Practice Article

The complexities and challenges of the

airline fare management process and
alignment with revenue management
Received (in revised form): 8th September 2008

Ben Vinod
serves as Chief Scientist and Senior Vice President at Sabre Holdings. Prior to rejoining Sabre, he served
(2000–2003) as Vice President of CRM and Revenue & Price Optimization business units at i2 Technologies.
At Sabre (1985–1999), Dr Vinod was Vice President of Airline Solutions, responsible for pricing and yield
management. He earned a PhD in Industrial Engineering from Purdue University with a concentration in
Operations Research.
Correspondence: 3150 Sabre Drive, Southlake, Texas 76092, USA

ABSTRACT Fare management is the first step in the revenue planning process. The success of an
airline’s revenue management programme makes a fundamental assumption that the customer segmentation
and associated price points accurately reflect current market conditions. The ramifications of an ineffective
fare management process have a detrimental impact on revenue management and can result in less than
optimal inventory controls leading to both revenue dilution and potential loss of market share. This paper
examines the airline fare management process based on proactive, reactive and demand management
tactics, its complexities and challenges and provides recommendations on how to improve an airline’s fare
management process to generate incremental revenues.
Journal of Revenue and Pricing Management (2010) 9, 137–151. doi:10.1057/rpm.2008.43;
published online 31 July 2009
Keywords: fare management; restrictions; fare rules; footnotes; routing; fare basis code; revenue
management

INTRODUCTION the industry had grown accustomed to govern-

Before the deregulation of the US airline
industry in 1979, airlines had operated in a
tightly regulated environment. The environ-
ment was regulated by government bodies and
self-regulated by organisations such as the
International Air Transport Organization
(IATA). Deregulation leads to an explosion in
the number of fares offered in the marketplace.
None of the airlines was prepared to handle the
volume of fare changes that proliferated
through the industry. This was because, in the
absence of competition, and with the view that
air travel was only for the privileged few, the
vast majority of travellers were relatively price
inelastic and competition was limited. Besides,
ment-mandated fare levels either through the
Civil Aeronautics Board (CAB)-mandated
Standard Industry Fare Level (SIFL) for US
domestic fares or through government-sanc-
tioned collusion in IATA tariff coordination
meetings. These fare levels ensured profitability
with limited competition and hence there was
little or no incentive for airlines to be creative
in targeting specific segments with the creation
of new products. Deregulation transformed
the industry by offering fares that were within
the reach of a whole new population that had
never travelled before. Overnight, guidelines
established by SIFL disappeared and interna-
tional carriers while still participating in IATA

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 Vinod
fares focused their attention on carrier-specific
fares within the bounds of the regulatory
environment for international routes.
The primary fare management objective of
airlines that has perpetuated since deregulation
is to match a competitor’s fare (Kretsch, 1995).
This is based on the premise that in a capital-
and asset-intensive industry, the marginal cost
of adding an additional passenger is very low
and hence the focus is to protect and retain
market share and pay down fixed costs.
Consequently, an airline’s fare actions are
mostly reactive. Fare changes could be classified
into two groups, regional or system-wide fare
changes and market-specific changes. The
former consists mainly of sales and general
increases on all fares. Sales are always matched
except when an existing sale provides a better
incentive to the public than the new one.
Market-specific fare changes are typically
triggered by a single carrier based on the
carrier’s perceived dominance in a market or
based on schedule-related service changes in
the market. When a fare action is triggered
by an airline, other carriers typically respond
with an identical response to protect market
share regardless of the revenue impacts.
Sometimes, the reaction ripples through other
markets or differs from the original change,
inducing a series of cascading changes. This
behaviour of reactive fare response is consistent
with the desire of most airline executives to
retain and protect market share. Research
dating back to the nineteenth century confirms
that price matching in the competitive
marketplace can be an optimal strategy
(Curry, 1995).
Since airline deregulation, airlines have
invested in information systems with the
primary objective of quickly responding to
competitor actions. Rarely has the decision
been scientific with the intent of matching
passenger demand to their willingness to pay
for travel. Typically, an airline files fares
containing various purchase or travel restric-
tions with fare distributors such as Airline Tariff
Publishing Company (ATPCo) in Washington
138 r 2010 Macmillan Publishers Ltd. 1476-6930 Journal of Revenue and Pricing Management
DC or SITA in Atlanta. ATPCo has a greater
level of airline participation.
The Air Traffic Conference of America, a
body within the Air Transport Association of
America (ATA), was founded in 1945 to
publish passenger tariffs (fares). In 1958 it
assumed publication of freight tariffs, formerly
produced by Air Cargo Inc., and in 1965 the
group divested from ATA as an independent
company, Airline Tariff Publishers, Inc. It was
reorganised and took its current name, ATPCo
in 1975. ATPCo is owned by many of the
major airlines and provides data collection and
distribution clearing house services for more
than 500 carriers worldwide. On a daily basis,
the fare aggregator and distributor consolidates
fares received from other carriers and broad-
casts the fares to all participating airline
reservations systems, major Global Distribution
Systems (GDS) such as Sabre, Galileo,
Amadeus, Worldspan and regional GDSs such
as TOPAS (South Korea), AXESS (Japan),
INFINI (Japan) and TravelSky (China).
Fare changes are submitted to ATPCo that
transmits the fares to the participating airline
reservations systems and GDSs in the United
States and Canada three times a day eastern
standard time (EST) Monday through Friday
(1000, 1230, 2000 hours) and once a day on
Saturday and Sunday (1700 hours). ATPCo also
transmits fares five times a day internationally
(0100, 0530, 1100, 1500, 2000 hours) Monday
through Friday, three times a day on Saturday
(0130, 0500, 1700 hours) and twice on Sunday
(1700, 2030 hours). Some GDS vendors
receive additional feeds a day. Distribution is
limited to twice a day on Saturday and once on
Sunday. Sales and system changes are typically
done using ATPCo’s Calculate, a tool that
provides the ability to change large quantities of
fares. Market-specific fares are changed by
submitting one or several batches of specific
fare changes. In the case of SITA, fares are
distributed eight times Monday through Friday
(0015, 0315, 0615, 0915, 1215, 1515, 1815,
2115 hours) and four times each on Saturday
and Sunday (0015, 0615, 1215, 1815 hours).
Vol. 9, 1/2, 137–151

