Harnessing the Power of AnalyticallyDriven Pricing Strategies
A
A Win
Wi for
f Airlines
Ai li
& Th
Their
i Customers
C t
Michael Bentley
Partner
Revenue Analytics, Inc.
1
© 2013 Revenue Analytics, Inc. All Rights Reserved.
Agenda
• A Brief History of Airline Pricing
• The Airline Pricing Problem
• Case Study: Hospitality Price Optimization
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A Brief History of Airline Pricing
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Pre-Deregulation: Airline Pricing was Easy
Prior to the Airline Deregulation Act of 1978, pricing wasn’t a
problem……
The Regulated
Industry
• Fares set by
y CAB
• Guaranteed Rate of
Return
• Route access controlled
• Startup airlines
prevented
……at least for the airlines.
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However, Paying for a Ticket was Not
For travelers, the cost of an airplane seat was prohibitively
expensive.
1960 United Airlines Des Moines –
C l
Columbus
b
ticket.
i k
P
Price:
i
$98
In 2012 dollars, that’s $765.
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With Deregulation, Came Challenges
The change to the industry created a number of challenges for
the airlines.
A Wave of New
Entrants to HighDemand Air Markets
Increased Competition
on Previously
Profitable Routes
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The Impact to the Industry was Immediate
and Lasting – Prices Fell.
$350
$340
$330
Change in Average Price
1974 - 2011
$320
Average Price
Absolute
Price
$3 0
$310
$300
$290
$280
$270
Airline De-Regulation
Act of 1978
$260
$250
Source: Supreme Court Justice Stephen Breyer, 2011
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In Constant Dollars, Prices have Fallen
Catastrophically.
$1,450
$1,250
Change in Average Price (Adjusted for Inflation)
1974 - 2011
Average Price
Absolute
Price
$1,050
Inflation Adjusted Price
$850
$650
$450
$250
Source: Supreme Court Justice Stephen Breyer, 2011
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……And Airlines Failed
In the last 25 years, bankruptcy among airlines has been 10 times
higher than the general business community
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The Rise of PeopleExpress
PeopleExpress sought to democratize air travel, putting it within
reach of those typically taking buses and cars.
“Flying That Costs Less Than
Driving”
• 1985 – Fastest growing company in
US history
• Operating at ½ the cost of major
carriers
• Prices 50%-70% lower than majors,
and the same price for every seat on
the plane
• 75% load factors compared with high
50-percentiles of other carriers
Source: Revenue Management – Hardcore Tactics for Market Domination, Robert G. Cross
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American Airlines Adopts Yield Management
American and the other majors had to find a way to offer low
prices the consumer was demanding, while remaining
profitable. Inventory Controls were the answer.
The Birth of Revenue Management
• Accurately forecast passenger
demand at different fares
• Save seats for late-booking high
fare passengers
• Allocate leftover seats to a variety
of fares with advanced purchase
restrictions
• Ultimate
Ulti
t S
Super S
Saver fares
f
Source: Revenue Management – Hardcore Tactics for Market Domination, Robert G. Cross
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Ultimate Super Saver Fares Change the
Industry Forever
American was able to satisfy consumer demand for discounted
airfare and incrementally improve their revenues, all by offering
discounts with laser-precision.
A New Kind of Price War
• American’s
American s discounted fares
undercut PeopleExpress everywhere
• Discounts were made available and
unavailable based on the latest
booking data
• PeopleExpress were unable to
respond and bookings fell
• Load factors at PeopleExpress
dropped from averaging 85% to
30%
Source: Revenue Management – Hardcore Tactics for Market Domination, Robert G. Cross
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The Fall of PeopleExpress
“We went from being a healthy, profitable company……to losing
$50M a month.” – Donald Burr, PeopleExpress
PEOPLExpress Annual Profit
100,000,000
$70M
50 000 000
50,000,000
$40M
$20M
0
(50 000 000)
(50,000,000)
(100,000,000)
-$130M
(150,000,000)
-$170M
(200,000,000)
1980
1981
1982
1983
1984
1985
1986
Source: Revenue Management – Hardcore Tactics for Market Domination, Robert G. Cross
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Today, the Practice of Revenue Management
is the Cornerstone of Airline Pricing
Airline pricing still relies on the same data and core concepts
American used in the development and execution of Ultimate
Super Saver Fares in the 1980s.
Market Segmentation
D
Demand
dF
Forecasting
ti
C
Competitive
titi D
Data
t
But, lack of innovation and the application of advanced
mathematical modeling has resulted in a significant pricing
problem.
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The Airline Pricing Problem
And its Impact on Customers
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Returning to Historical Airline Prices, it is
Evident there is a Pricing Problem
$350
$340
$330
Change in Average Price
1974 - 2011
$320
Average Price
Absolute
Price
$3 0
$310
$300
$290
$280
$270
Airline De-Regulation
Act of 1978
$260
$250
Source: Supreme Court Justice Stephen Breyer, 2011
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But, Just How Serious is this Problem?
Viewing historical airline pricing compared to other industries,
the severity of the problem is apparent.
