Dynamic pricing is everywhere in the airline industry conversation these days. Vendors pitch it. Whitepapers reference it. It even features in The Economist. Everyone wants it. But what does it actually mean? More importantly, what does it take to do it right?
This article pulls directly from a talk by Radu Iliescu, Managing Director of Consulting at Branchspace, and distils real-world insights on where most airlines stand, where the real challenges lie, and how to move forward with confidence.
When dynamic pricing makes headlines for the wrong reasons
In August 2024, tens of thousands of Oasis fans queued online for reunion-tour tickets, advertised at £135 for standing spots. By the time many reached checkout, those tickets had jumped to £355. Ticketmaster’s dynamic pricing model was adjusting prices in real time while fans were still in the queue. The backlash was swift: social media erupted, MPs called for action, and the UK’s Competition and Markets Authority opened an investigation into whether consumers had been misled.
Why does this matter to airlines?
Because dynamic pricing isn’t just for concert tickets and when poorly executed, it can alienate customers and damage trust. The same technology that makes pricing more responsive can just as easily undermine the customer experience if transparency is lacking.
What dynamic pricing actually means
Dynamic pricing, related to demand-based pricing, is a strategy whereby prices shift in response to real-time factors like demand, seat availability, competitor pricing, and market events. It’s been common in industries like hospitality and ride-hailing for years, but for airlines it is now seen as the “next frontier” in revenue management.
Done well, it can help airlines move beyond static fare ladders to a more agile, customer-responsive model. Done badly, it risks confusing customers, creating internal operational headaches, and even attracting regulatory attention.
The Three Pricing Frontiers in Airline Retail
Radu breaks down dynamic pricing into three levels. Each one builds on the last and reflects not just a technology shift, but a mindset and operational shift too.
1. Continuous Pricing: Most Common, Least Complex
Think of continuous pricing as dipping your toes in the water. You still work within a fare ladder, but instead of jumping from one price point to the next, you interpolate between them. That might mean offering a price of $133.55 when your filed fares are $120 and $140.
Many airlines already rely on this, by using a dual RBD (Reservation Booking Designator) structure, or by re-filing fares multiple times a day or, most commonly, by applying a real-time calculated discount to the filed fare, in all cases the price being determined based on an interpolation between consecutive fare ladder steps and the availability level within the lowest available RBD. It enables a greater price granularity than the discrete and rigid fare ladder, but you're still working within the same ruleset.
2. Dynamic Pricing: Real Optimisation Begins
This is where things get interesting. Dynamic pricing means calculating the optimal price in real time. It uses bid price curves and Willingness-to-Pay models to determine in real-time prices that reflect the current context of a flight search, market, and customer behaviour.
Similarly to continuous pricing, the process often involves issuing a ticket based on a filed fare and applying a discount to reach the optimal price point. For example, if the optimal price is determined to be $103.26 but your nearest equal or greater filed fare is $120, you issue the ticket based on the $120 fare and discount it by $16.74. But the algorithm used to determine the optimal price is much more sophisticated than the one used for continuous pricing.
Some large airlines and airline groups have been using such approaches for years. But it's not just about the science. The real challenge is implementing it within a legacy ecosystem.
Another example is Delta Air Lines pushing into AI-driven dynamic pricing, currently affecting about 3% of domestic tickets, with plans to scale to 20% by the end of 2025. The pricing engine uses context such as flight details and browsing behaviour to set what a passenger might be willing to pay. Despite its potential, the initiative has attracted regulatory scrutiny over fairness and transparency
3. Atomic Pricing and Dynamic Bundling: The True Retail Leap
The third level is where retail transformation becomes tangible. Atomic pricing means pricing every component of an offer individually: right to fly, cabin and hold baggage, seat selection, flexibility options (right to change & right to cancel), in-flight service etc. and then combining all of those into a final bundle that is priced as a function of the granular prices of its atomic components with an additional (optional) bundle price optimisation on top.
