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During good times, airlines brag about revenue management systems, promising they can capture every bit of revenue by measuring each traveler’s willingness to pay. Often, humans become near bystanders, told to let the artificial intelligence work its magic.
But sometimes top executives realize bookings aren’t tracking what they expect, and they overrule the machine, dumping cheap tickets. It’s happening in the United States now, on a nearly unprecedented level.
“The freakout has happened,” said Marietta Landon, a former revenue manager at Alaska Airlines. “No more advance purchase requirements, no change and cancel fees, and unprecedented low fares — although these things seem necessary because of this extreme situation.”
After holding out hope business and leisure travelers would return in summer or late this year and only discounting flights this spring, U.S. airlines seem to have given up, selling cheap fares through next February. A search of fares in key markets shows that while airlines may be avoiding deep discounts on premium class travel for late this year and next, and as well as economy class seats around the Thanksgiving and Christmas holiday, most other flights are cheaper than they have been in years.
With cash tight and demand plummeting, U.S. airlines may be looking to bring in whatever money they can, even if they won’t officially recognize revenue until a passenger flies. At most airlines, humans probably have taken over from computers, pushing to open the lowest fare buckets to keep money flowing. It is unlikely anyone cares about projections made in rosier times.
“Certainly they do want cash now,” said Tom Bacon, former vice president for revenue planning at Frontier Airlines. “I think they are in scramble mode.”
Usual Rules No Longer Work
Typically, revenue management software is designed to maximize profit. Often, systems want to fill airplanes, but that’s not always most important. Sometimes, they calculate the airline can make more money selling 75 percent of seats at high fares than 100 percent at lower fares.
The systems examine data from past years, along with information about events, to make projections. They know how many seats to set aside at each price level, and when to offer those prices. Hawaii flights tend to book early, so passengers may see high prices early in the booking curve, with prices dropping last-minute. Typically, a business route, like Los Angeles to Chicago, has inverse characteristics, which is why fares usually go up 14 days prior to departure.
Revenue managers long have excelled at plugging bigger events into the computer, like the NCAA Final Four, the Super Bowl or even baseball’s spring training, but in recent years they’ve gained a better understanding of micro-demand, adding festivals, and conventions and other smaller events to the picture.
But there’s no button for global pandemic. Now, airlines don’t know how to price future seats, because they’re not sure who will buy them, or even how many flights they will fly. Will business travel recover by November? Will people feel comfortable traveling in December?
“It’s all not booking very well now,” Bacon said. “How can you even know what metric to use to either increase the fares or decrease the fares?”
Scott Nason has seen this before. Nason was vice president for revenue management at American Airlines, taking over the year after 9/11. By then, demand was recovering, but still was not tracking what the computer system might expect. American had to discover, by trial and error, how to price.
“They had already had the initial shock but they had the same problem then that airlines have now, which is to say, how long is it going to take for it bounce back to normal?” Nason said. “They can’t know. They don’t know if the current social distancing is going to be for the next two weeks or next two months or through July or August.”
In a best-case scenario, Landon said, airlines will go back to maximizing revenue as soon they believe demand is recovering.
“The ultimate goal is maximizing revenue but when a ‘freak out’ occurs, you focus so much on load factor,” she said. “Then, when that passes there is a big focus on yield to try to recover. It’s a crazy airline pendulum that needs to go back to focus on revenue. But leadership really gets panicked at times.”
Pricing Low For Almost A Year
Judging anecdotally, the cheapest flights are in the next couple of months, when airlines suspect few travelers will buy tickets. You can fly roundtrip next month from Los Angeles to Chicago for $35 on Spirit Airlines (no, that’s not a typo), or about $75 on United or American.
Until recently, at most airlines, that was the extent of the deep discounts. Many had been pricing summer travel and beyond at near-regular rates, perhaps hoping demand would materialize. But that strategy seems to be waning.
Now, in many cases, discounting is expanding far past the spring, with American selling the Los Angeles to Chicago route for as little as $91 into November. Other routes have similar discounts, including Los Angeles-London, which passengers can buy for under $350 for flights into next January on major airlines.
No one knows whether those could turn out to be great deals, or whether customers again will have to postpone their travel. No one even knows if the flights will run as scheduled, because most U.S. airlines have said they plan to ground hundreds of airplanes until the crisis wanes. An airline might sell the flight and then cancel it, because of lack of demand, offering the customer a refund or a credit for future travel.
It’s all uncertain, but discounting future travel is probably the right move for airlines, Bacon said, because it gets money in the door.
“If you get that cash in advance, that is a free loan to you in some sense,” he said.
Still, despite the low prices, Nason said he doesn’t think airlines are showing nearly as much distress as carriers did 20 or 30 years ago. Prices are cheap, he said, but not yet at fire sale levels, particularly with fuel costs at historical lows.
“You saw those behaviors with a Braniff or Pan Am or TWA or Eastern in their final days,” he said. “They were pricing their seats to generate cash.”