Airline
Ai
li
A
Average Price
P i
1970 - 2011
Hotel
H
t l Average
A
P i
Price
1970 - 2011
$360.00
$120.00
$340.00
$100.00
$320.00
$325
$300.00
$280.00
$268
$260.00
$
1970
2011
R t l Car
Rental
C
Average
A
Price
1970 - 2011
$110
$50.00
$80.00
$80 00
$40.00
$
$60.00
$30.00
$40.00
$20.00
$20.00
$10.00
$20
$0.00
$
$0.00
$
1970
$45
2011
$4
1970
2011
Another way to think about it –
If the
th Corvette
C
tt Stingray
Sti
shared
h
d the
th same pricing
i i
history
hi t
with
ith
the airline industry, you’d be paying less than $6,000 for a
brand new one……instead of the $52,000 they actually cost.
Sources: Airline - Supreme Court Justice Stephen Breyer, 2011; Hotel – American Hotel & Lodging Association;
Rental Car – USA Today
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The Airline Pricing Model is Broken
Airlines have continued to improve and advance their Inventory
Control capabilities, but have neglected advances in the field of
Pricing.
The airlines have a
pricing problem,
but are only
treating the
symptom
The solutions
airlines have
sought are only
creating additional
problems
Other industries
have pursued
further advances in
pricing, with great
success
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Airlines are Treating the Apparent Revenue
Problem, but are Ignoring the Root Issue
Airlines are currently battling their revenue problem with a
variety of initiatives. However, these “solutions” are only
treating the symptoms and not the underlying pricing issues.
Pricing Issues
• Reliance
R li
on ““price
i matching”
t hi ”
• Overly-simplistic segmentation
• Lacking measurement and use of
price sensitivity
• Failure to reflect brand preference
pp
rather than
• Rules-based approach
true optimization
• Irrational First Class pricing
differentials
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Current Solutions to Close the Revenue Gap
Long-Term
have Long
Term Negative Consequences
Airlines are combating higher costs and revenue shortfalls by
charging fees for services previously considered “included”
……and angering customers in the process.
New Airline Revenue Streams
• Checked
Ch k d baggage
b
• Carry-on baggage
• Flight changes
• Priority boarding
• Award Mile Ticket processing
• Mileage-based upgrades
Airline ticket prices account for just 70% of airline revenues,
do n from
down
f om 80% in 2000
2000.
Source: Wall Street Journal – July 4, 2013
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While Airline Advancement in Pricing has
Stalled, Other Industries are Pushing the
State of the Art
Airlines have continued to improve their core Inventory Control
capabilities (forecasting, overbooking, etc.), but have fallen
behind other industries in the science and sophistication
supporting their pricing decisions.
Pricing Advances in Other
Industries
• Advanced Customer Segmentation
in Retail
• Market Response Modeling in
Telecom and Services
• Analytically-Driven Pricing
Strategies in Automotive
• Price Optimization in Hospitality
d Cruise
C i Industries
I d t i
and
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Hospitality Case Study:
Using Advanced Analytics to Drive Pricing
A Win for Hotels and Customers
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The Hospitality Industry Solution Takes a
“Customer-Centric”
Customer Centric View of Pricing
Hospitality Price Optimization is working because it’s aligned
with the way customers think.
Advances of Hospitality
Price Optimization
• Considers same key factors hotel
Price
Sensitivity
revenue managers consider when
setting prices manually
• Gathers and compares competitive
rates
t much
h as a customer
t
would
ld
shop for a room
Optimal
Prices
Demand &
Availability
Competitive
Prices
Key Inputs to Hospitality
p
Price Optimization
• Understands the trade-offs
g
g location,,
customers make regarding
quality, brand, and price
• Analyzes over 8 million alternatives
daily to recommend 350,000
optimal rates per day
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The Fundamental Basis of RM: More Accurate
Forecasting Drives Better Decisions
Improved forecast accuracy leads to better pricing and
inventory decisions.
Roadmap to Improved Forecast Accuracy
9 Segment customers by statistically significant characteristics
9 Leverage meaningful macroeconomic, socioeconomic, and
weather data
9 Understand how demand forecast might be impacted by own
price and competitor’s price position
9 Allow for user adjustment, but keep it simple
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Market Response Modeling Provides Critical
Insight into the Price Sensitivity of Specific
Customer Segments
De
emand
How does demand respond to changes in pricing?
Pickup
= 55
Lost Demand
= -15
Low p
price sensitivity
y
High price sensitivity
$215
$250
$295
Price
Accurate modeling of price sensitivity gets the right offers to
the right customers.
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Realized Benefits of Price Optimization
Deployment within Hospitality
RE
EVPAR
Raise the Top Line
Measurable Revenue Uplift
• Major hotel companies have stated a 3% revenue uplift
TIME
attributable to price optimization in their annual reports
Price with Confidence
Competitive Advantage in RM Sophistication
• Proactive pricing moves
• Revenue impact even with excess capacity
• Knowing when a competitive response is necessary
Ensure Tactical Actions Align with Strategy
System Recommendations Support Strategic Objectives
• Quantification of the right brand premium
• More time for revenue managers
g
to think strategically
g
y
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Following the Same Approach, Airlines Can
Begin Addressing the Pricing Problem
This proven approach will drive revenue directly to the bottom
line for the airlines, making them less dependent on ancillary
fees that are damaging customer satisfaction.
Inventory Controls are
essential for airlines.
But, they fail to capture
the full revenue
potential if the price is
wrong to begin with.
Statistically-based
segmentation and
market response
modeling ensure rational
market pricing that
meets customers’ needs.
Price Optimization can
be a game-changer for
the industry in the same
way Ultimate Super
Saver Fares were for
American Airlines.
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