Figure 1: Fare management process.
It has been reported that ATPCo, the larger
of the two fare aggregators, processes over 1
million fare changes daily. Figure 1 illustrates
the price planning and execution cycle. When
the airlines send updated fares to the fare
vendors based on a proactive or reactive pricing
action, the fare information is received and
the data are manually coded. Next, the coded
fare information is disseminated electronically
by the fare vendors to the GDSs who process
this information and store it in a format to
support fare quotes, price quotes and itinerary
pricing for the travel agent community,
effectively completing the price planning and
execution cycle.
Latency in the price planning and
execution process
To maintain relevancy in the marketplace, an
airline should be able to respond quickly to a
competitor’s fare actions. Latency is defined as
the time it takes for an airline to respond to a
competitor’s fare actions and have the new fares
available through all channels of distribution. It
is typically addressed through automation and
repeatable business processes.
There are two levels of latency that are
introduced during the fare management plan-
ning and execution process. First, there is
latency between when the fares are received by
an airline through a fare management aggrega-
tor’s scheduled transmissions and when the
airline responds to competitor changes. This
first level of latency is introduced due to the
complexity of airline fares. While the fare
amount itself is easy to define and not subject to
interpretation, the remaining dimensions of a
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Airline fare management process: Complexities and challenges
fare such as rules, footnotes and routings are
complicated and could leave room for inter-
pretation. In the absence of a standard format,
rules, footnotes and routings continue to be
distributed in text form, which is then
interpreted manually by the fare distributors
into the format required for electronic proces-
sing. The pricing analyst has to interpret all
the dimensions of a fare before responding
to a competitor’s actions. In the absence
of an automated fare management system that
can detect changes along these fare dimensions
and summarise the fare changes to a pricing
analyst, the process can be labour intensive and
time consuming. This results in the pricing
analyst not being able to respond to the
fare vendors in a timely manner before the
next scheduled transmission. Typically an
automated fare management system with pre-
defined rules is required to respond quickly to
the fare changes within the same transmission
window, the subsequent window or as quickly
as possible. Automated fare management
systems typically guarantee that on the average,
responses to 90 per cent of fare changes are
submitted within 24-hours. While continuous
transmissions have been discussed between
the airlines and the fare management aggrega-
tors, it is not the industry norm. This has
the advantage of not having to wait until
the next scheduled transmission to disseminate
competitor fare responses. The second level
of latency is the time it takes for fare changes
submitted by an airline to a fare aggregator
to eventually be available in the GDSs. Latency
is a serious issue since until the fare changes
are available in the distribution channels, the
Journal of Revenue and Pricing Management Vol. 9, 1/2, 137–151 139
 Vinod

