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Airline Industry Offers: Science vs. Static
Over the past several years, the airline industry has been increasingly using science-based pricing strategies in place of static pricing to create their product offers. A number of hard data statistics showcase this increase. Although the pre-pandemic rate of adoption was slow, there is much buzz in the industry about the pandemic serving as a catalyst for adoption in the coming years, as the industry is expected to face the impacts of COVID-19 through at least 2026. By 2026, science-based pricing strategies will likely be the norm in the airline industry, as such strategies are seen as imperative for airlines to remain competitive in an economically uncertain environment with rapidly changing consumer demands. To monitor this development over the coming years, it will be important to track indicators such as reported adoption rates via industry surveys, the onboarding of data specialists, the development of third-party software providers that operate in the area of dynamic pricing, as well as other indicators which are noted later in this report. These perspectives are explored in detail below.
The Airline Industry: A Slowly Increasing Shift From Static Pricing Strategies to Science-Based Strategies
Data collected from surveys of airline industry executives provides evidence that the industry is increasingly using science-based rather than static pricing to create their product offers, however, the adoption of such strategies appears to be slow. Despite this, the adoption of such strategies is expected to grow significantly over the next five years or so, as further evidenced by the survey data shown below.
- A 2019 survey of the airline industry found a dramatic decline in the percentage of airlines that use a static approach to ancillary offers when it comes to the use of customer data. In 2018 around 35% of airlines said they provided the same offers to all, while in 2019 this number dropped to around 25%. Meanwhile, there was an increase in the number of companies that reported providing customized offers for key customer segments (around 29% in 2018 vs. 33% in 2019), as well as an increase in the number of companies that reported providing customer personalized offers based on customer data (0% in 2018 vs. about 2% in 2019). In reference to this, the survey notes: "There has been some progress in how airlines use data if you compare our 2018 vs. 2019 results; however, one might say we are still far away from creating truly personalized offers based on customer data."
- "According to Skift’s airline survey, 93 percent of airline leaders regarded pricing choices in an offer as very important or critical to their business, 19 percent said they’ve already started work on ancillary price optimization, and 62 percent responded that they would between 2019 and 2020. [...] [Additionally,]more than half of all airline executives surveyed expect the evolution to customized offers will increase passenger revenue by 15 percent or more."
- A 2019 survey of about 400 airline industry executives, directors, and managers found that "more than 90% of airlines are seeking multiple changes to their tech stacks, including shopping and merchandising capabilities, and digital retail — all to deliver optimized offers to passengers while improving the passenger experience throughout the entire travel journey."
- Insights published by Travel Weekly in 2018 noted a growing trend of airlines providing fare offers based on the individual consumer making the ticket inquiry and that a handful of large carriers were moving towards this type of dynamic pricing science.
- A 2019 survey found that less than 8% of airlines surveyed reported doing dynamic pricing for their ancillary products, while nearly 25% do static pricing. The most popular pricing strategy for ancillary products was segmented pricing with 41% (e.g. per point of sales, route, etc).
- A 2017 survey of airline executives found that 19% expected to optimize their ancillary pricing using advanced approaches in 2018; 39% expected to do so by 2019, 23% expected to do so by 2020, and 19% expected to do so by 2025. This survey also found that 31% of airline executives expected to incorporate the 'relevance' of niche customer segments into their customized offers by 2018; 23% expected to do so by 2019, 23% expected to do so by 2020, 15% expected to do so by 2025, and 8% expected to do so by 2035.
Adoption and Indicators of Science-Based Pricing Strategies Through 2026
By 2026, science-based pricing strategies within the airline industry are very likely to be the norm, as the challenges posed by COVID-19 is putting a huge amount of pressure on the industry to change and adapt. This pressure was already building before the pandemic, but industry players have noted that the pandemic has really served as a catalyst for change, and one of the best defenses for airlines to remain resilient and competitive is to cater to the pricing needs of their changing customers. The most efficient way to achieve this is through innovative dynamic pricing strategies, which are already being implemented by major airlines. As the industry is not expected to fully recover until 2026, the current conditions blend perfectly to rapidly welcome and advance science-based pricing strategies at a significantly increasing rate. This is further evidenced by market reports showing the growth of relative technologies through 2026. This understanding is based on the culmination of data and information showcased below.
- Based on a survey conducted in July 2020, a majority (44%) of airline industry executives said they expect the industry to take between 1.5 years and 3 years to return to 2019 total revenue levels, while another 19% expected the recovery to take between 1 year and 1.5 years. On top of this, 69% said they felt the industry would be fundamentally changed by the COVID crisis. Although these data points do not relate directly to pricing strategies, one may infer that they set the stage for an industry that is ripe for radical change where cost strategies are concerned, where competition is even fiercer, and the demand for innovative pricing strategies that can capture customers and market share is high.
- Indeed, research published by MIT noted that the role of airline revenue management in the COVID-19 era is shifting and as a result, many airlines have expressed that they see COVID-19 as a "catalyst for change" and have thus begun shifting their development priorities. Major airlines such as Air Canada, United, and Qatar have all suggested they are placing a higher level of focus on dynamic and continuing pricing. One representative of Qatar said, "The one good thing about a crisis is people now see why dynamic or continuous pricing is relevant and how it would complement a revenue management system."
