These benefits from applying artificial intelligence come from research undertaken at University of Illinois at Urbana-Champaign. It addresses a move undertaken by many airlines in 2008 which caused much controversy – unbundling. With this tactic, airlines unbundled the costs of flights and ancillary services. In doing so, many customers regarded this as a businesses strategy to seemingly quote a low base fare and then enhance the cost in order to increase profits.
With the new analysis, the researchers see how unbundling and be reconfigured to meet customer needs through the use of new technology to create intelligent, individualized pricing models. With artificial intelligence these pricing models can be offered in real time to customers.
The motivation for unbundling was clear: to boost airline profits, given that most airlines operate on very slim margins and the actual flight cost is subject to the variations in the cost of fuel. However, while airlines earn a considerable portion of their revenue on ancillary purchases, the process of unbundling can also provide cost-saving opportunities to passengers.
By applying improved technology for example, customers can make informed choices so they do not pay for things they do not need, plus discounts can be provided to customers who would otherwise pass on the extras. This option can convert a “no sale” into a purchase.
As to how to target the level of discount, the researchers demonstrate how artificial intelligence can use information gathered about a customer while they shop in order to predict a price point at which the customer will be comfortable in buying an additional service. This price will be different according to the habits of different customers.
As an example, a passenger traveling for just a few days is probably not motivated to pay extra for checking in a bag. However, if the airline discounts this service at the right price so that convenience outweighs cost, then a sales conversion is possible.
AI can also vary what is put on offer and how many types of offers are made available to passengers. Variables here include flight origin, destination, the timing of travel and duration of a trip. This all contributes to moving away from the idea of the “average customer” and towards airlines offering services for “individual travelers.”
The new approach has been outlined in a working paper titled “Dynamic Pricing for Airline Ancillaries with Customer Context.”
