Airline Dynamic Pricing with Revenue Management Under NDC

Firms practice dynamic pricing when they charge different customers different prices for the same product, as a function of an observable state of nature. In the airline industry, dynamic pricing has historically been limited by the capabilities of distribution systems, which require filing a finite set of fare products with fixed prices. Advancements in airline distribution technology will soon allow the generation of “customized offers,” which could include a dynamically generated price.

In this paper, we propose a heuristic for customised dynamic pricing of airfares when the observable state of nature includes an observation of passenger characteristics. After generating a baseline assortment of fare products and observing the characteristics of a passenger’s request, an airline can choose to customise that passenger’s offer by dynamically incrementing or discounting the prices that would ordinarily be offered. The methodology could be applied with existing airline revenue management methods, and would be compatible with IATA’s New Distribution Capability (NDC).

For implementation, we propose a heuristic approach based on simple estimates of passenger willingness-to-pay distributions. The heuristics are simulated in the Passenger Origin-Destination Simulator (PODS), a complex airline revenue management simulation environment that takes into account passenger choice and competition. The results show that the heuristics can lead to revenue gains of up to 3 to 4 per cent when practiced by one airline. Furthermore, the heuristics remain revenue-positive in competitive environments.