There may not be an industry more driven by traditional supply and demand laws. That’s why one of the fundamental practices of airline revenue management is pricing segmentation. Only offering one price point would critically hinder revenue optimization.  

Therefore, airlines select multiple price points to stimulate traffic and to obtain the optimal mix of passengers. This is done through a mechanism known as fare classes or fare buckets.  

What are Fare Buckets?  

Airlines utilize fare basis codes to identify a fare type and allow airline staff and travel agents to find the rules applicable to that fare.

Chances are you’ve seen it on your boarding pass. As illustrated by the graphic below created by Boxever and published on Life Hacker, the letter Q represents the fare class.  

From these codes, distinct booking classes (otherwise known as buckets) are derived from alpha-numeric characters.

For distribution via the GDS (global distribution system), airlines are limited to the 26 characters of the English language alphabet, but nothing prevents one from using double letters or a combination of letters and numbers (AA or A1, for example) depending on the PSS (passenger-service system) used by the airline.

The booking class of a flight is based on the Reservation Booking Designator (RBD). The RBD is the code used in reservation transactions to identify the booking class.

Up until now, this has been the central process in which airlines can carry out price segmentation. The booking class provides airlines with a means for controlling fare prices in order to best leverage available capacity.  

Below is an example of how an airline could potentially segment a flight.  


In this over simplified example, you can see as the demand increases and the supply diminishes, the fare price increases. Each RBD represents a different price that an airline can offer.

It's up to revenue managers to decide how many of these fare classes to open in order to cater to the optimal amount of demand potential.  

How are Fare Buckets Designed?

Typically, an airline will increase the number of fare buckets in order to optimize a flight’s revenue potential. However, it’s not as simple as more fare buckets equaling more revenue.  

A revenue manager must find the optimal number of buckets to open. It’s best to avoid opening buckets with too few passengers, and ideally, each bucket should have a relatively even number of passengers in it.  

Examining purchasing history, or more applicable in today’s unprecedented environment, looking at intent data, can help with accurately setting up the amount and value of buckets.  

That leads us to the next point. How do you translate these buckets into a proper fare structure?  

A revenue manager must find the optimal number of buckets to open. It’s best to avoid opening buckets with too few passengers, and ideally, each bucket should have a relatively even number of passengers in it.  

Fare values depend on “breadth” of the bucket and the following conditions:

  • You must consider the price floor and ceiling of each bucket.  
  • It’s best to anchor a single price point in the middle of the bucket.  
  • There is the potential for multiple fares in wide buckets (which are controlled by fare rules).
  • Promotional and tactical fare positioning is not considered.  
  • Don’t forgot about any planned growth in your fares!

When building out your fare structures there are some common pitfalls to avoid that will undermine and distract from your strategy:

- Groups pricing:  

  • Exclude any groups passengers from your fare structure design analysis.  

O & D (origin and destination):

  • What percentage are connections? Analysis should emphasize local passenger demand.  

- Channels:  

  • Are any special fares needed? These can be determined after the main fare structure has been designed.  

How is Airline Pricing Changing?

Fare buckets have been used since the airspace was deregulated and legacy IT systems have been built around this strategy. However, this isn’t the most optimal way to price a product today.  

Segmentation and putting things into grouped buckets by definition means that the full spectrum isn’t covered, and gaps remain. This is best represented by the graph below.  

In this example, the available fair amounts are $10, $20, $30, $40 and $50. But what about passengers that, for example, have a willingness to pay $55, $35 or $8? This unaddressed revenue potential is represented by the triangles in the above graph.  

In a recent interview with Kambr Media, Simon Rimrod, Head of Revenue Management Pricing / Head of Revenue Management Systems & Solutions, Lufthansa Group, puts it another way.

"When you have the traditional way of pricing, where you have jumps in between one price point to another, for example, from 100 to 200, with this jump, you lose passengers on the way that maybe have a willingness to pay 150. That is the demand that is going somewhere else.”

Because of these missed revenue opportunities airlines are beginning to implement ways to offer dynamic pricing, otherwise known as continuous pricing, and move away from traditional fare buckets.

"When you have the traditional way of pricing, where you have jumps in between one price point to another, for example, from 100 to 200, with this jump, you lose passengers on the way that maybe have a willingness to pay 150. That is the demand that is going somewhere else.”

Simply put, continuous pricing is a function that allows for airlines to potentially offer an infinite amount of price points to passengers in order to make any relevant and contextualized offer available in any point in time for a certain segment of passengers or certain market. This happens without the constraints of fare buckets.  

Although there are a number of technical and industry-related obstacles to overcome, great strides are being made with continuous pricing, especially within the Lufthansa group. You can learn more about it in the aforementioned interview.  

While the precise mechanisms and strategies may change, the fundamental supply and demand principles of commercial aviation will remain the same, making airline revenue management one of the most intriguing and challenging operations.