1. Revenue Management in the airline industry
Paul Rose
Managing Director

2. Content My background The History of Revenue Management
Revenue Management an essential business practice
Group business and RM
System selection & implementation

3. My background BA 1970-94 in RA, Sales but mostly RM.
Virgin Atlantic Airways implemented RM.
Rejoined BA RM& Pricing
O&D and Oneworld RM projects.
2001 M.D. of PR RM Ltd:
SITA – RI & RM consultant, product manages range.
A.R.I.G. – Owner & Chair
Independent RM Consulting
Conferences and publications
IATA
Calidris – World’s leading RI supplier

4. THE HISTORY OF REVENUE MANAGEMENT

5. Revenue Management History
R.M was born from the deregulation of the USA airline industry in the early ‘70s.
Pioneered by AA and followed by other “Mega airlines” who could fund the R&D costs who instigated first systems = AA, UA, DL, BA etc)
“People express” a forerunner of LCC airline the first casualty of “ US Price Wars” did not have R.M. capability.

6. Revenue Management History
70s - “Reservations / Space control”
Basic control systems
Simple pricing with Few fares in the market place., Focus on space not yield, Reservations staff resourced, US deregulation starts.
Early 80s- “Basic Yield Control”
Better inventory systems
26 selling classes evolve, European regulation continues hence little competition.
Mid 80s - “Better Yield Control”
RM systems introduced
Yield focus through class hierarchy, deregulation & new aggressive competition emerge!

7. Revenue Management History
Early 90s - “Revenue Management”
Route Inventory & Sales Area Pricing begin to merge, Sophisticated RM systems now available
Mid 90’s - “Improved Revenue Management”
Quantum leap in technology - POS introduced, SBP / Heuristic BP introduced , Codeshare abounds, more carriers enlisting R.M.
2000 – today
Majority of major airlines have a RMS, RM & Pricing depts merged , focus on costs, profit, and more aware of competitors

8. Food for thought !
Yet RM systems are still only used by approx 45% of the World’s >1300 airlines!
Revenue Management typically delivers 3-9% revenue gain, with >11% achieved at some leading airlines!
Most unsuccessful RM installations are due to unsupported business processes, lack of Snr Mngmnt support, or lack of expertise rather than system failures !

9. Industries employing Revenue Management
Airlines
Hotels
Car rental
Tour operators
Cruise ships / Ferries etc.
Healthcare
Amusement parks, golf courses.
Theatres, Opera.
Energy companies
Advertising & TV companies

10. REVENUE MANAGEMENT AN ESSENTIAL BUSINESS PRACTICE

11. Is R.M. the same thing as yield management?
300 seats, full fare $1,900; discounted $1,300; would you prefer:
a) 50 full fare and 250 discounted, or
b) 190 full fare and 50 discounted, or
c) 135 full fare and 135 discounted ?
The one that makes you most money (c) is not necessarily the one that gives you the highest average yield (b) or the highest load factor (a).
Revenue Yield Load-factor
a) (50*1900)+(250*1300)=$420, /(50+250)=$1,400 (50+250)/300)*100= 100%
b) (190*1900)+(50*1300)=$426, /(190+50)= $1,775 (190+50)/300)*100=80%
c) (135*1900)+(135*1300)= $432, /( )=$1,600 ( )/300*100=90%

12. Airlines without RM Often only consider Load Factor
Their business driver is to sell as many seats as possible regardless of price, dilution or increased costs.
Few limits are imposed, fewer classes are utilised, and class availability is often sub optimal.

13. Airlines without RM
Large numbers of low yielding seats are usually sold with this approach, without any protections for higher yielding late booking clients.
The assumption is that the higher the seat factor, the higher the profitability for the airline, which is incorrect.
Waste valuable resources with manual “best guess” of likely demand.

14. Why RM is important
Revenue Management maximizes profitability by selling the correct number of seats at various fare levels based on demand and pricing elasticity
Sometimes the number of passengers carried may be lower than when compared to a simple load factor driven methodology.
BUT, the result of correctly optimised number of seats sold, with lower costs, will still provide higher revenue than an uncontrolled load factor approach.

15. Why RM is important
Managing an airline’s most important asset - its perishable seat inventory
Accurately predict future demand
Maximise revenue on every flight departure by setting optimal inventory allocations, that reflect the passenger demand forecast and allows for cancellations and no-shows.
Minimise seat spoilage, spillage and risk of denied boardings and /or downgrades.