products cannot be sold resulting in the airline Private fares

not being competitive. To address this second
dimension of latency, GDSs like Sabre and
Amadeus offer a capability for airlines to
directly file fare changes to the GDSs, thereby
bypassing the fare aggregator.
Fare dimensions and fare types
There are five dimensions to a fare, as described
in Table 1.
These five dimensions are physically sepa-
rate. In other words, the fare basis code does
not define a rule but it refers to a rule that is
defined elsewhere. The same is also true with
footnotes, general rules and routings.
Classification of fare products
Broadly speaking, in the world of pricing, there
are three distinct fare products that require
consideration. They are explained below.
Public fares
These are fares filed by an airline and is
then distributed by the fare distribution
vendors to all GDSs for worldwide access. All
customer segments have access to a published
fare and are automatically subject to travel
agency commissions where applicable. When a
travel agent sells a published fare to a passenger,
the gross fare is written on the ticket and
the agent submits the net amount to the
airline after the commission. Public fares are
sometimes referred to as gross fares or IATA
fares. Public fares are also referred to as
published fares.
Private fares are subject to limited distribution
and serve as a discrete outlet. These fares are
generally sold through wholesalers, tour opera-
tors and travel agents. When a travel agent sells
an unpublished fare, it is based on an agreement
with the airline on the net/net fare amount for
the tariff. The agent then marks up the fare to
onsell to a retail agent or a passenger. The agent
can then submit the net/net fare amount
through the BSP.1 Private fares are prevalent
in Asia/Pacific and Latin America. They
introduce some unique challenges such as
channel conflict, attractiveness of the end price
to the customer and absence of control of
the selling fare, which is in the domain of the
travel agents.
There are two primary variations to private
fares. First is the fare filed and controlled
by an airline with limited distribution and
usage as a private fare and uses security in
ATPCo Category 15 (CAT 15). Second is
the negotiated fare, which represents a subset
of the private fares with very limited distribu-
tion. A negotiated fare may consist of
multiple fare levels, amount, security and
ticketing data unique to the seller (for example,
the travel agent) and uses ATPCo Category
35 (CAT 35). A relatively new category
that is used widely in North America is
the Category 25 (CAT25) fare by rule. A
CAT25 enables an airline to create new
fares by filing discounts on a public fare. It
is typically delivered at a point of sale,
and a discount applies to the fare amount

Table 1: Dimensions to a fare

Fare component Description

Fare record Consists of the origin and destination, the fare amount, fare basis code, footnote and
the routing number.
Rules (the fare categories) Restrictions applicable to a fare.
Footnotes Additional rule restrictions applicable to a fare. Commonly used to include travel
restrictions or ticketing restrictions.
General rules Additional rule restrictions that may be applicable to a fare.
Routing The origin and destination and allowable cities in between.

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Table 2: The negotiated fares product
GDS vendor Negotiated fares product
Amadeus Negotiated fares
Galileo Private fares
Sabre Classified fares
Worldspan SecuRate air net
Apollo Private fares
Abacus Net fares
of a public fare with its associated rules and
restrictions.
Private fares are also frequently referred to as
off-tariff fares, sanction fares, unpublished fares,
market fares, confidential fares, net fares,
secured fares, wholesaler fares, consolidator
fares, bucket fares and grey market fares.
Knowing and managing the net/net fare is
important (net of commissions and overrides)
since the gross fares do not in any way represent
what the airline receives for these unpublished
tariffs. In some cases, the net/net fare could
be as low as 40 per cent of the gross fare. A
challenge is the absence of an industry standard
common format for negotiated fares.
The GDSs support a negotiated fares
database to create, manage and distribute these
private and negotiated fares. An increasing
trend is to use ATPCo as the primary source
for distribution of these fares in Category 15
(private fares), Category 25 (fare by rule),
Category 31 (voluntary changes) and Category
35 (net fares) with security controls for
private viewership, selling, ticketing and redis-
tribution. Table 2 summarises the product
offering by GDS.
Web fares
Web fares can be classified as private fares, since
distribution of these fares is typically limited to
the airline’s website. Web fares are a relatively
new phenomenon, an outgrowth of the
growing importance of the consumer direct
channel to augment brand recognition and
reduce distribution costs.
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Airline fare management process: Complexities and challenges
Fare rule categories
The underlying complexity in fares is directly
related to the different types of rules that may
apply to a fare. Table 3 summarises the most
prevalent fare categories that are in use today.
Routings are used in conjunction with both
domestic and international fares. Routing data
is also made available to host CRSs and GDSs
with a subscription.
Itinerary pricing
The composition of the different IATA Tariff
Conference Areas is as follows:
IATA area identifier Geographical locations
IATA Area 1 (TC1) North America, Central
America, Caribbean,
South America
IATA Area 2 (TC2) Europe, Russia (RU), Middle
East, Africa
IATA Area 3 (TC3) South East Asia, Indian
sub-continent, Japan/Korea,
North/Central Pacific,
Southwest Pacific
Hence, for example, a conference area of
TC23 could incorporate fares between Europe
(Area 2) and India (Area 3), while TC12 could
incorporate fares between the United States
and Germany. For example, TC3 could
incorporate fares within the Pacific, between
India and Fiji and between Hong Kong and
Singapore.
From the public and private fares, a specific
itinerary can be priced based on the funda-
mentals of fare construction. The IATA (IATA,
2006) Fare Construction Handbook serves as
the primary source for applying the funda-
mentals of fare construction. Fare construction
for an itinerary may include specific routings,
stopover charges, security fees, combinability of
one-way pricing units, mixed classes of service,
round trips, circle trips, open jaw, special
mileage provisions, journeys with surface
sectors, ticket reissue/exchange, and so on.
Constructed fares fall into a unique category
since the fare amount is only determined after
Journal of Revenue and Pricing Management Vol. 9, 1/2, 137–151 141
 Vinod

