ne of the biggest topics in commercial aviation over the past few months that doesn’t involve the current demand shock has been continuous pricing, specifically the solution the Lufthansa Group has rolled out.
In a recent article, we covered the launch of the product. However, there seems to be a lot of questions and speculation as to the details of Lufthansa’s continuous pricing and what it is and isn’t capable of.
In order to demystify the emerging technology, we decided to go straight to the source and interview Simon Rimrod, Head of Revenue Management Pricing / Head of Revenue Management Systems & Solutions, Lufthansa Group and Arber Deva, Senior Director, Head of Distribution Solutions, Lufthansa Group.
Rimrod manages the offer side, while Deva manages the NDC platform and relationships to a portfolio of distribution technology partners, making them the perfect duo to describe the process from end-to-end.
Kambr Media: On a high level, how would you describe Lufthansa's continuous pricing?
Simon Rimrod: Very simplified, if you're an airline, you have 26 possible price points, related to booking classes, which you can open and close. However, willingness to pay of passengers or markets are much more diverse than 26 booking classes.
The primary reason for continuous pricing is to make any price point available that we think is justifiable in any point in time for a certain segment of passengers or certain market. Therefore, we developed this technological competence, that allows us to create this price point according to what we think is applicable to the market.
KM: Not only did LH roll out this very advanced solution, but you did it in the most challenging time of the history of the airline industry. Talking to other airline executives, they've actually touted the pandemic and the demand shock as a positive in the sense that it's an opportunity to be more experimental and take on extra challenges. How did this play into the development of your continuous pricing solution?
Rimrod: First, the size of the change we have brought to the market is not something that you develop within weeks, in a little team, so you can be sure that the whole idea behind it and the commercial strategy behind it is something that we developed over many years.
The pandemic is a situation where we came to the end of a long project that we had planned and are now in the execution phase. What I could say from a crisis perspective is that this crisis accelerates certain things.
It accelerates areas where we think that is necessary to create unique selling points for us as a company. Continuous pricing in my perspective is one USP that the company not only needs for the long term, but also in this moment during the crisis.
Arber Deva: It's the same on the NDC side. There is not an overnight solution, but I think we're happy with how we managed everything. With or without the pandemic, we would have been ready to roll out continuous pricing to our NDC channels.
That's going to be a benefit for us post-pandemic when flying opens up again — we'll already be ready. We have secured reach for continuous pricing with it being a part of the majority of our sales. We believe we'll have a competitive advantage when we really start flying on a broader scale.
KM: Depending on whom you speak with, there seems to be varying views on continuous pricing capabilities. Therefore, we want to hear directly from the source, what's the deal with continuous pricing and the type of technologies and systems that you can work with?
Deva: What we have to understand here is the broader context of how offer management and offer distribution worked in the last 30 years for full-service carriers like us. Let's take a step back to understand the differences.
In the classic setup with GDSs, we would send offer components to them, like flight fare availability and a schedule, and they assemble it into a full offer.
For example, we don't send the full car to a dealer, but we send key parts separately, they do the final assembly and sell it to the customer. That was the legacy role of GDSs for full-service carriers in offer management.
We don't have control over the offer creation process or the final assembly of the offer, but we send it in bits and pieces where very complex mechanisms are in place for quality assurance.
If you want to decentralize it as it is, it is in a very standardized way; a way that has been there for decades with 26 RBD booking classes. However, it doesn’t work with continuous pricing and dynamic offering anymore.
"Other GDSs like Amadeus, Sabre and Travelport can easily connect to our NDC interface, as well as the over 70 different aggregators and startups that redistribute our offers to other marketplaces."
We're trying to change this approach by pushing NDC and insourcing the offer creation part. Our whole NDC strategy goes hand-in-hand with our offer strategy.
Next to our dot com, we also depend on our trade partners, so we want to reach trade partners with our continuous pricing. In order to bring the offers to our trade partners, we need to construct this ourselves, doing quality assurance right to the point where we assemble it and then distribute it to the other third parties and other aggregators.
The role of the GDS changes from an assembler — as somebody doing the offer creation and distributing it — to only a distributor. In this context, Farelogix/ Accelya is our IT partner to power our NDC platform for distribution. And it's not only Farelogix/Accelya involved, but there are also more offer components in the backend.
Other GDSs like Amadeus, Sabre and Travelport can easily connect to our NDC interface, as well as the over 70 different aggregators and startups that redistribute our offers to other marketplaces.
"Sometimes I hear, 'oh, it goes against the GDS…' Actually, we're happy to work with the GDSs, if the commercial components are set."
With NDC we have this end-to-end process of offer creation, order management and quality assurance in our hands. The reason why we started embarking on NDC was because we wanted to have certain third-party reach already before we start rolling out continuous pricing because we only benefit from continuous pricing on a mass market.
