Do Airlines Need More Fares?

     

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In order to maximize revenue on planes, airline revenue management departments set up a hierarchy of fares that allows them to prioritize what fares are sold. Airlines seek to offer low fares only when it’s necessary to fill the plane. Revenue management “inventory control” closes off availability of the lower fares when demand for higher fares is forecast to be strong. Traditionally, airlines have a hierarchy of 26 such fares or fare groupings (or “buckets” of fares) that represent increasing value to the airline. Even if some low fares are necessary to fill the plane, all low fares will become less available as demand for higher fares increases. The lowest fares are often restricted to less than 35% of the total seats on the plane - perhaps only 10% of the plane is reserved for the highest fare passengers that tend to book close to departure.

Managing cabin-specific inventory is often separate. There may be just one “F” group, for first class and one or two “C” groups for business class, leaving 20-25 groupings governing the wide range of fares that apply to passengers purchasing a “coach” seat. Economy fares generally range from a fare grouping that includes highly discounted promotional fares to one that holds full fare economy. Special groupings are often associated with “group,” or “government,” or “frequent flyer award” travel, each of which is built into the economy hierarchy based on an assessment of relative values.

In a leg-based airlines revenue management system, this hierarchy must also prioritize international connections (from $299 to $1499, for example) against local, short-haul fares (from $59 to $479, for example). In other words, the highest inventory levels are reserved not just for high fares, but also for high, long haul connect fares – which are typically deemed of higher value. Similarly, the fares for short-haul locals gravitate toward the lower fare classes.

So, an airline that has a variety of flights connecting with each other, long haul international and short haul locals, often easily makes use of each of the 26 fare groupings. In fact, many such airlines wish they had a dozen more. Although some revenue management systems have now built in the capability to handle more groupings, many airlines are still confined to 26. 

The need for more fares has become more acute as airlines offer more products. Whereas one or two fare groupings may be sufficient for a small first or business cabin, what is the optimal approach for an economy section that may now include premium economy, big seat, regular economy, and basic economy? If each sub-section is allocated 3-5 fare groupings, will the revenue management system be able to properly optimize inventory across fares, sub-sections of economy, and short-haul versus long-haul connections? For airlines accustomed to using 20 “buckets” to cover the range of fares offered in coach, can they still maximize revenue if they can only designate 3-5 fare groupings in each of their sub-sections of economy?

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Although there is currently no consensus across the industry on how best to handle this proliferation of products, an alternative approach that preserves more of the conventional 20+ fare groupings spread across economy fares designates the hierarchy only for the most basic product and assesses a fixed or semi-variable fare premium for enhanced products.

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This approach allows airline revenue management departments to control inventory exactly as they are used to – across 20+ fare groupings – thus minimizing the process changes required to manage multiple products. It continues to allow highly granular revenue management for airlines that wish to differentiate as much as possible across fare levels and O&D connections. In addition, the sell-up proposition is simpler to merchandise: a certain, logical premium for each increased level of service. If products were separately inventory controlled, the fare difference could grow dramatically or shrink to zero – or even negative - as inventory in certain groupings are sold out. Merchandising is certainly easier if there is an easy-to-understand fare premium.

On the other hand, having different products all sold in the same fare grouping can make GDS/third party distribution more difficult. The default mode in such GDSs is to automatically display only the lowest fare within a fare grouping – thus, only the basic economy fares would appear in the OTA in the example shown above.

The optimal approach is likely a hybrid, with some products managed uniquely with a few unique fare groupings and some products treated as “basic plus fare premium.” Expect airlines to experiment with different approaches and to potentially converge on an “optimum” solution only over a few years of managing the new menu of products.


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