going through a fare construction. For exam- record is constructed by combining a published
ple, add-on fares are widely used by interna- gateway fare with an add-on fare. For example,
tional carriers, which enable them to create a Malaysia Airlines may publish a gateway
fare between two locations without having to fare from their hub in Kuala Lumpur to
explicitly publish each market for which an London, Heathrow. They may also publish an
airline wishes to participate. The new fare add-on fare from a domestic city in Malaysia,
say Penang to Kuala Lumpur. Hence, the fare
from Penang to London can be constructed
Table 3: Summary of fare rule categories (ATPCo) based on the published gateway fare and the
add-on fare.
Rule Description
category
1 Eligibility. Eg Economy, first, bereavement,
student, and so on
2 Day/time application MARKET SEGMENTATION
3 Seasonal application Customer segmentation to support a rational
4 Flight application fare management process is the quintessential
5 Advance reservations and ticketing first step toward effective revenue management.
6 Minimum stay restriction
Even though every seat on an aircraft is viewed
7 Maximum stay restriction
8 Stopovers as a commodity and looks the same, the
9 Transfers perceived value that each customer attaches to
10 Permitted combinations a seat is very different. The broad-based market
11 Blackout dates segments and their respective attributes are
12 Surcharges shown in Figure 2.
13 Accompanied travel
14 Travel restrictions
Customers flying on business tend to be
15 Sales restrictions – where the fares can be sold schedule sensitive and less sensitive to the
and/or ticketed prevailing fare. Leisure passengers are by far
16 Penalties the larger segment consisting of vacationers and
17 HIP/mileage exceptions people visiting friends and relatives who tend to
18 Ticket endorsements
be more flexible and willing to consider
19 Children discounts
20 Tour conductor discounts alternative flights in order to get a lower fare.
21 Agent discounts A pricing strategy needs to take into account the
22 All other discounts types of travellers targeted by the proposed fare.
23 Miscellaneous provisions Table 4 summarises the broad customer seg-
25 Fare by rule. Dynamically generates new fares by ments that should be taken into consideration
using a carrier’s existing fares and rules as a
base. Allows airlines to file in ATPCo
when determining a tariff structure for a market.
increasingly complex corporate contract
terms, thereby improving faring accuracy and
Business Leisure
reducing agency debit memos Customer Customer
26 Groups
27 Tours
Schedule
28 Visit another country Sensitive
MORE LESS
29 Deposits
31 Voluntary changes
33 Voluntary reroute and refund
35 Negotiated fares. Enables travel agents to add Price
LESS MORE
Sensitive
their own mark-up to airline filed net fares,
so that the agents’ selling fare is displayed in
the GDS
Figure 2: Broad-based market segments.

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 Airline fare management process: Complexities and challenges

Table 4: Fare management customer segments

Customer segment Description

Business travellers – First Last-minute availability, no penalties, full refundability based on time–related flexibility,
Class seat pitch and comfort

Business travellers – Full Y Last-minute availability, no penalties, full refundability based on time-related flexibility
Industry-approved reduced Limited availability, advance reservation requirements, maximum stay limits, with and
fares without cancellation penalties

Corporate Corporate negotiated fares with the airline based on anticipated volume of bookings,
discounted fares with some or no restrictions

Frequent flyer redemptions Unrestricted redemptions apply as long as seats available on the requested flight.
(unrestricted) Redemption costs are typically double mileage points

Frequent flyer redemptions Restricted or capacity controlled redemptions based on the availability of the specific
(restricted) frequent flyer class

Tour groups Discounted tickets, air component with a land package, advance purchase and related
restrictions apply

Visiting friends and Deeply discounted tickets purchased well in advance, longer length of stay, less flexibility,
relatives maximum stay restrictions and cancellation penalties apply

Labour groups Timely availability, one way fares

Group fares Negotiated fares based on group size. Usually the negotiated fare is mapped to a published
fare with a predefined discount. Cancellation and ticketing time limit flexibility exist

Private fares Unpublished fares negotiated between an airline and a travel agency

Emergency Bereavement fares, available only with validation

Child fares Discounted fare when accompanied by an adult

A fundamental question that arises is: how
many price points are required in a market? Simply
put, it is always in an airline’s best interest to
participate in every segment of the market, subject
to having the capability to control seat inventory
based on value of the customer segment in
relation to demand for all customer segments in
the market (Crandall, 1998). Deregulation
resulted in an exponential increase in the number
of fares offered in a market. For example,
when Southwest Airlines, the industry low
cost leader, offered low affordable fares and
when American Airlines introduced the Super-
SAAverTM fare, it attracted a whole new
segment of the population that had never flown
before.
Figure 3 illustrates the theoretical price
demand curve. As observed in the figure, the
price points to address the demand from the
various market segments reduce the total
unrealised revenue potential, shown in the
shaded part of the curve.
Figure 4 illustrates the price demand curve
for various price elasticities in a competitive
marketplace. Demand is highly elastic at the
lower price points and less elastic at the higher
price points. As the elasticity increases, the
curve becomes more sensitive (steeper) along

