What Is Dynamic Pricing Of Airline Tickets?

 The Man Behind the Dynamic Pricing Model-Robert Crandall

The word ‘dynamic’ means continuous change. This pricing model of the airline tickets was first developed by Robert Crandall who was the president of American Airlines in 1980s. Robert is credited with many achievements which have made significant impact on the global aviation sector as such. He was the first person who came up with the first frequent flyer program, which almost every airline uses even today with some changes here and there. He was the one responsible for route optimization and adoption of central reservation system. Both of these innovations are being widely used even now, so much so that these form for foundation of functioning of airline industry. Crandall is also the one who is credited with incorporating the practice of overbooking, which has been quite controversial ever since it was initiated. He also pioneered the yield management principles which help in garnering maximum revenue for the airline.

Revenue Management by Airlines

Most of the airlines manage their revenues by adopting practices which aim to sell right product to right customer through right distribution channel at right price and at right moment. So, we find that the revenue management incorporates elements of product (air tickets), price (air fares), time, distribution channel and the customer.  These further have many different price points which can have an impact on the pricing of air tickets.

The Basic Formulation of Dynamic Pricing of Air Tickets

It is common knowledge that the air fares are determined by the high fixed costs and low recurring cost elements. This makes the cost of tickets dearer, and therefore, necessitates the need for selling the highest number of seats at highest possible price which a customer will be able to pay. A key balance is to be attained between the levels of occupancy of seats and the price of each seat. Since the occupancy is going to take time, which can be spread over weeks, the airline ticket prices cannot be kept same all through. So, the factors of product expiry and limited product capacity are important for determining pricing model.

Therefore, the current Dynamic Pricing is an improvementover the previous Static Pricing model. Let us first understand, in brief, what the Static model was all about.

Static Pricing Vs. Dynamic Pricing

Static pricing of the airline tickets entailed creation of the specific customer segments. So, there could be passengers who would want to fly on cheapest air tickets even if they have to buy connecting flights and the travel dates can be flexible for them. Then, there can be other segment of passengers who would want to fly on fixed dates and would want to reach their destination in shortest possible time. These examples demonstrate the way the segments were created, and there were many of these, which were used to determine the price of tickets.

Problems with the Static Pricing Model

The static pricing model had many gaps or limitations. At first, it could not take into consideration all the factors which are variable in nature and which have a direct bearing on the prices of tickets. This model did not consider the competition from other airlines which directly affects the price of tickets. There was a lack of understanding about how the fares are distributed and how more complex data received through analytics can be used to create a better revenue optimization model.

What Makes Dynamic Pricing Better?

Dynamic Pricing addressed all of these problems which were present in the Static Pricing model. With the adoption of dynamic pricing, it was possible to price a product as per the current market conditions, booking patterns, prices of competitors, impact of popular events and even weather on fares. The prices of the air tickets can change in real time. These can changes even when you are in the process of air ticket booking.  

This model is a vast improvement over the previous one when it comes to having highest revenue through sale of tickets.

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