16. RM is important as it allows a carrier to
Accurately accept Group business without diluting revenue or spilling high individual demand and focus on the best performing Tour Operators
Immediate benefit by using Historic data from the RMS db
Side benefits such as using passenger forecasts for Network planning,Catering, Customer Services resource planning and future aircraft acquisition.
SLIDE 12

17. So what is Revenue Management?
A “must-have” for high-fixed-cost, low-margin, price-segmentable businesses
A process of maximising revenue from perishable products, through the integrated control of capacity and price.
Although RMS can now be bought off the shelf, systems-integration, data-quality, and business-process- improvement still remain major challenges

18. What is Revenue Management?
In other words:-
Selling the right product
To the right customer
In the right place
At the right time
For the optimum price
Via the best channel

19. RM benefits
Has demonstrated the ability to generate of 3 – 9% in additional Revenue
Better management of group and tour operator performance
Better Pricing actions where Pricing and RM depts are integrated
Increased speed to market
Superior Management Information leading to better decisions

20. The major steps in RM
Planning
Produce business plan and set up flights based on historic performance with required inputs to reflect the future.
Forecasting
Produce Detailed Forecasts of Unconstrained Demand for Each Future Flight Departure 13

21. The major steps in RM Overbooking Optimisation
Overbook Future Flight Departures Based on Historic Patterns of No-Shows and Late Cancellations
Optimisation
Determine best authorisation levels for each Booking Class to maximise a flight’s Revenue using EMSR (Expected Marginal Seat Revenue algorithm)

22. Why we need computers for demand forecasting?
There are too many human biases in forecasting:-
Treat easily available or recallable data as more significant
Attach higher validity to info which confirms previously held beliefs, seeking information to support views.
Overemphasise conclusions from small samples: anecdotal evidence
Conservatism: failing to use new info to significantly revise estimates
Failure to regress to the mean, extreme values expected to continue

23. 5 Key elements of airline R.M.
CABIN SPOILAGE
PROBLEM
Loss of revenue occurring due to passengers who No-Show or cancel late on full flights.
SOLUTION
Identify revenue opportunities available and apply accurate overbooking levels.

24. 5 Key elements of airline R.M.
DISCOUNT SPOILAGE
PROBLEM
Loss of revenue resulting from turning away discount customers because discount seats were not available at the time of booking, subsequently the flight departs with a significant number of empty seats.
SOLUTION
Identify revenue opportunities lost on flights that departed with a significant number of empty seats, yet had discount class restrictions at some point prior to departure, and reforecast and re-optimise future flights.

25. 5 Key elements of airline R.M.
HIGHER YIELD SPILL
PROBLEM
The loss of revenue resulting from turning away late high yield demand because too many lower yield seats were sold early.
SOLUTION
Quantify the opportunity from flights that fill prior to departure leaving no seats for higher yield passengers, and protect on future flights.

26. 5 Key elements of airline R.M.
UPGRADE OPPORTUNITY
PROBLEM
The loss of revenue from failing to accommodate demand in a lower cabin from available seats in a higher cabin.
SOLUTION
Quantify revenue potential from more accurate setting of overbooking profiles & utilise adjustment of capacity between cabins.

27. 5 Key elements of airline R.M.
DIFFERENTIAL PRICING
PROBLEM
An airline seat can be viewed by a purchaser as a single commodity, the desire is to purchase at the lowest price.
SOLUTION
Differentiate brands ( e.g. First, Business, Economy ) to offer added value and create products within a brand utilising micro-segmentation of the market place and price fences ( e.g. Advance purchase tickets, Corporate rates, Tour operator fares, Frequent flyer redemption rates etc ).

28. What is Revenue Management?
MANAGEMENT OF SEAT FACTOR
Overbooking capacity to ensure maximum seat-factors with minimal offloads and downgrades.
MANAGEMENT OF REVENUE MIX
Cabin mix via market segmentation
Seat access & Group acceptance.
ADDED SOPHISTICATION
Sales area mix ( POS - Point of sale )
Managing traffic flows (O&D )

29. Airline business environment
High yield business books late, low yield business books early.
Average industry No-show rate of 15%, with variation between % ! Plus cancellation effects
Group Management - Materialisation & Rates
Multiple World-wide distribution channels
Many Business segments
Complex dynamic pricing structure

30. RMS functionality Unconstrained Demand Forecasting
Optimisation Process using complex algorithms.
Recommendations with Auto-Pilot options.
Automated No-shows / cancellation management
Management reporting
Group evaluation tools

31. Process map EXCEPTIONS FORECAST DEMAND OPTIMISE
PLUS CURRENT BOOKED PASSENGERS
EXCEPTIONS
RECOMMENDED
CONTROLS
NET YIELD
OPTIMISE
AUTOMATIC
CRS
&
GDSs
NOSHOWS &
CANCELLATIONS

32. Daily process cycle R.M. systems & people Daily analysis Performance
Measurement
R.M. systems
& people
Exception reports
Implementation
Forecasting & Optimisation

33. Overbooking and upgrading
ADVANTAGES
More seat access
More passengers accommodated
More revenue
Passengers more likely to trade up
Reward for frequent fliers and card holders
DISADVANTAGES
Full fare passenger may be annoyed
Frequent travellers will 'play the system'
Some passengers not suitable
Additional work for customer service

34. Balancing the network New York Copenhagen £115 £150 £100 Vienna London
£175
£65
Paris
San Francisco
£275
Johannesburg
Paris - New York £215
Vienna - New York £250
Johannesburg - New York £425
(1) All LH flights full = Take local traffic
(2) If JFK, or SFO, JNB empty => Take connecting traffic
Danger of “ First come, first served” for many airlines.