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 Vinod

the demand axis implying that for the same The price elasticity of demand is the ratio of the
change in price, the change in demand percentage change in demand for a unit percentage
becomes larger, as the definition implies. (1 per cent) decrease in price.
To understand passenger behaviour charac- By definition the price elasticity (e) is always a
teristics requires an understanding of the negative number (eo0) since price increases
underlying price elasticities for the different generally produces a decline in demand and price
fare types. To gauge the impact of price on decreases generally results in an increase in
demand, a functional relationship between demand. A product is called elastic if |e|o1,
demand and price is required. Econometricians inelastic if |e|>1 and unit elastic if |e| ¼ 1. When
define a quantity called price elasticity (e). price increases, revenue decreases in the elastic range,
revenue does not change for unit elasticity and
revenue increases in the inelastic range.
Unrealized Revenue The assumption of a constant price elasticity
model is typically not valid over the life of the
flight. Price elasticity changes with time to
departure. Demand is highly elastic long before
departure and less elastic closer to departure.
Revenue
Realized
Fare

Table 5 summarises the relationship between

price elasticity and total revenue.
A second measure of sensitivity to demand is
the cross price elasticity of demand, which
Demand measures the responsiveness of demand for a
Figure 3: Theoretical price demand curve. product to the change in price of another
product. If the cross price elasticity is negative,
the two fare products are complementary and if
Inelastic region it is positive, the two fare products are
$169
Higher PE substitutes. The air product bundled with a
hotel product is complementary and the cross
$149
elasticity is negative since the products are not
Fare

Elastic region
$129
redundant. An air product with similar attri-
butes from a competing airline is a substitute
Low PE and hence the cross elasticity is positive.
Consider the simplified example without
20 40 60 80 100 considering schedule attributes. United Air-
Demand lines and American Airlines are the dominant
Figure 4: Price demand curves for different PEs. carriers at Chicago O’Hare airport. Let us

Table 5: Relationship between price elasticity and total revenues

Price elasticity e Price elasticity |e| Description Impact on total revenues

D Price increase D Price decrease

e=0 |e|=0 Perfectly inelastic Increase Decrease
1oe o0 |e|>1 Inelastic Increase Decrease
e=1 |e|=1 Unitary elastic No change No change
Noeo0 |e|o1 Elastic Decrease Increase
e=N |e|=+N Perfectly elastic Decrease Increase

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assume that they both have a 7-day advance
purchase fare of $240. If American reduces the
fare to $200 and United remains unchanged,
American will see increased demand while
United would see a loss of demand for the same
product. If United’s baseline demand for the
7-day advance purchase fare is 5000 per month
and American’s demand is 4000 per month, the
fare decrease by American will see a surge in
demand to say, 4400 per month while United’s
demand decreases to 4800 per month, based on
the assumption that the overall demand in the
market has increased. The cross elasticity of
demand for United can be calculated as follows:
Cross elasticity ¼
Change in demandðUnitedÞ
Change in priceðAmericanÞ
PriceðAmericanÞ

Baseline demandðUnitedÞ
200 $200
¼  ¼ 0:20
 $40 5000
THE FARE MANAGEMENT
PROCESS
A fare action requires knowledge along two
distinct dimensions: competitive landscape and
market profile. Three factors play a role in
determining the response as a function of the
competitive landscape. They are:
(i) Competitive environment: Pricing actions
require an understanding of the competi-
tive environment. In addition to knowing
what a competitor’s fares are, it is hence
also important to know the associated fare
rules and restrictions, travel dates, ticketing
dates and also how the fares are being
distributed.
(ii) Market position: Market position is a critical
factor because a response to a competitor
who has a poor presence in a market could
be quite different than when the compe-
titor has significant market share. Factors
to be considered are consumer preference
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Airline fare management process: Complexities and challenges
of a carrier and the origin point presence
that represents the total lift out of the
origin city.
(iii) Quality of service: The quality of service
indicates how an airline’s schedule com-
pares to a competitor’s schedule. Other
factors that should be considered are
airport, in-flight service versus the com-
petitor and historical load factor.
Three factors play a role in determining the
fare response as a function of the market profile.
They are:
(i) Market density: The size of the market – is
the market a small market, a medium
market or a large market? Can potential
demand from nearby cities be attractive?
(ii) Market segments: This indicates the type of
customer segments served by the market
and the mix of business versus leisure.
(iii) Market stimulation: A fare reduction always
raises a fundamental question – can
demand be stimulated and can the market
stimulation be sustained for the long term?
Alternately, the market may be insensitive
to price changes.
Pricing strategy and its impact on
tactical pricing
Pricing strategy is always focused on the desired
long-term outcome of an airline’s position
relative to the competition. Based on market
dynamics, pricing strategy should be tailored by
the type of market and frequently for a group
of markets where there is a relationship
between fares across markets. Factors that
influence pricing strategy are yield and market
share, summarised in Figure 5.
An airline’s pricing strategy has the objective
of improving the revenue per available seat
kilometer (RASK) through two initiatives that
sometimes conflict with each other. First is the
development of a tariff structure to capture
additional demand and drive volume with
widely available base fares supplemented with
attractive discounts. If low cost carrier (LCC)
Journal of Revenue and Pricing Management Vol. 9, 1/2, 137–151 145
 Vinod

