China Eastern’s proactive fares strategy
Setting up fare rules and prices with a game-changing strategic fare-analyzer service
By Evrim Dener and Hunkar Toyoglu
Airlines should incorporate science and data-driven decision-making to understand proper market needs before they set up fare rules, restrictions and prices. Like Shanghai-based China Eastern, the airlines of the future must make proactive decisions using predictive models to be market leaders rather than followers of their competitors.
irlines should incorporate science and data-driven decision-making to understand proper market needs before they set up fare rules, restrictions and prices. Like Shanghai-based China Eastern, the airlines of the future must make proactive decisions using predictive models to be market leaders rather than followers of their competitors.
Airline pricing is heavily influenced by individual analysts’ expertise, as well as competing airlines’ practices and behaviors. Pricing analysts determine fare rules, restrictions and prices based on their expertise of market conditions, such as destination type, competition and seasonality. Most pricing analysts aim to preserve an airline’s market share by using reactive pricing focused on a response to a specific fare action taken by a competitor.
However, analysts often overlook customer behaviors, willingness to pay and responsiveness of market demand to changes in fares because they don’t have access to the market information and become preoccupied with monitoring and matching competitive fare actions. As a result, airlines lose the fundamental tenets of their pricing strategy by becoming overly reactive and fixating on securing short-term market share. Many airlines fall into the trap of monitoring, matching and becoming a follower.
Setting up fares for the upcoming season by monitoring and matching competitor fare changes is common practice. While this approach could be beneficial to setting up short-term tactical fares, it is not useful in developing long-term strategic pricing. In contrast to reactive pricing, which focuses on responses to specific fare actions, strategic pricing is a proactive process used to file a new fare structure for the entire fare ladder based on the desired business-pricing objectives, customer behaviors, price elasticities and willingness to pay.
The Strategic Fare Analyzer service enables a proactive and reactive process to file a new fare structure based on consumer and competitor behavior by leveraging six factors:
When it comes to setting up fare rules and restrictions, airlines generally employ specific predetermined business rules. This practice of rules and restrictions, combined with suboptimal fare levels, causes substantial revenue leakage.
Ideally, an analyst should aim to identify different fare and rule combinations to create fares that are appealing to certain customer segments. This requires customer-demand information, which calls for a data-driven pricing strategy.
Data-driven pricing strategies are based on a market’s actual needs rather than on a pricing analyst’s personal approach or rigid airline strategies. An opportunity exists for airlines to dynamically capture market share by adopting suitable data-driven strategies, empowering them to take proactive fare actions.
Proactive pricing challenges
Managing fare data to create a long-term proactive pricing strategy is a sizeable undertaking for airlines. Thousands of daily flights, more than 20 booking classes and many competitor airlines add to the complexity. Airlines file fares using fare basis codes (FBCs), alphanumeric codes that identify rules applicable to that fare. Although there are some standard FBC patterns that have evolved over time, each airline has its own system of FBC patterns. Therefore, FBCs for different airlines are mostly incomparable. Pricing analysts need to be familiar with the numerous FBCs used by the host airline and its competitors to be able to compare fare prices, rules and restrictions associated with different FBCs.
To optimize their fare structures, pricing analysts need to estimate how market demand would respond to changes in fares and restrictions. Based on the derived market demand, airlines need to determine the optimum fare structures to maximize revenue. Market-demand estimates and fare optimization cannot be achieved manually; therefore, setting up a proactive strategic-fares structure requires predictive modeling using advanced analytical techniques.
Using Strategic Fare Analyzer dashboards is a continuous cycle comprising key performance indicators, reservation booking designator analysis, fare filing and fare basis code analysis.
China Eastern and Sabre partnership results in new strategic fare-analyzer service
Through a consulting engagement, China Eastern and Sabre partnered to resolve the challenge. Together, they developed a web-based, integrated, decision-support service called Strategic Fare Analyzer that facilitates reactive and proactive pricing analysis. The service helps airlines identify improvements in their fare rules and prices for an upcoming fare season in conjunction with revenue and sales-budgeting targets.
With no comparable decision-support capabilities available on the market, China Eastern’s pricing department and Sabre’s advanced analytics services team collaborated to develop the tool to help answer the following business question: “How should I set my airline’s fares, rules and restrictions for the upcoming season to maximize revenue?”
The teams divided the problem into three parts — data, modeling and result interpretation — using visualization.
The data piece involved IT, pricing and analytics teams from China Eastern and Sabre to collect historical host and competitor data, and preparing the data for the modeling. Unobserved competitor FBCs and corresponding fares were inferred through an innovative data analyses. Fare rules, restrictions and the airline’s marketing strategy were used to identify the fare products.
From a modeling perspective, the partnership between China Eastern and Sabre as it pertains to the Strategic Fare Analyzer service consists of two models:
- The consumer-behavior model is an econometric multilevel demand system that estimates demand; that is, the airline’s price elasticities, as well as cross-price elasticities for specific fare products.
- The optimization model is based on estimates from the demand system. This model determines if there were potential improvements to the airline’s historical prices that would have increased its revenue outcome.
China Eastern and Sabre created visualizations that facilitate strategic decision-making. User-friendly dashboards provide a fast and easy method to execute the pricing strategy without losing focus on day-to-day competitive-price monitoring. Moreover, aggregated KPI visualizations are included to pinpoint existing pricing issues and conduct sanity checks for the new fare structures suggested by the solution.
“Strategic Fare Analyzer [service] allows us to be proactive in our fare-setting strategy, generating increased revenue and, ultimately, helping us meet our business objectives,” said Yang Chunfei, China Eastern’s general manager of revenue management in a recent press release. “Sabre provides us with innovation that delivers a significant market advantage, since most airlines have yet to employ similar fare-setting techniques. We are impressed by the way Sabre met our needs using innovative models and by its ability to deliver the project in record time. It has been particularly helpful for seasonal decisions on fare-design and pricing ladders in conjunction with revenue and sales planning.”
The Strategic Fare Analyzer service can help decision-makers at any airline evaluate different fare strategies and their estimated impacts. It provides optimal fare structures, including fare rules, restrictions and prices, enabling host, proactive, reactive and competitor analyses. /A
To learn more about Sabre’s advanced analytics capabilities, contact Hunkar Toyoglu. For more than 20 years, Hunkar has led operations-research and data-science teams to translate scientific knowledge into real-life applications. As the head of Sabre Advanced Analytics Services Team, Hunkar solves airline problems across a diverse range of domains, including pricing and revenue management. He builds proof of concepts and develops innovative software solutions to explore novel ideas by utilizing analytical techniques such as optimization and machine learning. Hunkar is the co-chair of AGIFORS Revenue Management and Distribution Study Group. He has a Ph.D. in industrial engineering.
For additional information about the Strategic Fare Analyzer service or how China Eastern uses it, contact Evrim Dener. Evrim manages airline-consulting projects on pricing and revenue management. She provides consulting services to major airlines using economics and operations-research techniques. Evrim supported the product and solution strategy for Sabre shopping and availability products and provided competitive analytics for major online travel agencies. She has a Ph.D. in economics.