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June 20th, 2022 (Updated 08/15/2022) | 15 min. read

Ken Edwards
Marketing Specialist at Pricefx

Airline Pricing Strategies Explained: Types, Examples & Tips 

As an airline trying to improve yields in the ultra-competitive Airline Industry, you face unique challenges that other industries don’t need to be concerned about. Your business is currently facing more disruptions than other industries as you continue to be affected by COVID-19, pilot shortages and the rising cost of fuel. In times like these, an airline’s pricing strategy is critical to ongoing success. 

At Pricefx, we’ve spent the last 10+ years assisting companies across several industries in becoming more pricing agile and more efficient. This resulting pricing dexterity helps businesses to adapt quickly to the rapid pace of the current unpredictable business environment, and to optimize their organizations to protect their profits while still drawing in customers with enticing offers. 

In this article, we will first summarize the two predominant business models of the airline industry, the corresponding pricing strategies and the two main types of distribution channels. After the foundation has been established, we will share the cross-industry best practices to implement successful pricing strategies including: 

  • Empowering Data Collection with a Data Executive Champion 
  • Using Data Analysis to Enhance the Outcome of your Chosen Pricing Strategy 
  • Understanding your business model’s value to customers & pricing appropriately 
  • Aligning your market objectives, distribution and pricing strategy
  • Including Value Added Services (VAS) in your private fare offering portfolio
  • Discuss Pricing Strategy with your Sales and Marketing Team 

Straight out of the gates – an upfront disclaimer for airline industry pricing veterans 

 

This article is not intended to answer your questions regarding revenue management of your services

 

In this article, we’ll concentrate on pricing strategies in general (and airline specific subjects and issues related to them), how data analytics can assist you in setting up your pricing strategy and maximizing your commissions.

So, let’s dig in and look at the unique business models of airlines and how that makes the airline industry different when setting a pricing strategy.   

Airline Business Models 

In the airline business, there are two predominant business designs: the Ultra-Low-Cost Carrier and Network Carrier business models. Each has unique characteristics and pricing strategies. Let’s review each.  

Ultra Low Cost Carriers – Referred to as ULCCs, carriers like Ryanair target the leisure and cost-conscious traveler. As such, maintaining the lowest possible fares is of primary importance. To do this, they have eliminated all free amenities and conveniences. 

RyanAir-Aircraft-Taking-Off-In-Clear-Skies

Executives at these airlines are rewarded for reducing costs. Generally, these carriers will sell tickets using their website to avoid 3rd-party commissions that can lead to higher costs. These carriers will fly out of secondary airports in major markets to avoid higher airport charges. They will also fly point-to-point to reduce network planning costs. Finally, they avoid aligning with a marketing alliance to avoid the cost of participating, sharing revenue and managing a loyalty program.  

Network CarriersCarriers like Delta Air Lines have a contrasting model to ULCCs. They offer fares attractive to leisure carriers, however, their target market is the less cost-conscious, business traveler. 

Delta-Airlines-Aircraft-and-Delta-Pricing-Strategy

Network carriers compete on the value of their bundled offer which includes an alliance loyalty program, seat upgrades to their frequent fliers, high frequencies between hubs and major cities; and complimentary check-in, bags, snacks and lounge access to their high-value passengers.  

At another time we will discuss pricing where interline, code-sharing, and joint ventures are involved. 

Why Pricing is Different for Airlines 

Airlines are unique in their approach to pricing due to; 

