Strategic thinking on pricing as we prepare for a new world in travel distribution

May 11, 2020

Since writing this piece, our world of travel and aviation in particular has been turned on its head by the effects of the COVID-19 pandemic. One thing we know for sure is that our industry is resilient. Strategic wheels are turning in the heads of all involved in mapping the future survival of airlines. And so, we feel this topic has meaning.

If you have been to any airline conference or indeed read airline articles and blogs over the past couple of years, you will be intimately aware that there is a lot of buzz in the industry around “Dynamic Pricing” and “Dynamic Offers”. 

There are several topics that have dominated the industry narrative over the last few years, including NDC, ONE Order, data analytics and most recently, Dynamic Offers.  Although airlines need to keep their eye on all of these innovations, I strongly believe that dynamic pricing is the single innovation that could provide the most tangible benefit to airlines in the short-term, as well as transform the airline revenue models of the future. Advances in revenue management and pricing, through dynamic offers, will give airlines the opportunity to dramatically increase high-value revenue, and most importantly, grow margin! It is my firm belief that dynamic pricing is the holy grail to growing margin in the airline industry today and in the future.

So, what is dynamic pricing?

Unfortunately, there are multiple opinions and definitions of dynamic pricing and dynamic offers. Not only are there various definitions, there is also a significant difference in perception between airlines and airline technology partners regarding the maturity of the technology and the airlines’ processes. IATA, supported by various airlines and system providers, developed a clear definition and “Dynamic Offer Maturity Model” to support the industry in defining the relevant concepts of dynamic offers. The IATA Maturity Matrix provides a framework for airlines and airline technology partners to track their maturity against the strategic destination of dynamic offers. The matrix also provides a roadmap, offering guidance on how to fully develop an airline’s dynamic pricing capability. The ultimate objective here is dynamic content creation coupled with dynamic price determination (shown in the upper right-hand side of the Maturity Matrix); achieving this will unlock the maximum value for the airline. 


 
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What is the current challenge to achieving dynamic offers?

It is well-understood that airlines are missing out on significant amounts of revenue by not optimising their revenue opportunities. Airlines do not have the ability to make granular pricing changes and get those changes to the market quickly. Airlines are not capable of assessing the customer’s “willingness to pay” for an airline’s products and services due to the current constraints of the airline industry’s constrained processes and technologies. The hands of airline revenue managers and pricing analysts are tied by these constraining industry processes and tools! Think of the revenue and margin potential we as an industry could achieve with a flexible process and the supportive technologies to capture lost opportunity on the booking curve.  There could be as much as 3-5% revenue leakage due to these constraints. Leveraging dynamic offers is a way of attaining this lost opportunity. 

Let’s dig deeper. What are the specific reason airlines are currently leaking revenue? The current pricing processes make it impossible to react instantaneously to market demands and desired pricing changes. Even if an airline can identify a needed pricing change to capture the current willingness to pay, they still have the obstacle of getting this price to market in time to utilise the opportunity. The norm of “filing fares” or closing fare class buckets to make pricing changes takes a significant amount of time, 4 or more hours in many situations, and is very “coarse-grained”; therefore they miss the opportunity to both sell more segments and to increase the price of segments sold. They desperately need a solution for making “fine-grained” pricing changes in real time to obtain this lost opportunity.

The Next Paradigm

It will take several years for the airline industry to achieve its ultimate goal of optimising offer bundles while also determining the optimum price, i.e., the upper right-hand quadrant of the Maturity Matrix. That said, there are increments along this maturity continuum that can provide significant short-term benefits. Today, it can take several hours for pricing changes to take effect. What if this could be done in real time? Imagine a scenario where an analyst identifies an issue in a specific market and is empowered to immediately make a 1% pricing adjustment, up or down, in real time, to respond and utilise the opportunity. 

As important as it is to enable a pricing change to be made, it is equally important that the offer can then be converted into an order that can be fulfilled, and if needed, self-serviced by the customer. The Datalex Digital Commerce Platform is designed to meet this airline need and to facilitate these granular level pricing changes, in real time, and create that order that can be fulfilled and managed. We have products accessible to any airline and which can be used to this effect while working alongside their current, albeit constraining, business processes. An airline can easily select a market, a flight or a route and make micro-pricing changes that are implemented in real time to capture the current willingness to pay. The airline can then monitor the change to ensure it is achieving the expected results.

Contact Datalex today to explore how your airline can capture more revenue and increase its margin.

Blair Koch

Blair Koch
SVP Customer Success & Delivery President of Americas
Blair Koch has held numerous technology, business and innovation leadership roles
in the airline industry, most recently as VP, Technology & Integration at JetBlue Airways.

 

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