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Revenue Management in the airline industry

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Presentation on theme: "Revenue Management in the airline industry"— Presentation transcript:

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


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


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


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


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


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?

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

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 !

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

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

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