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Managing pricing without data

August 10, 2020 by Marty Lariviere

Take a moment to appreciate the conundrum airline pricing managers currently find themselves in. In normal
times, the main task of pricing managers and the revenue management systems they oversee is to make sure
that there are enough — but not too many — seats left in the days before a flight for those flyers willing to
pony up big bucks. Again, in normal times, anyone could fill up a plane going between Chicago and LA at
$300 per seat. The magic is selling some seats at $300 early while making sure there are seats to sell at $2,000
later.

Of course, these are not normal times. Demand has collapsed across pre y much all markets making pricing
and saving seats for later irrelevant. But that shouldn’t last forever, right? And then airlines should be able to
get back to business as usual. But there is a hitch. As discussed in the Wall Street Journal, revenue
management systems base decisions on historical data but past data is pre y useless for the current situation
and the data being collected right now is likely irrelevant for when the market recovers (Coronavirus Has
Upended Everything Airlines Know About Pricing (h ps://www.wsj.com/articles/coronavirus-has-upended-
everything-airlines-know-about-pricing-11596632998), Aug 5).

You can hear the author discuss his finding here:

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So I must confess that this is not a problem that I have thought much about until I saw this article but the
reliance on historical trends and the questionable relevance of today’s data is going to effect a lot of
industries. Car rentals and hotels use similar systems to airlines and are facing the same problems. But think
about hospitals. In a non-pandemic world, they need to balance saving space for emergencies with
performing revenue generating elective surgeries. In many places, the la er have been on hold and the
emergency resources have been swamped by covid cases. They will face similar issues of understanding how
the market shifts from pandemic mode to some kind of normalcy.

The Journal article mentions the possibility of incorporating new data into their systems.

Tom Bacon, a longtime airline-industry pricing executive and consultant who taught revenue
management at the International Air Transport Association, thinks airlines need to move away from their
reliance on historical data. He suggests they become more like online retailers that use factors like how
many searches have there been for a particular product.

“Expedia or Amazon don’t think of it as: What did you sell three years ago and what’s the average sale for
that over the past three years? They are now: What is hot now?” Mr. Bacon says. …

[Airlines] say some of the new services they are considering involve companies that scour social media for
mentions of destinations or events and use that to predict demand for tickets.
At first glance, I am a li le dubious of this. Amazon’s definition of “what’s hot” is also driven by historical
data. If an article about some items goes viral and leads to a surge in demand, that surge is measured against
past performance. Similarly, airlines have to already be using information on big events. Someone at Delta
knows where and when the Super Bowl is scheduled to be held for the next several years because that drives
demand into a city. Is there any event big enough to move airfares that can be found on Facebook that the
airlines don’t already know about.

Posted in Airlines, pandemic, Pricing | Leave a Comment

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