Business analytics will enable tailored flight pricing, says American Airlines

Airlines will soon custom-tailor prices and passengers will feel happy to pay it, thanks to business analytics. That's the view of Rick Elieson, managing...

Airlines will soon custom-tailor prices and passengers will feel happy to pay it, thanks to business analytics.

That's the view of Rick Elieson, managing director of American Airlines. The company pioneered the Sabre seat reservation system that became a classic business school case study of how to use IT to tilt the competitive landscape in your favour.

In a presentation at Teradata's Partners conference in San Diego this week, Elieson said traditional revenue management principles have been refined since they first emerged in the mid-1980s. By now they were well-understood in the travel industry, he said.

"Price and schedule were the only things that people cared about," he said. But now, click-stream information from would-be travellers as they trawl the web is changing the rules again.

Elieson said passenger revenue yield followed the standard distribution curve (the higher the price, the fewer buyers). But the more information an airline had about the passenger's preferences and needs, the more it was able to offer different price points that reflected those preferences.

More information allowed them to capture more value from customers, he said. The question was how many dimensions did an airline need to optimise to extract the greatest value from the customer, given the intensely competitive nature of the sector.

Elieson said airlines were able to harvest vast amounts of data about individuals' preferences and behaviours from their web searches. Not only was it the transactional data, but also data about the events leading up to the purchase.

This included what other offers they had considered, what choices were available when they made their choice, how flexible they were with respect to time, destination and carrier, their loyalty programmes, seat, food and even in-flight entertainment preferences, and so on.

Analysed almost instantly, this enabled airlines to present combinations of options and prices, almost in real time, that led the customer to the "right emotional decision".

Because the airline could see who else was in the market for the seat, the accepted offer was the one that was the highest price the airline could get for it at that moment.

How and when the airline presented its offers was crucial in building the passenger's emotional engagement with the transaction, Elieson said. He suggested there were 10 levers that airlines, or indeed, any sales organisation, could use to stimulate a purchase, especially online. These were:

1. Defaults, where the airline pre-populated the customers' choice.

2. Context, because alternatives and the way they were presented radically affected final choice.

3. Decoys and anchors, where false options pushed decisions in the airline's preferred direction, or where the offered alternatives pulled the customer to a desired decision.

4. Reciprocity, where the customer felt he or she had to do something in return for something (of low value to the airline) that they have been obliged to accept.

5. Priming, where product placement or seeded questions provoked a desired decision.

6. Bundling, where a slew of options was reduced to a manageable few.

7. Scarcity, or the impression of it, which pressured a quick and possibly expensive decision.

8. Endowment, where customers tended to overvalue something they already owned.

9. Social proof, where the customer could see that others had done (and liked) what he or she was about to do.

10. Overkill, where the more choice people were offered, the less able they were to choose, and so opted out, unless the airline simplified things for them.

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