In an increasingly customer focused world, airlines need to get creative and segment better, writes Tom Bacon

At one airline, the new promotional fare with a three-day purchase window isn’t selling. Another is finding that a large tourist boom in Costa Rica isn’t translating into sales of more non-refundable fares. The booking curve, at a third, has elongated, with the booked load factor two weeks out up ten points.

These scenarios are not uncommon. Quite simply because airline fares continue to be rules-based with advanced purchase restrictions, refundability or change fees, and short-term sales. Inventory settings are all based on days before departure, with lower fare buckets closing as bookings come in.

Although pricing is ‘dynamic’ it still represents a rules-based world: for example, the low fares for Flight 121 are made available until they are automatically closed when the flight is booked at 61%, which we expect will occur 28 days before departure. Besides the orientation to days-before-departure, fare rules include carry-on and checked baggage limits, seating restrictions, and boarding priorities.

Fare rules and fare allocations are all behaviour-based. None are based on more traditional customer segmentation: business versus leisure travel, individual versus family, essential versus optional travel. Airlines have always relied on macro rules as a proxy for more fundamental segmentation. However, because of this approach, airlines tend to not really understand their customers and their purchase behaviour very well. This means they often:

• Forecast the number of passengers who fall within each rules-based behaviour group and allocate inventory accordingly

• Study those in each fare category. For example, they may estimate how many passengers who pay $129 - $159 might be willing to pay more (an estimate of elasticity-based sell-up)

• Don’t ‘know’ their passengers

This, of course, is not the way to merchandise most effectively; airlines can’t embrace personalised travel offers based on these categories of passengers. The $129-$159 fare category often encompasses a highly diverse set of passengers with a variety of different travel needs. Frequently, such a mid-tier fare range will include passengers representing a multitude of customer segments.

So, when the actuality dramatically exceeds or falls short of the forecast – an ineffective promotion, a disconnect between sales and the market, a change in the booking curve – airlines rarely have a good customer-based explanation. Instead, the norm is to adjust the forecast and ‘recalibrate’ the model with little true customer insight. In fact, airlines pride themselves on daily, automatic model adjustments.

Even when the forecast is perfect, the categorisation is obviously too crude to offer real merchandising opportunities. Because of the diversity within each existing set of customers, each fare level or each fare class, ‘average’ ancillary behaviour is largely meaningless (50% check bags; 35% reserve seats; and so on). Using just their existing segmentation, airlines will tend to continue to market on a generic basis. This rules-based approach will not work well in the new customer-driven world.

Airlines need to know ‘why’.

1.  Why customers used their chosen distribution channel

 Was it due to a promotion, corporate obligation, perceived ease of use, perceived completeness of information?  Many airlines seek more ‘direct’ bookings but without fully understanding ‘why’ customers go ‘indirect’, they will not be able to change behaviour effectively.

2.  Why they booked the fare

Did they book the fare after extensive shopping?  With or without complete knowledge of rules?  After assessment of the restrictions, relative to the fare discount/premium (what restrictions are accepted versus which drive customers to book a higher fare)?

3.  Why they booked the airline

Was the choice of flights the best flight time or just because of the fare?  Was this the preferred airline?  Did a corporate agreement drive the booking?

4.   Why they booked at this time

Did they book to get the fare, as the beginning of a larger trip-planning effort, or as an immediate response to a new travel need?

Airlines need to segment their customers in new and creative ways, going beyond the behaviours that simply reflect the rules airlines attach to their fares (advanced purchase, non-refundability, a free checked bag). Only when airlines adopt more creative customer segmentation will they be able to apply new merchandising approaches that leverage greater personalisation.

Tom Bacon has been in the business 25 years, as an airline veteran and now industry consultant in revenue optimisation. He leads audit teams for airline commercial activities including revenue management, scheduling and fleet planning. Questions? Email Tom or visit his website