This approach only really becomes feasible in an Offer/Order world. Trying to implement atomic pricing within a legacy PSS is not impossible, but the complexity would likely outweigh the reward.
Still, the potential is huge. It allows airlines to build modular, responsive offers and match pricing to actual demand signals at a granular level.
On the ancillary side, JetBlue has introduced dynamic pricing for baggage: during high-demand seasons, first checked-bag fees increase by about US $5 and second bag fares by US $10, varying further by route and booking timing.
Related: 5 considerations when moving to Modern Airline Retailing
The Real Roadblock? Legacy System Integration
One of the biggest misconceptions about dynamic pricing is that the hardest part is building the pricing model. In reality, a major challenge is also making it work across the airline’s legacy PSS and distribution ecosystem.
When we worked with Lufthansa Group on implementing dynamic pricing over NDC, the majority of the effort was spent on ensuring the pricing flowed correctly through Amadeus Altéa, NDC APIs and Revenue Accounting system, and retained downstream compatibility with legacy servicing systems (e.g. Amadeus ATC).
Many airlines underestimate the level of technical debt and architectural rigidity of their current setup. Pricing transformations often stall not because the algorithm fails, but because the downstream systems can’t handle the dynamic price properly.
Ancillary Pricing: The Overlooked Opportunity
Dynamic pricing is often discussed in relation to base fares, but optimising ancillaries pricing may be a significant revenue unlock as well.
Take seats, for example. They’re scarce, high-value (especially on long-haul), currently priced in static tiers and not subjected to regulatory constraints (like baggage tends to be). Demand-based pricing for seats, especially front-of-cabin or extra legroom options, offers strong margin potential with fewer ecosystem constraints.
Flexibility conditions, lounge access and cabin baggage are further opportunities. With limited overhead bin space, demand-driven pricing can help balance load while generating revenue (although this may be limited in some regions by local regulations).
Yet most revenue management systems aren’t built for this. A modern retail mindset means treating these components as products with their own demand curves, not just price tags.
What Should Airlines Do Next
Here are a few practical ways to build momentum:
1. Start with continuous pricing, but don’t stop there.
Design your architecture to scale toward true dynamic pricing and eventually atomic pricing. Build incrementally.
2. Be smart about data usage.
Most airlines avoid using individual / personal customer data for pricing due to discrimination concerns. Instead, rely on contextual signals: itinerary, pax composition, timings (time before departure, length of stay, departure and return days of the week etc.), competitor pricing, market trends, weather, events and any other non-individual customer-related signals that are likely to influence the demand elasticity of your customers.
3. Own your models, but test others too.
Some of our clients use both internally developed and vendor-provided models for Willingness-to-Pay (WTP), then A/B test them. Having both options increases your level of expertise on price optimisation while giving you control and flexibility, and potentially a greater degree of price optimisation.
4. Manage expectations on uplift.
WTP-based models are still maturing. The oft-quoted 5% uplift is possible, but not guaranteed. Focus on experimentation and tracking performance, not over-promising.
5. Think incremental transition stages, not gigantic leaps.
There’s a temptation to treat dynamic pricing as a single leap. But the reality is more layered:
- You start with continuous pricing;
- You build dynamicity capabilities;
- You prepare your architecture and governance to support atomic product management and pricing;
- All while adapting your distribution channels and wider IT ecosystem by aligning pricing with UX, merchandising, servicing and other downstream systems.
So, going back to our original question, what does it take to get the rollout and adoption of dynamic pricing right? There is no single right answer for everyone, it depends on where an airline is at in their current Offer transformation process, the specificities of their existing IT ecosystem etc.
What is crucial is knowing what you want to achieve (i.e. how much extra revenue you can aim for), defining your approach and assessing the investment requirements in advance. Setting the right transition strategy and defining your business case are both essential pre-conditions for a successful outcome.
The end goal? Higher yields and greater attach rates for ancillaries, yes. But also more relevant, personalised offers that reflect what travellers actually want, when they want it.
And that’s not just a pricing strategy. It’s modern airline retailing.
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