High Yield High Yield

the competitor reactive response is a crucial
Low Market Share High Market Share
factor on the success of a fare action, where
success is defined as the competitors accepting
Effective product Improve yield and
PROTECT market share
the fare change are filing their fares to match
segmentation to EXPAND
market presence the new fare initiative. In some situations,
competitors may not follow-through to match
a fare initiative.
Develop traffic and yield IMPROVE yield with There are three primary scenarios that make
OPPORTUNISTICALLY better traffic mix
up proactive pricing. They are:

Low Market Share High Market Share (i) Sales initiatives: A sales initiative or promo-
Low Yield Low Yield
tion results in lowering fares to stimulate
Figure 5: Key influencers of pricing strategy. the market. The challenge is to ensure that
the market stimulation can be sustained for
the long term.
competition is prevalent in the market being
(ii) Fare increases: Fare increases typically can
served, attractive one-way fare options should
result in loss of demand based on the
also be introduced to protect market share.
nature and extent of the fare increase. An
Second is the market segmentation required to
airline’s dominance in a market is a factor
influence sell-up behaviour to improve yield.
to initiate fare increases.
Influencing sell-up behaviour is based on
(iii) Targeted pricing: This represents initiatives by
competitive fare availability and the associated
lowering prices to stimulate demand and
fare rules.
raise fares for targeted customer segments.
Market-based pricing tactics are directly
influenced by the maturity of the pricing
Reactive pricing process
strategy. If the pricing strategy is not fully
The vast majority of fare actions are reactive.
defined, it frequently results in passive tactics.
This requires rapid analysis of the impact of a
Pricing tactics fall into three categories:
competitor’s action followed with a timely
response. The steps in deciding on a compe-
(i) Reactive, focused on retaining market share
titive response to a price initiative are:
by monitoring of competitor fare filings
followed with a series of standardised
(i) Identify fare actions: When fares have
responses based on rules.
changed, before a response can be deter-
(ii) Proactive, focused on capturing new demand
mined it is important to know what has
by working with sales in executing promo-
changed? It could be fare levels, rules,
tions to specific market segments with the
footnotes, and so on.
requisite advertising support.
(ii) Evaluate impact: Evaluation of the impact of
(iii) Demand management, focused on control-
not matching the fare initiative depends on
ling inventory based on discount controls.
the strengths and weaknesses in the market,
This is more difficult in a LCC restriction-
potential impact on revenue, market share
free pricing environment.
and revenue dilution.
(iii) Determine response: The impact analysis
Proactive pricing process indicates if the fare initiative should be
Price leadership in a market requires proactive matched or not matched. While fare
pricing tactics that are applied consistently over matching tends to be the norm, frequently
time. While uncompetitive pricing can have a situations arise when it is not prudent to
negative impact on revenue and market share, follow a competitor’s fare actions.

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 Airline fare management process: Complexities and challenges

(iv) Distribute fares: Ideally the cycle of detec- with the consumer. With their lower cost per
tion, impact evaluation and response seat mile competitive advantage, they are
should happen within the same time proactively setting the fare structure in major
period so that the responses are distri- markets and rapidly altering the customer’s
buted in the immediate fare distribution valuation of air travel.
window. In some cases, the fare response Traditional revenue management has always
may want to be supported with advertising focused on what the supplier (airline) is willing
and promotions over other media. to accept as opposed to a buyer’s (customer)
(v) Monitor performance: Bookings and revenue willingness to pay. LCCs practice a unique
performance serve as a yardstick to brand of revenue management that is based on
measure market performance, assess the a customer’s willingness to pay. Traits that make
relative merits of a fare action and provide the LCC revenue management model different
continuous feedback to the revenue man- from the full service network carriers are one-
agement and finance organisations. way fares with fewer or no restrictions, use of
fewer fare classes with smaller differences in
value, limited or no overbooking and the
Demand management with LCC absence of interline agreements.
competition Figure 6 illustrates the dynamics of pure
The advent of LCCs in the late 1990s with restriction-free pricing. In this scenario
aggressive pricing and marketing initiatives has the LCC would file multiple fares with the
resulted in renewed competition that threatens same identical minimal fare restrictions. Hence,
the very existence of the US majors, global the probability of selling a fare higher in the
pure play and international flag carriers hierarchy is contingent on the immediate lower
(McDonald, 2006). Today’s LCCs have a viable fare being closed for sale. When a flight is first
and sustainable business model, accounting for detailed in the reservations system, there is a
over 30 per cent of the industry capacity. single one-way fare in the market. As bookings
LCCs are synonymous with a simple no build up for the flight, the fares are progres-
frills product offering for the price-conscious sively increased until flight departure.
customer, high frequency point-to-point op- With the absence of fare restrictions, the
eration to secondary airports, low operating real-time reservations inventory control envir-
costs with a homogeneous fleet, high fleet onment must be dynamic to ensure that target
utilisation, simplified one-way pricing structure bookings are being achieved for each fare class
and consumer direct distribution. With LCCs, before the selling class is closed to promote
it can be argued that the control of airfares is upsell to the next higher valued class. For

