Week 4: History of Dynamic Pricing in Airlines

Did you know that “the computer reservations systems (CRSs) developed for the travel industry were among the earliest examples of e-commerce.”? (Smith et al., 2001, pg.37) Did you know that American Airlines was the first company to implement dynamic pricing?

Hello and welcome back to my blog! This week I made significant progress on my survey this week and hope to have it available in the next few days and will make sure to add a link on my blog post next week!

I also delved into a journal, “E-Commerce and Operations Research in Airline Planning, Marketing, and Distribution.” This journal went into the history of Airlines’ presence as an e-commerce company and how dynamic pricing started to get utilised. I learned that “through the 1970s, the Civil Aeronautics Board (CAB) regulated domestic airfares in the United States. Discounted fares were not widely available on scheduled carriers except for narrowly defined demographic groups, such as children and students.” (Smith et al., 2001, pg.39) This early approach, although not directly labelled as dynamic pricing, involved adjusting prices based on demographic characteristics, laying the foundation for later practices. 

The strategy of offering limited discounted fares did not last long. As the journal notes, “By the mid-1970s […] They realised that every empty seat flown was produced at almost zero incremental cost and selling otherwise empty seats at low prices could increase revenue and profits” (Smith et al., 2001, pg.39). This shift in perspective marked a pivotal moment in pricing strategies, emphasising the importance of maximising revenue through dynamic pricing models.

In order to optimise their pricing structure, “airlines developed yield management to fine-tune their increasingly complex pricing structures by tracking reservations and selectively turning on and off the availability of low fares” (Smith et al., 2001, pg.39). This allowed airlines to respond to fluctuations in demand, ensuring seats would be filled while also maximising revenue.“In January 1985, American Airlines launched a discount-pricing campaign, ‘Ultimate Super Savers,’ directed at filling the otherwise empty seats.” This is when the practice of  “offer[ing] full service at discounted fares priced at or below low-cost carriers” (Smith et al., 2001, pg.40). This strategy helped airlines fill their planes but also set a precedent for pricing strategies in the industry, highlighting the use of dynamic pricing in maximising revenue.

Thank you for tuning in on my blog again this week and be prepared to fill out a survey next week 🙂

For reference:

Smith, B. C., Günther, D. P., Rao, B. V., & Ratlife, R. M. (2001). E-Commerce and Operations Research in Airline Planning, Marketing, and Distribution. Interfaces, 31(2), 37–55. https://doi.org/10.1287/inte.31.2.37.10627