Competitive impacts of continuous pricing mechanisms in airline revenue management

Abstract

Traditionally, airlines have been limited to a set of fixed price points to distribute their fare products. The advent of IATA's New Distribution Capability (NDC), however, will soon enable airlines to quote any fare from a continuous range. In theory, such continuous pricing could increase revenues by extracting more of the consumer surplus, through its ability to offer fares closer to the customer's willingness-to-pay. This thesis examines the impacts of continuous pricing in competitive airline networks through simulation in the Passenger Origin-Destination Simulator (PODS). To this end, both class-based and classless RM methods for continuous pricing are presented. Class-based continuous RM relies on the same underlying forecasting and optimization models as traditional RM, while quoting a single continuous fare. Classless RM, on the other hand, completely abandons the notion of pre-specified fare classes, but instead forecasts and optimizes over a temporal dimension. Simulations show that the improved pricing granularity from continuous pricing results in revenue gains of 1-2% when adopted by all airlines, while the gain for the first-mover might be as high as 10-15%. These revenue gains are driven by the ability of continuous pricing to generate lower fares, in-between existing price points, towards the end of the booking horizon. These lower fares, in turn, result in the stimulation of new demand and capture of high-yield business passengers from competitors. We conclude by showing that an airline with traditional RM can reduce, or even reverse, the impact of a competitor moving to continuous pricing by inserting additional price points, adjusting its own RM system settings, or discounting its upper fares. Compared to the current general practice of fare matching, these less transparent competitive responses could have negative impacts on revenues throughout the industry when airlines repeatedly respond to each other's pricing actions.