Dynamic pricing of airline offers

Abstract

Airlines have started to focus on expanding their product offerings beyond flights to include ancillary products (e.g., baggage, advance seat reservations, meals, flexibility options), as well as third-party content (e.g., parking and insurance). Today, however, offer creation is rudimentary, managed in separate processes, organizations, and IT systems. We believe the current approach is inadequate and that the key to profitability is to manage offers consistently in an integrated Offer Management System (OMS). However, realizing this vision, will require significant advancements in the science of pricing and in distribution. The entire scope of an OMS cannot be covered in a single paper. Hence, to provide depth, we will focus on what we believe is one of the most critical components of the OMS—Dynamic Pricing of airline offers. Finally, we discuss various industry initiatives that will enable deployment of Dynamic Pricing of the flight product alone or the broader scope of OMS.

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Notes

  1. 1.

    The IATA (2016) terminology is set of services. The terms product and service seems to be used interchangeable in the airline industry. Hence to simplify the description of offers in this paper we will use the term products to collectively describe products and services.

  2. 2.

    Contribution is revenue less variable costs. Revenue Management often ignores the variable cost because the incremental cost of flying one additional passenger was small. However, with lower ticket prices and increasing fuel prices, landing fees, and taxes, this is no longer true. Further, for third-party content, the cost component cannot be ignored.

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Acknowledgements

We thank Jason Coverston, at Navitaire, for sharing his insights on Navitaire’s Ancillary Price Optimization (APO). We also thank Stephane Lecourtois for sharing his knowledge on merchandising.

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Correspondence to Thomas Fiig.

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Fiig, T., Le Guen, R. & Gauchet, M. Dynamic pricing of airline offers. J Revenue Pricing Manag 17, 381–393 (2018). https://doi.org/10.1057/s41272-018-0147-z

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Keywords

  • Revenue Management System
  • Offer Management System
  • Dynamic Pricing
  • Ancillary Price Optimization
  • Machine Learning
  • Distribution
  • NDC