Pitch-Perfect Price Points
Get In Harmony With Fare-Class Realignment
Significant changes in an airline’s selling strategies, flight network, partnerships or technology may necessitate the fine-tuning of its revenue-management and pricing practices.
Despite the marvelous online and product evolution the airline industry as a whole has undergone during the past decade, the basic, traditional tenets of airline pricing and inventory management largely remain intact today.
For the most part, the price that an airline offers in the market on a given route per a given price point is the primary factor most passengers use to determine which airline to choose. How do these price points arrive on the selling shelf, how do they change over time and how might this process ultimately control a given market’s overall profit/loss?
For most airlines, selling price points are a culmination of actions taken by the pricing department in terms of the actual number of price points published on a given route at any one time and subsequently, by the actions of the revenue management department based on specific, technology-driven inventory allocations for each of the active and available fares.
For any fare quoted, airlines have an electronic “shelf” stocked with a given number of seats at a given price point generally based on forecasted demand and analyst influence reliant on a series of technologies to efficiently quote, sell and continually reset inventory. As this process plays out on a daily basis across a network of flights, the overall health of the fare structures and pricing and revenue management strategies in place weigh heavily in terms of business process efficiency, the mix of fares sold at the various price points made available throughout the selling life of each flight and ultimately impact airline profitability.
Both the pricing and revenue-management functions require occasional maintenance, and unfortunately, it is not uncommon for activities that are seen as optional to core operating functionality to fall by the wayside. Given the wide array of active selling fares across a given network that fulfill an airline’s commercial obligations and are well received by customers, the tendency within pricing is to simply expand the number of fares and rules over time.
Though pricing and revenue management may become increasingly efficient in their ability to, for example, receive a new competitive fare request from the sales department and then review and introduce it to the market to maintain price parity with one or more competitors, this approach can eventually lead to cluttered arrays of fares across the inventory reservation booking designator (RBD) ladder. As well, it often becomes a slippery slope to suboptimal returns given the downline impact to revenue-management-optimization practices, which may necessitate a fare-class realignment (FCR).
Fares can be described as the “fuel” required to successfully operate and generate quality optimization outputs from any revenue-management technology. Classic revenue-management technologies generally call for higher RBDs to represent higher selling fares to enable the methodology work as designed. Instances of fare inversions, in which lower fares are placed in higher RBDs, tend to upset revenue-management forecasting outputs, as do inconsistent gaps or differences in average fares between RBDs in a given market.
An airline’s commitment to internal analytical rigor is often tied to available resources and the pace of overall change that might be happening as part of running a highly competitive business and completely unrelated to pricing. Nonetheless, no matter the size or breadth of a carrier, investments have been made in employees, business processes and technologies necessary to operate a high-functioning, continually competitive pricing and revenue-management practice. Maintaining fares in a harmonious state is imperative for optimizing the use of revenue-management technologies and subsequently, maximizing revenues.
A number of triggers can prompt a request for proposal (RFP) for a FCR (fare-class realignment) or at least an elevated level of managerial consideration for such, including:
- A significant commercial/product change in the marketing/selling of an airline to the customer, including introduction of ancillaries that impact basic fare offerings or frequent-flyer program changes.
- A significant network change, such as new flying into regions where specific pricing demands of the marketplace introduce new complexities that require an FCR to adequately address.
- A significant airline partnership change, for instance, entry into a global alliance or significant expansion in special prorate agreements.
- A technology change within pricing/revenue management /inventory areas, such as migrating from leg-segment revenue management to O&D revenue management or changing vendors.
Achieving Harmonized Fares
Fares must consistently increase from lowest to highest to realize harmonized fares. In addition, the difference between average fares must be model-driven to attain consistency across an airline’s network. In this example, from V (cheapest RBD) to Y (highest priced RBD), fares must consistently decrease/increase and gaps between average fare amounts in each RBD must be ascending/descending to be in harmony.
How is an FCR executed?
The process generally begins with an expansive review of recent revenue-accounting data. Depending on the size of the carrier, this process may involve more sophisticated statistical modeling tools to best manipulate the data and customize it to specifically requested business requirements. The data requirements call for exhaustive, market-by-market views of an airline’s offerings in terms of prices or priced products, their placement in the RBD hierarchy of fare values, respective fare-basis codes, distance flown for a given market and a host of other attributes.
From there, a best-fit statistical modeling approach is determined based on an understanding of the nature of the airline’s network (i.e., the balance between short-, medium- and long-haul flights) and fare structures and approaches used by the airline for marketing and revenue management. Yield-based or distance-anchored models typically work best and all require a healthy dose of customization to establish the best fit.
Once the model is customized, its output is referred to as a “FCR calculator” and then serves as a pricing tool to assist in determining where a given fare should be filed from an RBD perspective to maintain recommended harmony.
The value from the FCR process can be seen from both a current-state perspective and a future-state perspective. Current-state meaning that initial FCR model outputs will likely suggest a significant number of adjustments be made to fares and their placement within the RBD structure across a set of the most revenue-significant markets. Future-state value is gained by the airline taking ownership of the model to evaluate and drive pricing decision-making moving forward, as well as maintaining a standard analytical process in assigning fares to RBDs.
Given the evolving nature of the business and depending on the degree of change experienced by an airline following the point of FCR model creation, new data uploads should be considered on an annual basis to maintain a model that best reflects the current selling state of the airline. Changes within an airline at such intervals could range from the minor (e.g. a small adjustment to the frequent flyer program necessitating that a single RBD be added or removed) to grander calls for realignment brought about by airline partnership enhancements, changing technology requirements or significant competitive activity.
Depending on the overall health of the fare structures and outcome of the modeling, an FCR exercise consistently calls for some measure of ongoing pricing changes to drive the market-level harmony desired and provide the revenue-management technology with the right “fuel” for optimization. Beyond this core work, an FCR often leads to larger management discussions in terms of considering evolution of overall market pricing strategy and perhaps additional commercial changes focused on sharpening pricing and revenue management performance.
Airline revenue management, which is anchored in statistics, functions optimally when technology inputs are orderly and what is made available to sell resembles the competitive selling market. Pricing is anchored in efficient, organized analytics and filing activities, which keep an airline price-effective in the marketplace.
As an airline falls further away from such pricing and revenue-management attributes, an FCR is one of the most efficient return-on-investment vehicles for re-establishing fare and inventory harmony and placing pricing and revenue management on a new foundation for onward revenue maximization.