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For decades, most large airlines have used the same, rigid approach to pricing their tickets. But Air France-KLM and other large airline groups now want to break free of the old ways. Their goal is to price tickets as flexibly as ride-hailing apps such as Uber do.
Exhibit A: Air France-KLM said on Tuesday that it had tapped airline tech vendor Accelya to help sell its tickets in new ways. Air France-KLM said it would roll out “continuous pricing,’ meaning that it plans to calculate and present its prices in close to real-time — similar to how Uber responds to changes in supply and demand when setting rates for its ride-hailing services.
What’s in it for travel agents?
“Agencies will benefit from more sales,” said Pieter Bootsma, chief revenue officer of Air France-KLM. Early testing showed the new pricing collected more revenue from the same amount of ticketing, Bootsma said. Air France-KLM will roll out the method worldwide by year-end.
To access the broader set of fares, agencies must use channels that offer so-called NDC (new distribution capability) content. They can’t access the new pricing via the traditional reservation workspaces that Amadeus, Sabre, Travelport, and TravelSky give agencies.
In September, Amadeus became the first of those four tech companies to agree to commercial and technical terms to offer Air France-KLM’s NDC content and continuous pricing. The companies said the connection would go live by January, but the Amadeus pipes are set to open and deliver the content created by Accelya’s tech “within a few weeks.”
The pandemic inflicted severe losses on airlines, and that factor is fueling the sudden interest in more flexible pricing.
“The hottest thing coming out of Covid is dynamic, or continuous, pricing,” said Jim Davidson, chief product officer at Accelya. “Price competition is going to be fierce as airlines fight to win back customers. So price sensitivity will be extremely volatile in the marketplace. One thing continuous pricing does is it offers a much more instantaneous and fine-tuned reaction to shifts in customer willingness to pay.”
Wide adoption will take years, but momentum for change has built rapidly.
Lufthansa Group led the airline pack last October when it began rolling out continuous pricing worldwide. British Airways’ parent company International Airlines Group said in December it had begun a similar effort. Qantas has told investors it wants to adopt continuous pricing.
It’s not just the best-known airlines that are interested. On Tuesday, soon-to-debut Norwegian airline Flyr said it had hired tech vendor Kambr to create a continuous pricing system from scratch.
What Continuous Pricing Means
Airlines have a harder time selling tickets than retailers have selling goods because they’re usually trying to sell essentially the same thing, a seat, to different customers. They want customers with a high willingness to pay high prices, such as business travelers, to pay more than bargain-minded leisure travelers.
Today, an airline’s revenue manager typically decides in advance to sell, say, a dozen bargain priced-tickets for a given flight. Each fare class has a simplistic band of fares. When seats sell out in one fare class, computers typically offer seats in a more expensive class, regardless of demand. Think $79, $99, and then $129.
Large airlines use 26 buckets, with one fare class for each letter of the alphabet. Each airline sets its own rules for its fare classes. “F” on one airline might mean a full-fare first-class ticket, while “Z” might mean a deeply discounted, heavily restricted ticket that has a traveler must buy at least three weeks ahead of departure.
Continuous pricing blows up that system. The goal is for computers to essentially keep changing the pricing in a more granular response to factors such as how quickly a flight is selling out. Think $76, $77, or $82.
“The theory is that allowing an airline to pick any price to offer will allow it to choose the exact one that maximizes revenue,” wrote Massachusetts Institute of Technology (MIT) researcher Nicholas Liotta in a paper in 2019.
The research found that when only one airline uses continuous pricing on a route against a rival who doesn’t, it could boost its revenue 10 percent by selling the same number of seats. The gains mostly come at the expense of a carrier using the old pricing method.
The continuous pricing concept isn’t just about pricing seats. It’s also about bundling multiple services with seats into custom packages. This trend builds on years-long experiments. Airlines first created fare families (or bundles of products at different prices) such as Air New Zealand’s SkyCouch, which offers three seats in one ticket purchase. Airlines also created products like basic economy fares, which strip out full-service perks to match budget airlines’ bare-bones service. Carriers have seen revenue and profit gains from such experiments, which makes them want to experiment further.
Boom for Airline Tech Vendors
The move to continuous pricing promises more business for tech vendors. Replacing “static” fares with “dynmic” ones means airlines have to use various new tools to keep track of what fares are in the market. They’ll also have to hire companies to help forecast demand trends and update their revenue management software.
“Continuous pricing isn’t rocket science or completely new as a concept,” Davidson said. “But it’s also not something that everybody can do at scale today.”
“When you’re talking about a large airline that has just hundreds of thousands of fare bases and codes and you add in ancillaries and special rules, you need a sophisticated system,” Davidson said. “Some airlines we work with on continuous pricing want to go in afterward and add rules like, “Don’t have a more than 20 percent discount off the lowest price in the market on Tuesdays because we’re historically great at selling on Tuesdays.’ It gets complex fast.”
Some companies anticipate a boom in sales. Earlier this month, Cirium, an aviation analytics company, acquired Migacore, a tech start-up that has worked with Lufthansa and Singapore Airlines on demand forecasting in the past two years.
Some industry players need to adapt. Until now, airlines filed static fares through industry-owned clearinghouse ATPCO (Airline Tariff Publishing Company). Continuous pricing will disrupt that model. ATPCO’s new CEO, Alex Zoghlin, told Skift in January that his organization plans to adapt its tech to cope with continuous pricing.
Nine airlines use FLX Merchandise today, and Accelya plans to announce a tenth soon. Air France-KLM is one of a few additional carriers that use the FLX tool for narrower purposes, such as continuous pricing or calculating baggage allowance and fee information.
Yet the industry will be slow to shift, and the technical hurdles are significant.
“It’s a massive change,” said Bootsma of Air France-KLM Group. “It will take time for all the people with seats at the table to get prepared and in agreement.”
Air France-KLM offers continuous pricing and NDC content to agencies via its direct portal and via other so-called NDC aggregators, such as Trip.com Group-owned Travelfusion. The airline group also plans to roll out other content exclusively via its NDC channels, and it called this content personalized, dynamic, and bundled offers.
“We’re now stimulating interest among travel agents in adopting new channels by moving toward providing compelling offers exclusively through them,” Bootsma said.