Sometimes I hear, "oh, it goes against the GDS…" Actually, we're happy to work with the GDSs, if the commercial components are set. And every GDS can access these offers too, if they come to our NDC interface directly.
Rimrod: From a functional perspective, what we try to achieve is to design the right offer for a passenger, and the right offer for the passenger can vary as much as we vary in our personalities.
While one customer looks for economy fares, another one asks for a business class fare, with or without baggage, with or without seat selection, etc. In order to address specific needs in the most customer-centric way, we must focus on presenting the offer that best matches the request.
And this in our perspective demands a different in-house capability. Our philosophy is that we create the offer. Creation of the offer as Arber outlined, includes the price, what is available, etc.
This is only possible with a certain technology behind it. Therefore, it's clear that we only can apply it where the technology supports our commercial strategy.
KM: With that in mind, is there a certain way that you need to configure your internal systems and software or a way in the future in which you'd like to have everything configured to make continuous pricing and NDC flow smoothly?
Deva: The way we do continuous pricing now is where we start to challenge these very well working, but legacy systems which have limitations on how to do it in a dynamic way.
As a full-service carrier with the legacy process we have in place, it was challenging introducing NDC to agencies. However, we reached a maturity level, and at least for Lufthansa Group, we reached the scale of having over 30% of our agency sales in NDC, which is a significant achievement.
Where we still have limitations in place is on the order management side. You may know we still have tickets and PNRs. Whereas low-cost carriers would work only with one code and have an order there managing this.
"At least for Lufthansa Group, we reached the scale of having over 30% of our agency sales in NDC, which is a significant achievement."
Our underlying technology is scaled, but decades old. Then there is the initiative where we have an initial offer from IATA called One Order.
All these initiatives are about truly digitizing a process which was originally done for paper tickets and now is being done in an electronic way.
This is where we still see challenges because if you implement something like continuous pricing, sometimes you need to do certain workarounds, you need to translate certain things into these legacy parts.
On the whole fulfillment side, we will need to continue working on that and making airlines’ orders more like a receipt or something that can be dynamically changed and refunded.
But there's nothing that the end consumer sees right now, that's more complexity in our back-end systems. That makes us sometimes a bit slow in getting to the next level of pricing dynamization or offer management.
KM: Along the lines of continuous pricing, there's also a lot of discussion about dynamic pricing. How do you guys compare dynamic pricing to continuous pricing?
Rimrod: To take a simple perspective, this is a lot of the same with different wording. But if you look at the theory, and how we at Lufthansa Group approach it, then you could say dynamic price is flexibly playing back a certain price according to certain segmentation criteria.
We see the airline industry as being dynamic, or mostly being dynamic, already. But continuous means having a continuous price elasticity curve over the market from which you generate the price point.
KM: We touched on this in the beginning of the interview, but maybe we can go into more detail how continuous pricing fits into the bigger picture at Lufthansa Group with initiatives such as ancillary revenue and the NDC protocol.
Rimrod: Continuous pricing for me is a method to come up with a price point in a specific moment in time for a certain segment, possibly for a certain channel.
When it comes to ancillaries, clearly this is the way forward, and Lufthansa Group has run quite successful test cases to also apply continuous pricing to ancillaries. But the question now during this pandemic is, how quickly can you move forward? From a concept perspective, we are fine. Another question is how quickly can we bring it to the market?
Deva: Now, if I can add, it's not really related to NDC or any kind of messaging standard. Rather, how can you do these complex things like continuous pricing that take two or three years?
How can you manage it in your internal systems so that it makes sense? How do you address the willingness to pay? How do you address the customer demand? And then how do you distribute it?
It could be NDC or it could be any XML or any API at the end of the day, but the NDC is the approach to standardize the messaging standard from an industry perspective to distribute it to your partners.
And not only sell on the Lufthansa dot com, but also sell on other distribution platforms because some potential customers are possibly not going to the Lufthansa website.
KM: Do you think that continuous pricing will have any effect on demand forecasting?
Rimrod: I would say it has the same effect on demand forecasting as any pricing. Lufthansa Group has a clear distinction between what is the forecast and what is the price generated from the market’s willingness to pay; and these things are for us not the same.
"The main link is, and I know this is where the airline industry differs, but for us forecasting and segmentation are two different things. One is a signal from the market. The other one is a prognosis of the potential volumes."
Continuous pricing like every other pricing indirectly affects the forecast just by the value of the buckets you forecast. Therefore, it’s no different than applying any other pricing strategy. It's just that the information is more accurate.
The main link is, and I know this is where the airline industry differs, but for us forecasting and segmentation are two different things. One is a signal from the market. The other one is a prognosis of the potential volumes.