35. Declining Yield Over Time
Actual versus comparative LONDON - LOS ANGELES- FIJI - AUCKLAND - SYDNEY - SINGAPORE - LONDON LONDON - LOS ANGELES - TAHITI- SYDNEY- BANGKOK-LONDON LONDON - NEW YORK- LOS ANGELES - FIJI- SYDNEY- HONG KONG-LONDON LONDON - BERMUDA- ACAPULCO- TAHITI- SYDNEY- DARWIN-SINGAPORE- BOMBAY- BAHRAIN- LONDON 1 9 6 1 9 8 4 1 9 2 9

36. GROUP BUSINESS & REVENENUE MANAGEMENT

37. What is wrong with most airlines Groups business process
No economic evaluation of groups
Limited evaluation of the possible route itineraries
Limited estimation and very little planning of group utilisation rates.
Response times slow, typically 3-5 days
No automated monitoring & tracking of Group bookings
No comprehensive performance measurement and no management reporting

38. Results are lost revenue
Airlines say ‘YES’ - when they should say ‘NO’
Which can potentially displace higher-revenue passengers
Airlines say ‘NO’ - when they should say ‘YES’
Which can potentially reduce load factor
Airlines respond too slowly – clients shop around
First airline to offer good rate and space usually gets sale.

39. The objectives of a good Groups system
Maximise revenue opportunities from groups by analysing trade-offs between price, seat quantity & time
Provide real-time decision support capability to perform economic evaluation on all requests
Evaluate all possible scenarios for acceptance
Create “win-win” situation where airline remains in control

40. The objectives of a good Groups system
Convert group data into valuable decision support information and reports
Provide facilities to forecast and continuously monitor group utilisation behaviour
Mechanise mundane manual processes e.g. contracts.
Enhance user productivity

41. Group Evaluation Business Process
Receipt of request
Economic evaluation of itineraries
Interactive negotiating capability
Agree on itinerary
Agree on price and terms
Generate the group PNRs
Generate contracts
Input of names
Continuous monitoring through post-departure

42. Ad Hoc Groups decision support
Forecasting group utilisation (take up)
Evaluation of complete itinerary
Determination of minimum acceptance price for each itinerary option
Whole and / or break-up of Group across alternatives.
Agent commissions
Free tour conductor passes (dependant upon carrier’s policy )
Channel groups toward itineraries with highest incremental revenue potential (offer connections)
Management reporting system

43. Series Groups decision support
Evaluate Series requests spanning multiple itineraries and travel patterns
Analyse requests among competing travel agents and tour operators
Determine optimal block allocations to sales offices for subsequent distribution to individual travel agents / tour operators
Monitor all bookings by travel agents / tour operators from time of acceptance until departure

44. SYSTEM SELECTION & IMPLEMENTATION

45. PROJECT INITIALISATION
Assessing the current position
No RM at all
Base inventory controls
Market segmentation - crude or sophisticated?
First generation RM system looking towards an upgrade ?
What are the business drivers / aims ?
Size of network, nature of the traffic ?
Do we need an O&D system?
Do we compete with LCC’s
Are we a LCC?

46. PROJECT INITIALISATION
Needs analysis study.= What is needed, when, how ?
Options :-
Independent consultant.
Software supplier
Enlist Senior Management support.
Understand the basics:-
- Forecasting - Optimisation
- Yield - Market segmentation

47. PROJECT INITIALISATION
Simulations
Provides proof of concepts.
Provides insight into current data, uncovers problems.
Optimal/Actual/System only/No control
Requirements & Scope:-
Understand your current business processes:-
Strengths, weaknesses, need for change.
Phased deliveries.
Budget available - $1 - 10M ?
MANAGING EXPECTATIONS - Rome wasn’t built in a day !

48. PROJECT INITIALISATION
Expertise requirements:-
RM expert (s)
Project Management
Adequate IT dept/infrastructure.
Budget approval - Don’t underestimate and include everything !
Hardware, software, project management costs, consultancy, training, travel /accommodation costs, support & maintenance etc.

49. SOFTWARE SUPPLIERS Narrowing the field:-
System Demos
Range of modules available - RM, Groups etc.
Integration between RMS and other systems.
Who understands your business the most ?
Speak to other airlines, visit reference sites.
Timescales - can supplier meet desires ?
Price - best option for what airline can afford, that matches requirements.
Upgrade options for the future

50. PROJECT INTIALISATION
Select supplier.- Sign contract, build relationships
Visible Project plan.
Key milestones, deliveries.
Track costs, resources.
Does the airline have the right people for the future in the R.M dept ?
What are their current skills vs required future skills?
Do they want to be part of the future ?
Education & training of team.

51. COMMUNICATE !
Sell the benefits to key internal partners e.g. Airports, Sales, Revenue Accounting, Marketing etc.
Maintain Senior Management support.
Utilise all avenues - Intranet, In-house mag, company journal, workshops, presentations.
BUT MOST IMPORTANTLY WITH THE R.M. TEAM !

52. IMPLEMENTATION Start measurements before implementation.
Benchmark against old results, against other competitors or industries.
Set targets, measure success, at macro/micro levels
Systems & People performance
Improvements in Revenue
Offloads / Downgrades
Seat access, speed to market.
Success milestones - Celebrate & Communicate

53. Thank you