  • Fare Price Constraints – Subject to legacy IT constraints, airlines are limited to offering twenty-six fares per itinerary. Within these fares an airline will have various cabins (First Class, Business, Economy, etc.) advance purchase options (30-day, 7-day, etc) and itinerary dependencies (one-way, round-trip, connecting). 
  • Customers – Generally, airline customers fall into two categories, leisure and business. While the leisure traveler is cost-conscious, the business traveler is convenience-focused. For the network carrier, the leisure traveler helps cover costs while the business traveler is critical for profitability. Leisure travelers are the lifeblood of the ULCC. 
  • Loyalty Programs – For many carriers, the airline loyalty program is more valuable than the carrier itself. To generate cash during COVID, carriers collateralized loyalty programs. Most network carriers are members of one of the three airline alliances (Sky Team, Star Alliance and OneWorld). Each allows for members’ points sharing. Savvy airlines are now pricing loyalty awards and redemptions based on the load factor of the flight. Depending upon the award or redemption value, a seat can be sold or redeemed for a points-premium or discount compared to the same seat sold for cash. 
  • Ancillaries – Because they are ultra-competitive with their fares, the majority of the ULCC’s revenue and profit come from the sale of bags, assisted check-in, additional legroom, etc. Conversely, the network carrier, dependent upon the business traveler for profitability, will include amenities in their private fare.
  • Network model – Generally, the ULCCs fly short-haul routes, two-hour flights, and from point-to-point. They keep their costs lower because passengers are not connecting resulting in less baggage handling and IT systems overhead. Network carriers will deploy one strategy for short-haul flights and when a long-haul flight is involved, deploy another strategy. For example, for the short-haul leg of a connecting itinerary, a network carrier will be more price competitive with an ULCC, while they deploy a strategy resulting in a higher fare for the long-haul portion of the itinerary.
  • Sustainability – Sustainability is becoming increasingly important for eco-conscious leisure travelers and corporations. Sustainability comes with the cost of more efficient aircraft or higher fuel. Knowing the flight footprint of your competitors can drive your strategy.
  • Payment terms – Ticket changes, cancellations, the possibility of reserving a seat all have an associated charge. Depending upon the fare purchased (and the associated revenue) a network carrier may charge for the privilege or not. Generally, the ULCCs charge for that privilege.
  • Published Fares – For the most part, the fares mentioned above are transparent. As an airline using Indirect Distribution changes fares, competitors are made aware of it, often in minutes. With that, an airline’s market strategy is also made available.
  • Private Fares – Airlines offer fare discounts to Travel Agencies and Corporations in the form of private fares. Unlike published fares, private fares are not transparent to each airline. Savvy airlines are now reducing their dependency on discounts where the price of a seat is not as important to the traveler (e.g. law and consultancy firms). Instead, they are offering complimentary lounge access, priority boarding and free cancellation perks.
  • Distribution costs – There are two categories of distribution the airlines use, Direct and Indirect (discussed below). 

The 2 Main Types of Distribution Channels & Their Effects on an Airline’s Strategy 

Another factor driving a pricing strategy is the distribution channel a carrier chooses to market their flights. Distribution channels can directly impact a carrier’s profit, so choosing the right one is critical. 

There are two main pathways a carrier can use to market their flights to travelers. These are the Direct and Indirect channels. The ULCCs rely almost exclusively on the Direct Channel to keep their sales costs to a minimum. Pre-COVID, network carrier’s channel’ use was split relatively evenly. As we emerge from COVID, the ratio has skewed toward the direct channel because business travel has not returned to pre-COVID levels. When it does, it is expected the ratio will return to pre-COVID levels.

1. Direct Channels

With direct channels, flights are not marketed through 3rd-parties. Instead, carriers rely on traveler affinity, email marketing and promotions to pull travelers to their website to shop for flights. 

A Direct Distribution channel strategy complements a carrier’s low fare strategy as there are lower sales costs as carriers do not have to pay commission or costs to intermediary distributors. As we mentioned earlier, both types of carriers will use the Direct Channel, however, it is predominantly used by ULCC’s whereby a carrier’s flights will almost exclusively be available from the Direct Channel. That is not always the case with the Indirect Channel.

2. Indirect Channels

On the other hand, indirect channels are 3rd-parties that market flights on behalf of carriers. The 3rd-parties performing this service are ever expanding and includes Online Travel Agencies, Travel Management Companies, Travel Retailers (Bricks-and-Mortar), Cruise Lines, Tour Operators and others. 