In that sense, it fits together for us because our forecasting is pretty much continuous as opposed to being static.
KM: Let’s discuss the type of bookings that can be done with continuous pricing. For instance, can group bookings be done with continuous pricing at the moment?
Rimrod: Here we must also first dive into the history. Our group bookings, for example, of one of our companies within the Lufthansa Group, SWISS, were continuously priced for a long time already. This is clearly the way forward to find the optimal price point.
KM: What about corporate customers who traditionally might like to have a bit more ticketing flexibility? Does continuous pricing only work with same day ticketing?
Deva: It’s not that all corporate customers do a booking and then leave it for two or three days until they issue the ticket. Even today, we have a high share of tickets that are issued during the same day.
This is a benefit we can offer, if you can decide during the day and get your approval process done and whatever else needs to be done. You're able to benefit from continuous pricing, which is, in all cases lower than the traditional price, or traditional price in the bucket.
But there is always the fallback, which is the traditional price. So, if it simply takes you two to three days to decide, you still will have the opportunity to book the typical price that is also published in the GDS and everywhere else.
Rimrod: From a corporate perspective, everything is there as it was beforehand. But what we offer is if you're able to decide, let's say instantly, hey, then you can take advantage of this way of how we want to price the market.
In that sense, maybe the trade-off is what you as the corporate buyer need. Do you want the price advantage or the ticketing flexibility? There will also be improvements in how we do this and how we do continuous pricing as a whole over time.
KM: Your Continuous pricing solution seems to arrive at a continuous priced fare by decrementing some calculated discount amount from the standard cloud fare amount that is otherwise applicable under an available RBD class. Is this in fact how you’re executing continuous pricing? And what is driving this strategy? Is it commercially or technically driven?
Rimrod: For us, it's more of a commercial decision than a technical one., We are in two market environments. We have what’s more of a legacy ecosystem and we have a much more advanced NDC-based future ecosystem.
When we apply continuous market pricing to the market, we made sure to stick to Lufthansa Group's commercial strategy that the best offer is first available in our own channels. Secondly, of course, vastly available in our NDC channels.
So that means that we would not overshoot in our own channels or the GDS price. In other words, we want the best price and the most optimal prices in our own channel.
From that perspective, it is not incrementing, but It's decrementing from the next higher price point. This way we can make sure the continuous price is equal or lower than the filed ATPCO price.
Deva: The technicality that you described and that Simon ended with is also a part of compromise that we need in our legacy system architecture when you want to service these things.
Like in the corporate case of booking time limits, you need to consider, do you delete the booking, or do you allow that the booking goes back to the same legacy price and legacy structure?
There are more technicalities to consider in order to make smaller consistencies in an interim phase until you can be really end-to-end on an IATA One Order set up, where you don't need to take care of what you have in other systems in place.
KM: How do you see continuous pricing impacting competition among carriers?
Rimrod: What we strive to do with continuous pricing is bringing the right price to the market or to a passenger in specific point in time.
And clearly, 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. We think we are able to address the demand according to the individual willingness to pay much better with continuous pricing.
KM: How do you imagine continuous pricing will evolve in the future? Do you think airlines can one day permanently do away with buckets and fare classes?
Rimrod: As the functional department of pricing and revenue management, I would love for that to one day be the case. Realistically, I would say the industry we're in is not always moving as quickly as maybe if you are in a startup industry or in younger industries.
We are bound to a vast context when it comes to interlining and all that kind of stuff where we are connected. I think we are getting less and less dependent.
And ideally, yes, for continuous pricing, a booking class is not necessary. But, in order to be connected to the legacy world, we use it. If you ask me 15 years down the road, maybe this is a reality, but I don't see this happening in the short term.
KM: Instead of 15 years down the road, let’s look a little more into the short-term future, say 2,3, 4 years down the road. What would success look like for Lufthansa's continuous pricing initiative?
Rimrod: Generally, I would say regain and restart our business again as an airline industry. But that's not continuous pricing specific. I would say for the next couple of years we should bring this method of pricing to the market to as many customers as possible.
Increase the reach, we should bring it to the market to as many components of our selling as possible, such as ancillaries. I would consider this a success.
Deva: We need to make sure that the reach of these offers is even higher than it is today. So next to our dot com, next to the partners that have access to NDC already. This is the path that we're continuing on right now. As I said, more than 30% of our agency sales come via NDC.
Technically, it could be more. There are more partners connected, but for commercial (and other) reasons, they don't do all their bookings on the NDC channel yet.
But I think here we have a strong differentiator now, really strong, so that's going to accelerate the reach. Simply because there are great offers out there showing the benefits of a NDC integration to Lufthansa Group. This is the path that we need to continue over the next two or three years.