A dynamic pricing engine for multiple substitutable flights

Abstract

As enhancements in airline IT begin to expand pricing and revenue management (RM) capabilities, airlines are starting to develop dynamic pricing engines (DPEs) to dynamically adjust the fares that would normally be offered by existing pricing and RM systems. In past work, simulations have found that DPEs can lead to revenue gains for airlines over traditional pricing and RM. However, these algorithms typically price each itinerary independently without directly considering the attributes and availability of other alternatives. In this paper, we introduce a dynamic pricing engine that simultaneously prices multiple substitutable itineraries that depart at different times. Using a Hotelling line (also called a locational choice model) to represent customer tradeoffs between departure times and price, the DPE dynamically suggests increments or decrements to the prices of pre-determined fare products as a function of booking request characteristics, departure time preferences, and the airline’s estimates of customer willingness-to-pay. Simulations in the Passenger Origin–Destination Simulator (PODS) show that simultaneous dynamic pricing can result in revenue gains of between 5 and 7% over traditional RM when used in a simple network with one airline and two flights. The heuristic produces revenue gains by stimulating new bookings, encouraging business passenger buy-up, and leading to spiral-up of forecast demand. However, simultaneous dynamic pricing produces marginal gains of less than 1% over a DPE that prices each itinerary independently. Given the complexity of specifying and implementing a simultaneous pricing model in practice, practitioners may prefer to use a flight-by-flight approach when developing DPEs.