Class Fare Inventory Class Closing Condition

Q $ 79 Flight is Detailed
Y
Authorization Limit B Z $ 99 Day 55 or after 12 bookings
Active (selling) fare
M
Cumulative Bookings

V $109 Day 34 or after 28 bookings

H H $119 Day 20 or after 54 bookings
V
M $149 Day 13 or after 28 bookings
Z
B $179 Day 3 or after 80 bookings
Q
Y $199 At Overbooking Limit

0 1 2 3 4 5 6 13 20 27 34 48 55 62
Days to Departure

Figure 6: Dynamics of restriction-free pricing.

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 Vinod
carriers operating point to point without
significant connecting traffic, inventory control
can be based on authorisation levels and time
limits. In the absence of time limits, revenue
management must provide frequent updates
based on the pace of bookings observed in the
reservations system. For network carriers that
file both restriction-free tariffs and regular
tariffs based on competitive need, a hybrid
inventory control structure may be more
appropriate.
IMPACTS OF FARE
MANAGEMENT ON
REVENUE MANAGEMENT
An effective fare management process is a
fundamental requirement for a successful
revenue management programme. This section
discusses the most significant impacts of fare
management on revenue management.
Fare class realignment in the price
planning process
The figure below illustrates the relationship
between fare basis codes, fare categories (also
sometimes referred to as fare groups) and
booking classes. Fare classes or booking classes
are also frequently referred to as reservation
booking designators or RBDs, which is used by
an airline reservations system to manage the
mix of passengers to maximise revenues. Fare
classes play an important role in both online
fares and interline agreements. Incorrect map-
ping of a fare to a fare class or using the
wrong designator on an interline agreement
can result in loss of revenue. A fare class is a
required element for auto pricing of passenger
itineraries by GDSs. Fare classes can be
distributed globally through fare aggregators
ATPCo and SITA.
The fare categories define the market
segments and the fare basis codes represent
the fares with rules, restrictions, routings and
footnotes represent the selling products that are
ultimately distributed by an airline to the target
channels. While the fare category is an internal
148 r 2010 Macmillan Publishers Ltd. 1476-6930 Journal of Revenue and Pricing Management
classification by an airline to identify and define
market segments, fare basis codes and booking
classes are external classifications that are
published to travel agencies, tour operators
and consumers. The booking classes are
typically in the domain of revenue manage-
ment to forecast demand, set inventory controls
on the reservations system and distribute
availability to the GDSs. The fare categories
and fare basis codes are in the domain of airline
pricing as shown in Figure 7. A many to one
relationship typically exists between fare basis
codes and fare categories. While ideally each
fare category should map to a unique booking
class it is frequently not the case and a similar
many to one relationship exists between fare
categories and booking classes. An example is
booking class Y that typically has two fare
categories mapped into it – the unrestricted full
Y fare, which is the most expensive and has no
restrictions and the unrestricted frequent flyer
category offered for double the standard miles
required for redemption.
While the fare management process has to
respond to competitive fare actions continu-
ously, an issue frequently arises when the filed
fares in a market are inconsistent with the
corresponding booking classes that they are
mapped into as shown in Figure 8. The
booking class hierarchy based on value is
Y>B>M>H>V>Z>Q. Ideally, the tariff struc-
ture for a market should be such that there is no
overlap in fare ranges between booking classes.
Fare range overlaps between booking classes
make the revenue management process ineffi-
cient and incapable of generating incremental
revenues due to minimal separation in average
fare values between booking classes and fare
inversions, when a booking class higher in the
hierarchy has a lower fare than the booking
class below it.
When inventory control recommendations
are perceived to open up the lower classes,
the first step in the diagnosis is the tariff
structure and its relationship to the booking
classes. Although frequently overlooked,
addressing the fare class mis-alignment problem
Vol. 9, 1/2, 137–151
 Airline fare management process: Complexities and challenges

Revenue Management Fare Management

Domain Domain

Fare Class Fare Category /

Fare Basis Codes
Fare Group

Full Y

Y
Frequent
B Flyer
Unrestricted
M
Frequent
H Flyer
Restricted
.
V
Unrestricted .
Z Discount .

Q MIL11XD7
Military /
. Government MILX07D7
.
. MECO7AP3
Restricted
Discount

ZECO1403
VFR
.
Travel .
Industry .
Discount

Figure 7: Traditional fare structure.

