Airlines versus hotels in the battle for the best pricing strategy
Pricing it right is challenging at the best of times but do hotels have a smoother ride than the airlines when it comes to pinning a number on deal or fare? Ritesh Gupta investigates
Be it for the nature of the business, organisational structure or even the agreements signed for third party distribution, there are many ways that pricing as a discipline differs at airlines vis-a-vis hotel companies. However, while there are some similarities in how the two entities price their products, there are more differences.
When it comes to similarities, most companies take advantage of travellers’ tendency to plan ahead, and offer discounts to price-sensitive customers who are willing to plan in advance. Customers who are willing to book late and pay higher fares or rates may see prices hiked. In addition, competitive pricing is a significant influence on pricing decisions.
All hospitality and travel entities deal with many of the same basic types of customers:
1. Individuals or families travelling for pleasure
2. Individuals travelling for business
3. Groups travelling together
In addition, both hotels and airlines often suffer from over-capacity.
An arduous task
When it comes to differences between the two, hotels represent the most commoditised sector of hospitality and travel. When you delve deeper airline pricing comes across as an arduous task. For example:
· A typical airline watches competitor fares for changes every day of the year, multiple times a day.
· In addition, airlines differ from hotel companies in the choice of services they provide (ie: which airports to serve, and what flights to schedule to and from them) and this closely related to pricing (rail companies and cruise lines also do this, to some extent).
While these may be different functions in an airline, the decision on what flights to schedule and what prices to charge are closely related decisions, and so these departments are usually in close communication. This is distinguishable from a hotel firm, where strategic pricing concerns might be considered when determining where to build a property. However, once the property is built, there is no need for day-to-day communication between the pricing or revenue management (RM) function and those departments that are involved with the development of the property, as they are not typically involved with operational decisions.
There are several ways in which airline pricing organisations differ from hospitality pricing organisations, says Alex Dietz, principal product manager, SAS.
1. Centralisation: Airlines are very distinguished from most hospitality organisations in that the pricing function is nearly always centralised – and this is true even for large international airlines.
2. Systemisation: Virtually every airline utilises some type of RM process – and most airlines use some type of automated system. This type of automated RM solution is much more prevalent in airlines than other hospitality and travel sectors.
3. Specialisation: The airline pricing function is nearly always split into two types of specialised roles:
a. Pricing and Fare Management – This role manages fares, fare publication, fare rules, and fare distribution, including monitoring competitive changes on a daily (often several times a day) basis. This role is also usually involved with pricing strategy. A typical pricing analyst manages a large number of markets – anywhere from 20 to 100 or more, depending on the airline.
b. RM – This role manages the availability of fares that have been made published or distributed to partners on each flight departure and connecting itinerary. A typical revenue management analyst also manages a similarly large number of markets.
“Each of these roles typically has their own decision support system to assist them – and these systems are quite different. These roles may report up through separate functional organisations (ie: a ‘pricing department’ and a ‘revenue management department’), or they may work in a geographically combined team (eg: ‘Pricing and Revenue Management: Trans-Atlantic’),” says Dietz.
Airlines have it tougher?
According to Dietz, a number of factors make airline pricing challenging, including:
1. High fixed costs, low variable costs: Like most travel and hospitality sectors, scheduled airlines have high fixed costs and low variable costs. As a result, the simple ‘cost plus pricing’ approach traditionally used in many industries simply will not work.
2. Competition: Much of the public views air travel as a commodity service– at least relative to the sectors like hotels and cruise. As a result, market share can shift significantly whenever an airline is not price-competitive.
3. Variability in fuel costs: Fuel is one of the top costs for any airline (along with labour) – and its cost to an airline can fluctuate significantly. Accounting for this while remaining price-competitive is challenging.
4. Multiple offerings: In a typical market, an airline will have a handful (or more) fares that are available to the general public. Each of these fares must be distinguished based on rules and restrictions, or benefits associated with the fares. Managing both price level and segmentation for such a large number of products in a given market is a significant challenge.
“Unlike hotels, airlines are not typically subject to any type of price equality (as with hotels and ‘rate parity’ agreements) as a part of their distribution agreements,” says Dietz.
This means that airlines are able to ‘undercut’, if they choose to do so. This type of practice is not typical, though – airlines generally force OTAs, for example, to compete on an even playing field with regards to fares. Most airlines also do not typically undercut these partners with special pricing that is readily available on their own booking site – even though that site typically produces reservations at lower costs than these other partners.”
On the other hand, the battle for price parity is quite intense in case of hotel companies.
From a hotel company’s perspective, Andrew Lau, director of revenue management and distribution, Marco Polo Hotels, says maintaining rate parity across distribution channels is one of the critical success factors in today’s distribution strategy. With the growth in use of the Internet, hotel rates are more transparent than before. And in addition with the Best Available Rate strategy, package pricing is more or less being eliminated. “Everything is based on BAR. Geographic is no longer a fence,” says Lau.
Overall, airline fare management and revenue management are very complex processes, and things can fall through the cracks – just as they can for hotels – and pricing ‘specials’ and ‘deals’ come and go.
The volatile business of airlines makes pricing seems to be more challenging owing to the extremely competitive nature of the industry and the intense battle in international markets which have been deregulated for many years.) Indeed there are many external and global factors influencing their financial performance.