Using Indirect Channels, fares may possibly have higher prices due to the extra costs involved using intermediary distributors. Ideally airlines will pass that cost on to the traveler, however, when competing with a ULCC it is not always possible on certain routes. An airline uses the indirect channel to expand its reach to sell the seats on a given flight. As such, not all flights are available on the Indirect Channel. To lure corporate travelers, the Indirect Channel is a necessity because Travel Management Companies, like American Express Global Business Travel and others, book their flights using it. 

In order to make the indirect channel more competitive with the direct channel airlines are beginning to leverage a hybrid for the indirect channel referred to as NDC (New Distribution Capability). NDC enables an airline to avoid some costs and constraints of distributors while making their offer marketing friendly. 

Types of Pricing Strategies Used by Airlines 

Depending on the business model and market, a different pricing strategy may be used. This section will explore the various strategies used today, keeping in mind when we mention pricing, we are including cash, loyalty points and or a blended use. 

Leading ULCCs and Network Carriers understand the clear gateway to achieving optimum yield, revenue and profitability is to aim to make logical and science-based pricing decisions with advanced pricing software. 

However, there may be different pricing strategies that airlines use to reach that end profit goal including; 

  • Lowest Fare Strategy – Ryanair is noteworthy for their low fares. They have distinguished themselves as the lowest price provider in the markets they compete in. Their strategy requires the lowest cost of operations and a relentless determination to keep operating costs at the lowest levels. The business design is based on maximizing the load factor of the flight and then when combined with the upcharges for check-in, bags, beverages, etc., results in a profitable flight.
  • Competitive Pricing Strategy – In markets where no single carrier is dominant, a competitive pricing strategy (a pricing method that involves setting the fares in relation to the fares of competitors) is often used. In some cases, a carrier may choose to match another network carrier, while when competing with an ULCC they may choose to add percentage uplift to a ULCC’s fares. 
  • Penetration Pricing Strategy – Penetration pricing is a pricing strategy that is used by new entrants to a market to gain a significant market share quickly by setting an introductory low fare to entice customers to fly their airline. 

What-is-a-Penetration-Pricing-Strategy

  • Value-Based Pricing – Value-based pricing is a strategy of setting prices primarily based on a traveler’s perceived value of a product or service —also known as customers’ willingness to pay—to determine the price it will charge. Utilizing shopping data, this is possible to determine. 

Virtuous-Cycle-Value-Based-Pricing

  • Branded Fares – Both types of carriers successfully utilize this strategy on both channels. These are fare bundles that include the ticket and, at a discount, amenities and the possibility of changing or cancelling a ticket at no charge, priority boarding, a premium seat, etc. 

Tips for Setting an Airline Pricing Strategy 

Consider these tips when looking to apply a pricing strategy for your airline to make it more robust, in these uncertain times; 

  • Empower Data Collection with a Data Executive Champion – At all points of the processes, data needs to be available to enable the accuracy of your pricing strategy. 

If data is not being collected, drive its collection through the support of an appropriate person at the C or VP level of your airline. Executive support for data collection will be critical to the effectiveness of your strategy. 

  • Use Data Analysis to Enhance the Outcome of your Chosen Pricing Strategy: Applying a pricing strategy that can keep pace with the rampant current rate of change in inflation, rising fuel prices and hiring constraints is key. Data-informed pricing software is THE way to achieve that. 

If you have an unlimited army of employees to input data 24-7 into Excel spreadsheets, it may be possible without pricing software, but who can, or even more importantly, wants to do that? Regardless of which pricing strategy you implement, enhancing your pricing response times is critical to avoid over or under-selling a flight (referred to in the industry as spillage and spoilage). 

  • Understand your business model’s value to customers & price appropriately – Savvy leisure customers understand the ancillary upcharges the ULCCs apply. It’s important to price ancillaries (bags, meals) based on trip length and other factors affecting the cost of the flight and the value of the amenity to the traveler. 
  • Align your market objectives, distribution and pricing strategy – Your business objectives per route will be the critical component in deciding which strategy you implement. Most airlines offer the same flights on their website and 3rd-party sites. However, due to different sales costs and other factors, fares for the same seat can vary up-or-down. 

