Understanding How Airline Fares Are Generated and Organized by Carlos Miguel Lasa, December 18, 2014
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Understanding How Airline Fares Are Generated and Organized by Carlos Miguel Lasa, December 18, 2014 Overview. The global commercial airline industry is a domain both fascinating and complex as there are many moving parts that work together to ensure that the 2 billion passengers flying annually on 23,000 aircraft to and from 3,700 airports across the world are transported in a safe, secure and orderly fashion. At the center of this industry lies the organizing system that underpins its economic model – the Computer Reservations System (CRS). The CRS serves as the “factory” where fares are calculated, fare inventories are stored and where all reservation transactions happen. All airlines have their own CRS where fares can be accessed and purchased by customers through two distribution models – direct and indirect. In the direct model, customers purchase fares directly on an airline’s CRS through its website or call center. The indirect distribution model involves multiple organizing systems that interact with one another and is the more traditional model of the two. In this model, fares are published by an airline’s CRS to two major organizations, the Airline Tariff Publishing Company (ATPCO) and the Société Internationale de Télécommunications Aéronautiques (SITA), which act as clearinghouses and aggregators for fare information and flight schedules across all major airlines in the world. Once published on ATPCO and SITA, this fare data is then picked up by another organizing system called a Global Distribution System (GDS) for further distribution. A GDS is a system traditionally accessed by travel agencies for fare search and comparison across airlines, eliminating the need to look up multiple CRS systems manually. There are three major GDS systems being used in the industry - Travelport, Amadeus and SABRE. As fare purchases have slowly moved online, these GDS systems have also become the information source for online travel agencies (OTAs) such as Expedia, Orbitz and Travelocity, as well as metasearch engines like Kayak and Hipmunk. The GDS however does not hold any of the fare inventory, so all reservations and ticketing transactions still have to happen on the chosen airline’s CRS. What is being organized? Essentially, at the core of the CRS and all these other systems, the resource that is being organized is the fare. At face value, the fare that passengers see is basically the price for an airline ticket between two locations for a generic class of service (i.e. first, business or economy). There are however underlying metadata and resource descriptors that are not entirely visibile when the passenger is making the booking, such as fare subclasses and the restrictions that come along with them. This combination of rules are represented in what is called the fare basis code, which is 3 to 7 alphanumeric characters long and is what ticketing agents refer to when trying to assess modifications being requested for a booking, like whether a ticket is refundable or if the fare is valid only on certain days of the week. So for a typical flight, while there are either 2 or 3 main classes of service, the airline will typically assign a certain inventory of fares between 10 to 20 different fare basis codes to control the amount of each fare level sold. Why is it being organized? Many a traveler has wondered why there is such differentiation between fares. This is largely due to the deregulation of the airline industry in the mid-20th century, which removed many of the government controls on fare pricing to encourage competition in the airline industry. Since then, the airline industry has adopted a practice called yield management that governs how fare prices are determined. Yield management is essentially a variable pricing strategy which adapts to consumer and competitor behavior in order to maximize the revenues generated from the sale of finite perishable resources such as airline fares or hotel rooms. Prior to deregulation, fares were based mostly on the distance covered by the flight. Today, there are multiple factors taken into account by yield management that influence the price of a fare, which include demand for a particular route, proximity of the booking date to the departure date, consumer behavior, demand for a particular service class, competition along a route by other airlines and uncontrollable environmental or market conditions such as the season, prevalent weather conditions and the price of fuel. The bottom line for the airline at the end of the day is to ensure optimal profit generation, which has led to this organization of fares in their reservation systems. How much is it being organized? The result of the confluence of all these factors in a highly volatile market such as the airline industry is a fare pricing system that has grown so complex that on most flights, you would find that no two passengers will have paid the same price. Airline pricing has grown so complex that researchers from MIT led by mathematician Carl de Marcken have determined that it is practically impossible to design an algorithm that would be able to find the cheapest fare between two given locations. To handle such complexity, the aforementioned fare basis codes kick in to try to bring some order into the whole equation. These fare basis codes though are not sorted into a hiearchical classification, as the CRS implements more of a faceted classification system to determine which rules and restrictions a particular fare would have. Also, given that there is a lot of interplay between systems, the airline industry has adopted a controlled vocabulary through its trade association, the International Air Transport Association (IATA), which has set standards for things such as airport codes (e.g. SFO for San Francisco) and airline codes (e.g. UA for United Airlines) to maximize interoperability. When is it being organized? Given the dynamic nature of fare pricing, fares are constantly being updated in the airline’s CRS to reflect changes in market conditions, such as when certain fare classes sell out or when special discounts are programmed by airline inventory managers. When an airline changes their fare prices in the CRS, the ATPCO and SITA systems pick these up at least once every hour and push them out to the downstream GDS, OTA systems and metasearch engines. Given the caching and latency across all these systems, it is normal to encounter situations where fare prices don’t always match the final price that is ticketed, as there would normally be thousands of users accessing similar fares across the globe at different stages of the booking process. How or by whom is it being organized? After fares are purchased, the airline aggregates all the sales data from the CRS, ATPCO/SITA and GDS systems and uses it to forecast demand and inform future pricing decisions. The analysis and updates are done through computer algorithms that automatically set prices based on conditions that have been set by teams of market planners and inventory control agents. These agents are assigned to monitor specific routes, and they use the sales data and forecasts to set the optimal price limits and inventory for fares on those routes that will generate the most revenue for the airline. Airline Airline CRS Website or (Delta, United, American, etc.) Call Center ATPCO SITA Travel Agency Customer GDS OTAs (Expedia, (Travelport, SABRE, Amadeus) Travelocity) The Distribution Models Metasearch Engines of Airline Fares (Kayak, Hipmunk) Direct Model Indirect Model Deciphering the Fare Basis Code and Fare Classification Code Meaning P First Class Premium F First Class Fare Class A First Class Discounted J Business Class Premium C Business Class Number of days fare needs to be D, I, Z Business Class Discounted purchased before flight departs W Economy / Coach Premium Y, S Economy / Coach Special upgrade fares B, H, K, M, L, Economy / Coach Discounted N, Q, T UP Upgradeable fares NR Non-refundable OW One-way fare RT Return fare Numerals Days for advance bookings, or Sample fares from San Francisco (SFO) to San Diego (SAN) on a SABRE GDS terminal maximum stay restriction.