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Airlines have always had to pay attention to competitive fares.
The Traditional Method
Traditionally, airlines respond to a new low fare offered by a competitor in two steps:
The two-step process translates into either matching the competitive fare if inventory is open or ignoring the competitive fare if remaining demand is forecast to be strong.
1. Pricing analysts monitor competitive fares multiple times a day and file competitive fares before the next filing deadline, often within a few hours
2. Inventory Controls’ analysts – independently – determine what fare level is to be offered based on days before departure and forecasted remaining demand
The two-step process translates into either matching the competitive fare if inventory is open or ignoring the competitive fare if remaining demand is forecast to be strong.
An Evolving Practice
This practice has had to change somewhat over the past decade.
Over the past ten years, real-time fare availability has been added to the traditional process.
Competitive fare tracking now includes screen scraping other airline websites and other distribution channels to see what fares are actually available for customer purchase (availability incorporates the other airline’s own demand forecasts which may limit the availability of the lowest filed fares).
As screen scraping became common, some airlines have adopted real-time processes for matching other airline selling fares.
The other change is the proliferation of ancillary fees and the growth of low-cost carriers. “Matching” a low-cost carrier base fare may actually mean undercutting the total fare.
Legacy airlines have developed new business rules for how and when to match a low fare introduced by a low-cost carrier. In general, many carriers match with a premium and then only in markets where the low-cost carrier has substantial capacity.
Over the past ten years, real-time fare availability has been added to the traditional process. Competitive fare tracking now includes screen scraping other airline websites and other distribution channels to see what fares are actually available for customer purchase.
Competitive fare availability and ancillary pricing have made the competitive fare process much more complicated over the past decade. Still, there are multiple problems with competitive fare matching today:
1. It is largely manual and not real-time. Even with the use of availability tracking, most airlines monitor the fares and analysts must separately decide whether or how to match.
2. The standard process generally lacks more nuanced responses to some competitive fares of other legacy carriers: for example, undercutting a fare with a small discount or matching with a premium.
3. Conceptually, the matching strategy should correspond to a more sophisticated and dynamic competitive assessment. Most airlines handle this with simplistic business rules followed manually by analysts.
Rules might include not matching low-cost carriers at all; aggressively matching a strong competitor in overlapping markets; and not matching or matching with a $10 premium in markets with a high share. Such rules are by definition broad and crude.
4. Inventory Controls, by default, do not build in any demand change not already reflected in booking history. The remaining demand is likely to be influenced by the new low fare offered by a competitor.
If the competitive fare is attractive and not matched, demand might disappear completely. The forecast in the RM System might improperly anticipate a full airplane while not matching would likely result in empty seats.
5. On the other hand, the competitive fare could fill a competitor’s seat allocation of low fare passengers and then close off the low fare buckets. If the low fare buckets close, the selling fare will rise again.
In fact, in some scenarios an airline could expect more higher fare demand by not matching.
Few airlines can appropriately manage this complexity across fares, markets, and competitors. New technology, however, offers much opportunity on more scientifically optimizing competitive fares.
PROS and Etihad had been working on a more automated, more scientifically based approach to competitive fares. Their work, published in a recent Journal of Revenue and Pricing Management, affirms the basic impulse to be more aggressive when demand is forecast to be low – including the possibility of undercutting the competitive fare.
Their work also added a new dimension for pricing with analysis of “loyal” travel demand. With willingness-to-pay calculated to be higher for “loyal” customers, their algorithm recommended a more muted competitive response in markets with high loyalty.
Editor's note: Etihad Airways has since signed a deal with Amadeus. As part of the deal EY will implement the full Amadeus Altéa PSS suite, including web booking, revenue management capabilities and merchandising, data management and passenger servicing solutions.
This work is just the beginning. Future systems need to incorporate competitive schedules, capacity, point of origin, price leadership, pricing rules/restrictions, competitive positioning (LCC), ancillary, and more into competitive price matching. Airlines need to continue to refine competitive fare responses.
Tom Bacon is an airline industry consultant based in Denver, Colorado. With 30 years experience in a variety of travel companies and business situations, he has a track record of dramatically improving profitability through innovative revenue strategies.