- A key driver for airlines' interest in dynamic pricing in the post-COVID era is that there are many challenges in regard to forecasting demands as the models, methods and technologies being used previously are no longer relevant and the rate at which demand can and does fluctuate is highly spontaneous due to the varying degrees of changing restrictions across geographies. Insights published by Eurocontrol state that "recovery in flight numbers is not likely until 2026," which serves to highlight the importance of long-term adaptations in pricing strategies within the airline industry.
- Post COVID-19 passengers are demanding flexible and refundable ticketing policies, which is also helping to drive the need for dynamic and continuous pricing innovations.
- Additionally, the high pressure for airlines to adopt technologically advanced pricing strategies based on computer science has been ongoing for a number of years already, even without the added pressure of the post-COVID economy, as evidenced by an article published by McKinsey in 2017, which suggests that airlines that didn't hop aboard this trend fast will lose their competitive edge. One hindrance to this adoption, McKinsey noted, was a lack of in-house specialists, such as data scientists, who could build these capabilities for an airline company, tied together with a lack of third-party software providers offering such a product. These challenges appear to be resolving within the industry, as evidenced by insights published in a 2020 market report that analyzes the airline IT market through 2025: "Airlines are trying to reach the level of personalization provided by [retail shopping] industries to gain more of the opportunity in ancillary products by pitching the right product to potential passengers at the right time. Numerous start-ups in various stages of growth are developing niche technologies that can improve the particular processes of an airline. Airlines and solution providers are partnering and investing in these start-ups to support their digital growth."
- In November 2020, McKinsey published another article noting how data remains of significant importance to the airline industry, despite a decline in customers as a result of COVID-19. The article notes: "Revenue managers have been at the center of managing this crisis. Some have proved agile and resourceful in their adoption of new data, and this has also led to new ways of working. Revenue and network managers have worked closely to understand unconventional demand signals and to make route, capacity, and pricing decisions accordingly." Once again, these insights infer demand for science-based pricing strategies in the airline industry for the coming years.
- The price optimization software market, in general, is experiencing a surge in demand which is expected to last through 2026, according to a 2021 market report. In tandem, a separate market report (published in 2021) notes that the ancillary revenue management market is expected to grow at a CAGR of 6.6% between 2020 and 2027. Lastly, the airline route profitability software market is expected to grow at a rate of CAGR 7% through 2026, according to a report published in 2020. As to drivers for this growth, the report notes: "Procurement of advanced software suites by the airlines to maximize over the ever growing aviation market is one of the major driving factors... [...] The growing adoption of technologies like artificial intelligence, augmented reality, virtual reality, mobile, and conversational commerce will assist the airlines in intelligent retailing and scaling their business."
Based on the data above, it would likely be useful to monitor the development of the following indicators in order to track the growth of science-based pricing strategies in the airline industry over the next five years: 1) the rate at which airlines are hiring data scientists and related roles, 2) the development and growth of third-party software providers that operate in this area, 3) surveys that track the operations and expectations of industry executives (e.g. quantitative adoption levels), 4) research and development funding/activities for in-house projects related to innovative pricing technologies, 5) growth and drivers of markets related to innovative pricing technologies and systems, 6) the rate at which the airline industry is rebounding from COVID-19 and it's impact on the competitiveness of the industry, 7) evolving trends in the airline revenue management market, 8) changing consumer demands relative to airline ticket purchasing, 9) case studies of airlines that have implemented dynamic pricing strategies, and 10) ongoing academic research in the field.
Research Strategy
Overall, the amount of direct information related to science-based pricing strategies is scarce within pubicly available information. Much of the available information is high-level and qualitative, likely because this is still a very new and emerging trend within the airline industry specifically. However, our team has worked diligently to conduct research through numerous surveys, market reports, and insights from industry experts to harvest relevant insights that collectively help to illustrate the current and future conditions of science-based pricing within the airline industry. Below, we have outlined some of the strategies and logic applied during our research:
Although there is much talk in the spheres of academics and industry experts with regard to the shift towards science-based pricing strategies among airlines, the vast majority of this information is qualitative in nature, featuring mostly the musings and recommendations from such experts as to why this trend has evolved, the advantages and disadvantages of it, and impact predictions; very few sources provide any quantitative insights showing the actual adoption of this trend. Our team believes this lack of hard data has to do largely with the currently low-levels of adoption for this trend. Despite the scarcity of this information, our team was able to dig up some surveys of industry executives which provide hard data on the percentage of those who are engaging with and/or intend to engage with these pricing strategies. This data proved to be most useful as it shows an increase and projected increase over time as well as provides hard data about the current level of adoption. We also attempted to find hard data relative to A.I.-based yield management specifically, since this was provided as an example in the research outline, however, no relevant information was uncovered.
To understand how the airline industry is likely to look in 2026 with regard to science-based pricing, we first attempted to find any direct, hard figures that would pinpoint projections for this year. However, no such figures could be found, which our team believes is due to the uncertainty of the market as a result of COVID-19. Instead, it appears that much of the industry is still in the phase of exploring options for how to cope and rebound from the past year's dramatic losses. As such, there is mostly just qualitative data available from credible sources and market reports that speak to the fact that dynamic pricing is buzzing in the industry due to its potential to behave more favorably in such an unpredictable economic climate. Additionally, because the industry is expected to feel the impact of COVID-19 for at least the next five years, it made sense to place focus on what the results of this impact will be in terms of driving science-based pricing strategies. Collectively, these insights helped us to gain an understanding of where the industry is headed over the next five years with regard to these strategies and, therefore, where the industry will likely land by 2026.