay, or in other words what price point each customer is likely to convert at for each different product. This means that when demand is weak, rather than offering everyone a 15% discount, the airline can instead target customers with a range of personalized discounts based on that customer's predicted willingness to pay. This will prevent cannibalization of existing revenues and will act as a more effective means of driving additional demand. This technique has already proven successful in grocery retailers through their loyalty schemes and personalized discount coupons. 

For some time now, many airlines have been applying various segmentation techniques to group customers and targeting them with offers. Some of these techniques have even extended into contextual segmentation where a customer can be identified in more than one segment depending on the context of their situation. Leading online retailers have used AI technologies to move to highly personalized offers, the so-called 'segment of one'. This technique uses data science to create a unique segment for each customer and targets that segment with personalized offers and recommendations.

These personalized offers will take broad segment insights and combine them with specific personal insights to maximize conversions and continually learn from each customer interaction. As transportation suppliers, airlines have traditionally based their businesses around selling a 'need-based' product, where demand already exists and the airline just needs to service it. Typically, the customer already has a need to get somewhere and the airline's main concern is addressing that need and selling a ticket at a price that maximizes the revenue opportunity. 

As airlines continue the transition to travel retailers, they are starting to sell more and more products beyond the airline ticket, both products that they sell directly such as an exit row seat or an extra checked bag, and products that they are selling on behalf of a third party, such as a destination-based activity or theme park ticket. These new products are predominantly targeting discretionary spend, so the airline will need to develop the retailing skills to generate demand and drive conversion.

Platforms like the Datalex Dynamic pricing & Shopping enable airlines to compete as travel retailers by giving them access to capabilities that have been successful in other retailing verticals, leveraging behavioral economics and AI algorithms to optimize conversion. It is capabilities such as these that will ensure that that airlines neither leave money on the table, nor dilute their existing revenue streams, and create an optimum and sustainable dynamic pricing strategy. 


Alan Dunne
Chief Innovation Officer, Datalex 

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