The Case Against Personalization in Airline Pricing?

A recent study by airline revenue management experts simulated adopting a form of more personalized airline pricing (“Dynamic Availability of Fare Products with Knowledge of Customer Characteristics” by Wittman and Belobaba in the April 2017 issue of the Journal of Revenue and Pricing Management). Increased personalization is a hot topic for airlines and all e-merchandisers, and so many airlines are experimenting with various approaches.

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Do Airlines Need More Fares?

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.

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3 Key Elements to Achieving Best Practices in Airline Revenue Management

Airline revenue management may be decades old, but is now virtually a necessity for any airline. While in the past, the use of sophisticated forecasting and optimization tools offered the most innovative airlines a 5+% revenue boost versus its competitors, today such tools are considered as fundamental to the business as airlines acquire revenue management tools before their aircraft are even in the air.

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