Combating Buy Down through Airline Dynamic Pricing
A common rule of thumb in airline revenue management is that travelers tend to buy the lowest fare class available. At any point in the booking curve (bookings over a certain period of time), there is a risk that the demand will buy down to the lowest class available, even when passenger’s willingness to pay might be higher, diluting potential revenue.
Ideally, the goal of airline revenue management is to open and close classes and thereby push demand to higher classes that eventually align closer to the passenger’s willingness to pay. It’s a common problem that airline revenue managers face and one that requires investment in technology, processes, and strategies. So how does an airline accomplish this? Here are some approaches PROS has explored with its airline partners, some being more advanced than others:
- Increasing class closure rules: One option airline revenue managers have is to create class closure rules based on load factor and days prior to force passengers to buy higher classes. For example, 10 days before departure or when a plane is 80% full, you can close off the lowest class forcing passengers to buy up. This may sound simple, however, it can get very complex, very quickly to set up and manage multiple rules across multiple origin and destinations and flights. And after all, this process is manual and comes with rigidity. You are still playing a guessing game as to when to open or close classes and it’s not as dynamic, scientific or revenue optimal as some of the other options.
- Implementing airline dynamic pricing: Here, an analyst can use Real-Time Dynamic Pricing to implement fare strategies which influence the OD availability. For example, you can file four price points in ATPCO for the exact same product. Then, to determine which of these four price points are offered to the passenger (which is lowest available in the system), you can adjust the daily fares based on marginal revenue. In the end, you adjust the availability according to the fare you want the segmented passenger to buy. Want to learn more? Airline industry revenue management expert, Karl Isler breaks down airline dynamic pricing option via his whitepaper, The Art of the Possible in Airline Dynamic Pricing.
- Incorporating willingness to pay: A more sophisticated approach relies on data science to calculate the likelihood of a passenger buying down and automatically adjusts the availability fare to account for that buy down. Depending on the demand forecast and optimization algorithm, airline revenue management systems can determine the passenger’s willingness to pay for both business and leisure traffic and eventually create continuous demand curves through dynamic pricing. Stay tuned for more from my colleague Justin Jander, Manager of Product Management for Revenue Management, as he dives in more about this in a future blog post.
Overall, there are different approaches to combating buy-down, and it can vary based on an airline’s goals and business strategies. At PROS, we strongly believe options 2 and 3 are the more scientific and revenue optimal approaches. And it’s important to remember that they are not mutually exclusive. An airline can begin with a more ‘manual’ process and gradually lean more on an algorithm when ready. The algorithms may not be able to cope with all situations from the start.