Book Review Published in Transportation Journal Winter 2008
The Future of Pricing
How Airline Ticket Pricing Has Inspired a Revolution
By E.Andrew Boyd
New York, NY
November 2007, pp 192, $45.00
Written by a leading authority on pricing, The Future of Pricing presents a view of airline pricing practices from the inside. The author’s stated goal is to teach using interviews, examples, history, and personal experience. This approach helps to make his book readable and Dr. Boyd does accomplish his goal of teaching the basics of the science of pricing to the average reader. The stories used as examples range from Socrates to Las Vegas casinos. While interesting, these anecdotes often do not seem relevant to the subject matter.
After providing background about airline pricing in Chapter 1, the author clearly explains yield management and introduces the concept of perishability of airline seats in Chapter 2. This is followed by clear descriptions of the long haul, hub and spoke systems of the legacy carriers and the shorter haul, point to point operations of the low cost carriers.
Chapter 3 is one of the most interesting and informative in the book. It examines the evolution of airline reservations systems from manual booking to card and chalkboard systems, followed by mechanical systems and present day computerization. As reservations systems evolved, airlines learned to use them as a competitive advantage. Travel agents and airlines also began the practice of co-hosting, or shared displays on reservations systems. Anecdotes in this chapter show how management practices and airline inefficiencies have often led to dilution of revenue. This created the need, after deregulation, for passive reservations booking groups to morph into sales teams.
Chapters 4 and 5 are dense and mathematical but do illustrate the big challenges faced by airlines. The main points are that it is difficult to convert reservations systems from inventory management; filling seats, to revenue management; maximizing yield. This is further complicated by uncertainty of demand and high costs of airline infrastructure. Some examples of pricing terminology in this section include nested fares, pseudo fares, and fare class buckets.
Chapter 6, “Hold Me, Darlin”, continues the discussion of demand forecasting by using lengthy examples of card playing strategies. The author is enthusiastic about poker and blackjack but the connection to scientific pricing is not made clear. The chapter describes four forecasting concepts: Unconstraining, Buy-down, Competitive Price Data, and Consumer Choice.
The applications of revenue management in the hotel, car rental, and cruise ship industries are explored in Chapter 7. The examples used here do reflect the travel experiences of the average reader, making this chapter especially effective in communicating the effect of scientific pricing on revenue management. The business problems of these travel companies are similar to those of airlines. All face the pressures of perishable inventory. Competition for market share demands that revenue management not necessarily result in price increases.
In Chapter 8, the author invokes Aristotle and Socrates to introduce the concept of “just pricing”. Oil company profits, along with rapidly changing fuel prices, are widely seen as unjust. Airline fares are associated with miles flown by the average consumer. Actual costs, however, are the result of both high fixed costs and uncertainty of demand. This makes it difficult to establish what a fair and reasonable price should be for any particular flight. Accounting based pricing attempts to recover costs plus some profit, while science based pricing charges according to demand and willingness to pay. A big issue for companies using science based pricing is that they run the risk of offending the sense of justice of their customers. Frequently changing prices takes away our idea of a just or reasonable fare.
Chapter 9, “The Scientists”, consists of a rather uninteresting story about some of the major players in the world of scientific pricing. Dr. Boyd emphasizes that the point of operations research in business is to increase profits. This may be anathema to those “pure” scientists who wish to do research for its own sake. This view, according to Boyd, hinders the growth of scientific pricing due to the researchers’ unwillingness or inability to communicate the science in business terms. Chapter 10 provides examples of pricing done by the seat of the pants in some industries.
Chapter 11 is intended to illustrate how pricing is slowly evolving through the use of science. It includes a lengthy anecdote about contract pricing in health care and is supported by graphs. I found this chapter confusing and difficult to connect to the topic of airline pricing. The book concludes with Chapter 12, making a strong case for customer centric pricing as the way of the future.
This book will certainly be of value to pricing professionals in airlines and other industries. However, I would be reluctant to recommend it to the average reader or airline passenger.
Mitch Kostoulakos, CTL
Adjunct Instructor- Supply Chain
Northern EssexCommunity College