An airline may be looking to cover costs knowing on a competitive, hub-to-hub flight travelers will most likely be connecting to another destination where a higher fare can be sold because of your more convenient flight schedule. Alternatively, for an itinerary that is not competitive, you can price your fare based on a traveler’s willingness to pay. Choose and execute a pricing strategy that best reflects your network and market goals and how you expect to realize it. 

Furthermore, break down your business objectives as much as you can. Examine your larger plan and break it down into more detailed strategic plans as much as possible. For example, if your organization’s goal for the fiscal year is to increase revenue by 10%, having a plan where that 10% will come from across your various markets etc. will be important. 

  • Identify and understand value drivers for your airline at a granular level: Data tracking at granular levels is vital in far optimization. Understand which products (fares and ancillaries) are being sold, per itinerary and cabin, to harvest the value of your offering.

That analysis can empower an airline into taking specific actions to deliver the most value for its customers. 

  • Include Value Added Services (VAS) in your private fare offering portfolio – Consider offering additional services and accessories and building them into your value-based pricing strategy. 

Business travelers’ meeting schedules change regularly. Instead of a deep discount, as part of your private fare, include ticket changes and cancelations with a competitive fare at no charge. 

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Learn More About Airline Corporate Sales Strategies Here: 

CTA-Airline-Pricing-Strategies-Selling-to-Corporations

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Protect your fare margins by offering complementary customer-valued ancillaries and extra services to avoid fare wars. Network carriers are famous for maintaining premium pricing and adding value to their customers in the face of competing with low-cost air carriers. Pricing according to your value prevents you from short-changing yourself while creating a unique buyer ‘feeling and experience’ for your customers that is aligned with their expectations. 

VAS build plenty of extra profit opportunity for an airline and assist in building and strengthening your customer relationships with your clients. A happy customer will almost certainly return to fly with you again in the future. 

However, ensure your Sales Team understand the value behind your VAS and price the private fare discounts accordingly. 

Airlines-Pricing-Strategy-Flying-Blue-sky-from-below-view

  • Discuss Pricing Strategy with your Sales and Marketing Team – Much of your airline’s customer knowledge rests with your sales and marketing teams. When setting your pricing strategy, who your customers are, where they fly, business type and other demographics are all crucial factors. 

Clean and granular data sets are important and having your sales team collect prospect and customer data as part of their KPIs will assist in implementing a more accurate pricing strategy that includes discounts and incentives to 3rd-parties.  

  • Restructure Your Agency Commissions – In uncertain times like these as the airline industry gets back on its feet post-COVID-19, every single flight matters to your bottom line. If you’re employing the same commission model across travel agencies and routes, you could be leaving indirect channel revenue on the table. A well-structured incentive program gives an airline a significant competitive advantage. 

Protect your fare margins by offering complementary customer-valued ancillaries and extra services to avoid fare wars. Network carriers are famous for maintaining premium pricing and adding value to their customers in the face of competing with low-cost air carriers. Pricing according to your value prevents you from short-changing yourself while creating a unique buyer ‘feeling and experience’ for your customers that is aligned with their expectations. 

VAS build plenty of extra profit opportunity for an airline and assist in building and strengthening your customer relationships with your clients. A happy customer will almost certainly return to fly with you again in the future. 

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Learn More About Agency Incentives Here: 

CTA-Airline-Agency-Ticket-Selling-Article

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I’ve Decided on a Pricing Strategy – Where to Now? 

After reading this article on airline pricing strategies, you are now fully informed on the tips and tricks to help you decide and implement a customized pricing strategy to help your airline prosper, drive growth and profit. What’s more, it’s clear that it’s now time to get granular with your commissions and to maximize your agency returns, next generation pricing software like Pricefx will be required to do so.  

You have possibly already chosen the best pricing strategy that fits your organization’s unique business objectives, but how you implement that pricing strategy is not readily apparent.    

If you would like to learn more about how to implement a unique pricing strategy for your business, check out the advice this practical article below: 

CTA-How-Do-You-Implement-A-Pricing-Strategy