Coronavirus Has Upended Everything Airlines Know About Pricing
| le 5 August 2020
The pandemic has completely confounded the computers that spit out airfares based on passenger behavior
By Scott McCartney – The Wall Street Journal
Airlines have lost the ability to extract as much money as possible from travelers. And their pricing computers may stay confused for some time to come.
Revenue management—the science of getting the highest price for an airline seat, hotel room or other perishable good or service—is based largely on historical data. With big-data computing, airlines know with surprising precision what the demand will be for the 2 p.m. flight to Chicago on the third Thursday of October. Except now they don’t, since so much of revenue management is based on past buying with no relation to a pandemic.
“You’re not flying blind, but you definitely have blinders on,” says Dax Cross, chief executive of Revenue Analytics, an Atlanta-based revenue-management software company.
His firm is working with clients, including airline, hotel and passenger rail companies, on two problems: What to do during the pandemic and how to price post-pandemic.
Spot checks on busy routes show surprisingly little variation between pandemic fares this fall and summertime prices next year, when airlines hope there will be strong demand. In other words, pricing systems look confounded.
United’s lowest price for a week-long round trip leaving Friday from Chicago to New York was $197 on Monday. The same trip in both early May and early June next year was also $197. Between New York Kennedy and Los Angeles, American and Delta priced a Sept. 4-11 round trip at $297. Both had the same price for the same trip Oct. 2-9, another weak travel time. Next year in early May, both offered the same $297 price. Before the pandemic, some of these fares would have been hundreds of dollars higher.
Kevin Healy, a former pricing and marketing executive at several airlines who now is chief executive of consulting firm Campbell-Hill Aviation Group, says traditional revenue management techniques don’t work when there’s no appetite for higher-priced seats.
“Right now the demand is so low it doesn’t matter,’’ he says.
Part of the problem for airlines is that next year, pricing systems won’t have good data either: 2020 won’t be indicative of 2021, they hope.
“The entire demand patterns and booking patterns have changed. Not only are they lower, but any information about the mix of business and leisure bookings is no longer relevant,” says Peter Belobaba, principal research scientist for air transportation at the Massachusetts Institute of Technology.
Mr. Healy thinks consumers will have the upper hand for a while. Of course, plenty of people won’t feel safe traveling, or have the need to travel, for some time.
“The good news is that if you banked up a lot of frequent-traveler miles, redemption is not going to be an issue,” he says. “Even business travel is going to be cheaper. I don’t think it’s going to be fire-sale type stuff. It’s just that inventory is going to be much more available.”
It’s worth explaining how airlines actually price tickets. It’s a system that often frustrates consumers with rapid changes. The cheap prices never seem available when you want to go.
Airlines typically have a pricing department that sets a range of fares for each flight and includes rules that govern each fare, like a 14-day advance-purchase requirement. The lowest price might be a match of a cheap fare a discount carrier has in a particular market. The highest coach price will be the unrestricted, refundable walk-up fare. In between, there may be a dozen different prices.
Airlines also have a revenue-management department, separate from pricing. Revenue management decides how many seats to sell at each price and how many to hold back for higher prices, based on forecasts of demand and how flights are actually selling. Human analysts fine-tune computer results and mix in their own hunches and experience.
Every price gets loaded into reservation systems along with the availability of seats. If seven seats sell at one price and that’s all the airline allocated, the price a shopper sees jumps to the next available price.
Tom Bacon, a longtime airline-industry pricing executive and consultant who taught revenue management at the International Air Transport Association, thinks airlines need to move away from their reliance on historical data. He suggests they become more like online retailers that use factors like how many searches have there been for a particular product.
“Expedia or Amazon don’t think of it as: What did you sell three years ago and what’s the average sale for that over the past three years? They are now: What is hot now?” Mr. Bacon says.
Airline officials are reluctant to talk publicly about pricing because carriers got in trouble with the Justice Department in the past for signaling intentions to competitors about raising or lowering prices. But they say some of the new services they are considering involve companies that scour social media for mentions of destinations or events and use that to predict demand for tickets.
Mr. Bacon predicts airlines will rely more on rules placed on discounted tickets to keep business travelers from flying on the cheap. Requirements like 21-day advance purchase and Saturday-night stays largely disappeared because of widespread competition from low-cost carriers and because airlines became more reliant on inventory management that limited access to cheap fares. But rules now could make a major return.
“I don’t know if Saturday-night stay will come back, but I think there will be a big role for rules,” Mr. Bacon says.
Today, airlines say they are doing a lot of manual pricing and essentially pricing every flight as if it were a brand new route with no historical data.
Mr. Cross of Revenue Analytics offers this advice for consumers thinking about booking a big trip for next year: “I would say look now and if you find a bargain, jump on it. And if you don’t, fear not. I bet the bargains will come back as things start opening up.”