he Lufthansa Group announced last week that it has launched an industry-first “continuous pricing” (CP) solution. This means the group’s carriers can now offer a theoretically infinite number of distinct price points because they are no longer tied to reservation booking designator (RBDs), also known as fare classes.
Traditionally, airline pricing has been forced to fit existing fare class structures, leading to large price jumps when a fare class closes, suboptimal price offers and availability which cannot be customized to individual customer attributes.
NDC Extends Reach Beyond Airline-Owned Distribution Channels
In a LinkedIn post, Simon Rimrod, Swiss International Air Lines’ head of revenue management systems and solutions, called the rollout a “clear commitment to our NDC strategy.” This refers to the New Distribution Capability program championed by the International Air Transport Association (IATA). NDC is an XML-based data transmission standard to facilitate third-party sales, bypassing traditional global distribution systems (GDSs).
Fares derived under the new methodology will only be made available via the public websites of Lufthansa and SWISS, as well as certain NDC-connected agencies. Guidance published to the group’s NDC-connected agency partners says those directly connected via the group’s NDC interfaces or Farelogix SPRK agent application can already access CP fares.
The guidance document said the new methodology is limited to European continental itineraries except those commencing in Austria. Agents cannot choose between RBD-based and CP fare offers, but the latter are only applied when advantageous to the passenger.
The two can be combined in a single ticket where applicable, such as end-on-end combinations. The new offers can be applied to any filed fare, where published or unpublished. Flights eligible for CP can be combined with non-eligible flights (e.g., those operated by a codeshare partner) in a single booking.
Lufthansa Group already offers unpublished fares and targeted promotions to key online travel agencies (OTAs) and corporate travel management companies (TMCs) via its “NDC Smart Offer” program.
Incentives Shift Away From GDS Sales
Continuous pricing will make it easier to undercut GDS-offered fares via its direct channels. Due to GDPR privacy regulations, the group told partners it is unable to make customer-specific offers.
In its guidance to partners, Lufthansa said CP logic uses standard filed fares and booked RBDs to determine whether a CP-derived fare or filed fare is the optimal offer for the passenger.
This is another move away from GDS sales for the group’s carriers, which have been more aggressive than most in incentivizing customers and agencies to book through non-GDS channels.
Otherwise, managing parallel pricing methods would add complication to the airlines’ revenue integrity efforts as the group’s airlines could find non-NDC agencies undercutting their direct channels on price. But direct channels will be more likely to offer base fares lower than those connected via GDSs.
This is another move away from GDS sales for the group’s carriers, which have been more aggressive than most in incentivizing customers and agencies to book through non-GDS channels. In 2015, Lufthansa Group airlines were among the first full-service carriers to implement a “distribution cost charge” to compensate for GDS fees. The group raised its fee 30% to USD 21 per booking earlier this month.
These moves place the group on a collision course with PSS providers like Amadeus and Sabre, which control their namesake GDSs and derive a significant share of revenue from GDS commissions.
Demand Forecasting Made More Precise
Continuous pricing is also a breakthrough for demand forecasting as it allows carriers to forecast demand in fare value ranges without having to “map” those values back to fare classes. This, in turn, allows an airline to record historical demand by fare value.
In traditional forecasting, RBDs represent discrete fare value ranges but still lump together demand at different price points. For instance, if fare class X has a range of $50-$75, then passengers booking $51 and $74 fares are treated as identical.
The advent of fare-value forecasting tied to CP permits the airline to boost revenues through increased segmentation, while passengers receive offers better aligned to their willingness to pay – increasing the likelihood of look-to-book conversion.
Continuous pricing is also a breakthrough for demand forecasting.
While such revenue-lifting innovations have long been sought, the pandemic-induced demand shock has both made them more vital and reduced the disruption cost of implementation. Traditional RBD-based forecasting and pricing, which were already struggling to keep pace with technology, have been broken by COVID-19.
Demand disruption also provides a unique opportunity to begin capturing value-based demand data as the value of previous data history has been greatly diminished. That said, some carriers may choose to mine their revenue accounting data for a clearer before-and-after picture of demand.
Personalization Opportunities Exist Despite Privacy Regulation
Carriers not subject to GDPR will have even greater opportunities to utilize continuous pricing. Without such privacy limitations, they can target individual passengers with unique fares or bundles of ancillary products like checked bags or lounge access based on their previous purchase history.
Even where airlines must adhere to GDPR regulations, continuous pricing is compatible with micro-segmentation efforts, whereby passengers are clustered based on their non-personal, itinerary request identifiers – such as trip duration and party size. Different fares and/or bundles are then targeted to each micro-segment.
In combination with enhanced ancillary demand forecasting and pricing optimization, this could lead to the dawn of "total revenue management" for airlines, where a passenger’s total spend is predicted in order to derive an appropriate base fare.
Casinos already use this approach as they forecast accommodation, food/beverage and gaming revenue for each guest to calculate a customized hotel rate offer.
Updated on November 20, 2020