The science of matching competitor’s fares
Think you are getting a great deal from an airline? Think again. Guest columnist Tom Bacon says fare matching in the airline industry is now largely a myth
Yes, the largest airlines still monitor the fares of competitors many times a day, and have alerts that warn of any changes. Pricing departments also sometimes mechanically match these fares. But when it comes down to it, more often than not, travellers will not see significant differences in fares when they search for flights.
On a recent search for non-stop flights between Denver and Dallas/Fort Worth, the lowest fares for a non-stop service offered by the key competitors varied from $52 to $159:
DEN->DFW; Oct 12, 2014
(more than 60 days out)
Lowest Fare by Airline
Spirit --- $67
Frontier --- $52
United --- $159
American --- $98
Airlines and airline customers have complained for decades that air travel has become a ‘commodity’. If travel truly is a ‘commodity’ - totally price-based - then you shouldn’t see this huge variance in available fares. If travel is a commodity, then all bookings should go to Frontier in the above example, until it raises its fares or the other airlines drop theirs.
So, what’s going on?
The fares offered to the public for a particular trip on a particular date varies among airlines for the following reasons:
1. Airline fares may vary by service level: A connect flight could be priced lower than a non-stop flight. The non-stop airline may not wish to match a connect fare given the likelihood that most passengers would prefer the non-stop alternative. Similarly, an inconveniently timed flight (a ‘red-eye’, for example) may command a lower fare.
2. The fares you see are affected by individual airline demand forecasts: Each RM department restricts fares on flights it expects to be full. If there is different forecast demand for each airline, there will be different fares available at any point in time – this is the science of RM. To match a competitor’s availability would be to ignore the RM demand forecast (matching a low fare would fill up too many seats that could be filled by higher fare passengers according to the airline’s own history-based forecast).
The difference in forecasted demand could be the result of:
i. Difference in the network or product that results in a real difference in demand. A hub carrier, for example, will fill up a plane with connecting passengers that are not necessarily targeted by a competitor in the local market. The hub carrier may forecast high demand – a full plane – that the more local-focused airline does not. Or
ii. A perceived difference in demand due to differences in their RM systems or parameters. A carrier operating with an O&D revenue management system may have a different forecast than a carrier with a leg-based RM system. Or the carriers may disagree on the future strength of the overall marketplace. Or one carrier may have factored in demand for a future event in a different way.
NOTE: An exception to heavy reliance on one’s individual RM system demand forecast is when the airline recognises it has an inferior system. It may make sense for airline to match a competitors’ fare availability as a way to tap into the competitor’s superior forecasting system.
Also, if the competitor is acting differently from history – if it has opened up availability more than it has historically, for example – then the history-based demand forecast may be flawed. However, even in this case, it Is not likely that matching is the optimal response. Ideally, the demand forecast is adjusted appropriately and the airline still allows the model to determine the best fare availability solution.
For hotels, Intercontinental Hotel Group (IHG) in conjunction with Revenue Analytics has designed a pricing model for its hotels that compares prices across a market and explicitly estimates the cross elasticity of demand for its properties versus its competitors in each market. If a competitor changes its’ pricing versus history, the model can capture the expected impact on the reference hotel’s demand.
3. Increasingly, airline charge different ancillary fees: Different bag fees or change fees, for example. Southwest Airlines promotes its policy of not charging bag fees or change fees at all – this can allow it to offer a slight fare premium for a trip rather than mechanically match a competitor. Spirit and Frontier, on the other hand, charge higher ancillary fees than their competitors and are willing to undercut the base fare offered by their competitors.
Prescription: Do not match!
So, generally, airlines do not, and should not, match each other’s fare availability. Instead, airlines should base their fare availability on:
- Forecast demand for their own flights, based on history
- In fact, demand forecast should trump service level. Only if the connecting flights are not projected to be full, should the available fare be lower than a nonstop and only if the poorly timed flight is expected to have excess seats should its available fare be lower than more conveniently timed flights.
- Ideally, this should include competitor’s pricing – but as one input into a more sophisticated model of cross elasticity.
- Their unique Total Revenue Strategy (ancillary fees, etc.)
- Airlines that do not have as many ancillary fees should refrain from matching the low fares of ‘ULCC’ (ultra-low cost airlines) that assess more such fees.
Airlines are offering a greater range of fares than previously. This reflects differentiation among carriers in service levels, ancillary strategies and network demand forecasts. It is a sign of the greater economic health of carriers – and new differentiation -- that they are not compelled to lower base fares to the same level as the cheapest alternative.