Range of Fares ($) Mapped to a
Booking Class

Y B M H V Z Q
Fare Class Hierarchy

Figure 8: Inconsistent mapping of fares to booking classes.

is mandatory for revenue management to Impact of private fares

produce positive results. Fares then need to The practices employed today for the manage-
be re-filed to eliminate the inconsistency. This ment of private fares have a major impact on
process also provided the opportunity to the consistency of the fare class hierarchy. At
eliminate redundant fares. Figure 9 illustrates issue is that sales agents negotiate deals with
the tariff structure mapped to booking classes individual travel agents that frequently violate
after a fare class realignment exercise for a the fare class hierarchy. For example, a sales
market. agent may negotiate a round trip K class fare for

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 Vinod

Range of Fares ($) Mapped to a

Booking Class
Y B M H V Z Q
Fare Class Hierarchy

Figure 9: Fare mapping after fare class realignment.

$799 in a market with travel agency A while may not reflect the current prevailing fares in
the same or different sales agent may negotiate the market. Hence, future fares can be
a $699 fare with travel agency B for the weighted by historical flown traffic data from
same market. Both fares are mapped into K revenue accounting to get a more accurate
class and yet there is no easy way to control the representation of average fares for revenue
two requests independently based on the management processing. Weighting future fares
value of the negotiated fare. For a carrier that with flown traffic ensures that fares used in the
controls seat inventory by leg/segment con- averaging process for revenue management are
trols, sub-class-level allocations are required the selling fares.
to control availability at the point of sale. In this
scenario, the sub-classes could be K1 (the Integration of filed fares and
$799 fare) and K2 (the $699 fare) where K1 is inventory control
given greater availability than K2. With sub- The two methods used for the control of seat
classes, the passenger name record (PNR) inventory by O&D are continuous nesting
should store the sub-class information (K1, (Vinod and Ratliff, 1990; Vinod, 1995) con-
K2, and so on) and not just the booking trols or virtual nesting controls (Smith, 1986).
class since when a cancellation occurs, seat Both methods require the calculation of the net
availability must be returned to the same contribution for each availability request of a
sub-class. Most reservations systems do not one-way itinerary as follows:
support sub-classes for inventory control. X
Alternately if the carrier controls seat inventory Net contribution ¼ QualifiedFaresc  lj
by origin and destination (O&D), availability j2s
can be controlled by the actual value of the
reservations request by point of sale using The QualifiedFaresc is the most restrictive market
continuous nesting (bid price) controls. value for service s and class c, lj is the bid price
for flight leg j; sAS, where S is the collection of
Relationship between filed fares services in the network. The deployment of
and revenue management O&D inventory control on a reservation
Historically, airlines have created average fares system can use a simple average of the service
by booking class and significant point of sale class fare or have a more detailed representation
from revenue accounting data. However, based on the fare qualification rules that can be
historical fares obtained from flown coupons determined when an availability request is

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 Airline fare management process: Complexities and challenges

Table 6: Fare qualification rules applicable for availability determination

Fare qualification rule Description

Frequency Day-of-week qualifier on which departure date of the service must fall
Trip type Non-stop, direct, online connection, interline connection
Advance purchase Number of days before departure of the service that the booking must occur
Blackout dates Date ranges on which the fare class item may not be used
Point of sale Where the booking is made, includes all levels from region to agency id
Selling dates Date range when the transaction may occur
Travel dates A date range within which the departure date of the service must occur
Days open before departure Number of days before the service departure that item is applicable
Days closed before departure Number of days before the service departure that item ceases to be applicable
Included flight number ranges List of flights or flight number ranges on which this item is applicable
Excluded flight number ranges List of flights or flight number ranges on which this item is not applicable
Flight routing restrictions Connect point requirements
Joint carrier restrictions Carriers that may be included in an interline connection for this item
Inhibits Restrictions on the use of this item, booking only, host agents only, and so on

made. For example, fare restrictions such as
minimum stay and maximum stay are not
applicable since they cannot be determined
when an availability request is being made. The
applicable fare qualification rules are either
ATPCo fare categories or footnotes and are
summarised in the Table 6.
Using fare qualification rules ensures that the
market value used for determining availability is
as close as possible to the ticketed fare. While
the values will never be the same, the objective
is to ensure that they are very close.
CONCLUSIONS
This paper discusses the airline fare manage-
ment process and its associated complexities
and challenges. Ultimately, the success of an
airline’s revenue management programme is
dependent on the effectiveness of the airline’s
fare management process along the dimensions
of effective market segmentation, delineation of
strategic and tactical pricing initiatives, timely
fare filings that eliminate latency, a rational
pricing structure that eliminates fare inversions,
applying demand management jointly with the
revenue management process to control the
availability of restriction-free tariffs and finally
ensuring that the fare management process is
rational, consistent and a standardised, repea-
table process.
NOTE
1 Billing and Settlement Plan (BSP) for IATA
accredited passenger sales agents.
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