Ai Edtiorial: Dynamic Pricing and Reward Seat Availability

Understanding the game of dynamic pricing and reward seat availability

One factor that seems to be annoying a lot of customers these days is the availability of the lowest cost award tickets. Ai’s Ritesh Gupta explores why airlines are going ahead with dynamic pricing

All the talk about frequent flyer programs proving to be a value asset for any airline is incomplete if the loyal customer is frustrated or dissatisfied. But is this really an area of concern for carriers?

In fact, it is being highlighted that what works for a passenger isn’t adequate for airlines in financial terms. 

So what is it that’s forcing airlines to change their approach toward FFPs?

Cameron Trant, president at Trant Consulting says airlines first and foremost are concerned with losing rather than gaining in the FFP game. He explains: “History has shown that airlines that have tried to hold out on having a program, such as Southwest, Swiss or Singapore all discovered they were losing market share within the high yielding business segment and eventually initiated a loyalty program of their own.  I think that only after coming to the realization that a FFP is a critical part of doing business do airlines then look to try and monetize the program itself, primarily through partnerships that purchase mileage from the airline.”

Award ticket pricing

So what’s annoying flyers today? One factor that seems to be annoying a lot of customers these days is the availability of the lowest cost award tickets. 

Typically airlines have very sophisticated inventory management solutions and often they only allocate the lowest awards to seats they feel would otherwise go unsold. As Trant points out, however as load factors have increased from the low 70th percentile to the low 80th percentile over the last decade, the number of seats going unsold has been drastically reduced – especially on flights around holidays, or any peak travel times for leisure customers. 

“Airlines have to walk a delicate balance between risking long term revenue potential by alienating customers that perceive they can never redeem their miles, and maximizing their short term revenue potential on any given flight,” says Trant.

In terms of how airlines are going about reward seat availability, a survey by released by IdeaWorksCompany in May this year indicated that increasingly more carriers are governed by “accounting regulations that allow airlines to post revenue to their income statements only after a member redeems miles or points”. Overall, airlines “are continuing to be more generous with reward seats”. The average for all airlines for 2010 was 66.1%, which increased to 74% this year.

Still there already has been quite an uproar about revenue-based award tickets.

As highlighted by IdeaWorksCompany, a major development last year was Delta’s decision to go for revenue based mileage accrual this year.  This ranges from five points per dollar spent on base fares for members without status, and up to 11 points for Diamond level members. 

This meant that the new approach would result in a “windfall of miles for members paying higher fares”, and at the same time, it curtails the overall mileage accrual for members without status booking saver-type fares. 

So a regular member buying a $316 roundtrip Atlanta – San Francisco ticket accrues 1,580 miles in 2015; that same trip delivered 4,278 miles last year!      

The big question over here is the way airlines modify the value of miles.

It is being highlighted that a majority of awards are anyway not going to be relevant to those who are associated with relatively lower earning rates. This essentially means that it would take them a lot more time to earn the requisite mileage for that particular seat.

Dynamic pricing

Trant says, “Airlines have historically used very complex systems for making pricing and inventory decisions for revenue tickets, however their award ticket pricing has been relatively static – meaning it is the same cost for a customer who wants to fly on a off-peak day vs. someone who wants to fly on a peak travel time as long as the inventory was available.”

He adds, “With dynamic pricing, the airlines hope to apply the same sophistication to properly price award tickets.  If you are a consumer that is willing to fly the redeye flight or travel on Tuesdays you may actually benefit, if however you are only a weekend warrior you may find yourself paying significantly more miles than you have been accustomed to.”

Commenting on the non-availability of mileage award charts (such as Delta stopping publishing of charts), Trant says, “If you were to equate frequent flyer miles/ points to a currency, the airline itself has extremely broad powers to set the value of the currency.”

According to him, what the airlines are doing through dynamic pricing is an attempt to optimize the cost of award tickets in the same manner that they do with revenue tickets. 

In its simplest form, if a particular flight has a high demand for award travel, the airline would increase the required miles to redeem on the flight until the demand met the available supply, while simultaneously burning the maximum miles possible, says Trant. Although the actual variables that an airline may factor into the final pricing may vary greatly (flight demand, elite status, past purchase history, propensity to purchase add-ons etc), the end goal is to optimize the revenue gained and/or mileage burned on every flight.

Writing on the wall

It is clear that how much a passenger spends is now having a big impact on the future of FFPs. 

With the growth of low cost and ultra-low cost carriers, legacy carriers have found themselves having to offer deeply discounted fares during times of low demand in order to achieve their target load factors.  These low fares, while good for stimulating demand, are also prime targets for a practice called mileage runs, where a customer takes a flight with no other intention other than earning the maximum number of miles for spending the least amount of money in order to obtain elite status, explains Trant. He adds: Another less nefarious example, but one that can happen under a mileage based program is the case of where one customer who flies from North America to Asia and can earn the top tier in as little as 4 or 5 roundtrips, while a customer that commutes domestically every week 1K miles each way, but takes off 4 weeks for vacation and holidays, comes just short of the threshold necessary. 

“A revenue based program would hope to correct both of these situations by removing the incentive to take mileage runs, giving an opportunity for the Asian flier to still achieve elite status provided he or she is buying full fare or business fare tickets, and reward the almost weekly flier who would certainly make the threshold due to the sheer volume of their purchases,” says Trant.

He also asserts that switching to a revenue based system is not a panacea however.

“By tying points to a specific spend, it becomes an easy equation to determine the value of those points.  Consumers can then easily make all sorts of calculations as to whether the value received is worth the value spent.  In addition, FFP partners know that same equation, so it will be much harder to negotiate premiums for the perceived value of points that the partner is purchasing from the airline when they are publicly pegged to a specific value.”

As for consolidation in the U. S. industry impacting FFPs  and redemption, the jury is still out as to the complete impact this will have on FFPs. 

“In some cases the changes are almost immediate – for instance I was able to shop an award itinerary last week that had a connection in Charlotte in one direction and one in Chicago in the other (thanks to the AA-US merger), but many other impacts could take years to develop,” shared Trant. For instance, airline co-brand credit card programs are highly sought after by banks due to the fact the customers typically spend far more on the airline card than on a typical credit card.  Now through consolidation there are less of the programs available to bid on, and the programs are much larger so this puts extra negotiating power into the hands of the airline. As Trant says, only time will tell if this results in better product offerings for the customer, or if the airlines will focus solely on getting better financials for themselves.

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