Presentation on theme: "Revenue Management in the airline industry"— Presentation transcript:
1 Revenue Management in the airline industry Paul RoseManaging Director
2 Content My background The History of Revenue Management Revenue Management an essential business practiceGroup business and RMSystem selection & implementation
3 My background BA 1970-94 in RA, Sales but mostly RM. Virgin Atlantic Airways implemented RM.Rejoined BA RM& PricingO&D and Oneworld RM projects.2001 M.D. of PR RM Ltd:SITA – RI & RM consultant, product manages range.A.R.I.G. – Owner & ChairIndependent RM ConsultingConferences and publicationsIATACalidris – 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 systemsSimple 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 systems26 selling classes evolve, European regulation continues hence little competition.Mid 80s - “Better Yield Control”RM systems introducedYield 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 availableMid 90’s - “Improved Revenue Management”Quantum leap in technology - POS introduced, SBP / Heuristic BP introduced , Codeshare abounds, more carriers enlisting R.M.2000 – todayMajority 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 !
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, orb) 190 full fare and 50 discounted, orc) 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-factora) (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 RMLarge 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 importantRevenue Management maximizes profitability by selling the correct number of seats at various fare levels based on demand and pricing elasticitySometimes 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 importantManaging an airline’s most important asset - its perishable seat inventoryAccurately predict future demandMaximise 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 OperatorsImmediate benefit by using Historic data from the RMS dbSide 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 businessesA 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 productTo the right customerIn the right placeAt the right timeFor the optimum priceVia the best channel
19 RM benefitsHas demonstrated the ability to generate of 3 – 9% in additional RevenueBetter management of group and tour operator performanceBetter Pricing actions where Pricing and RM depts are integratedIncreased speed to marketSuperior Management Information leading to better decisions
20 The major steps in RMPlanningProduce business plan and set up flights based on historic performance with required inputs to reflect the future.ForecastingProduce Detailed Forecasts of Unconstrained Demand for Each Future Flight Departure13
21 The major steps in RM Overbooking Optimisation Overbook Future Flight Departures Based on Historic Patterns of No-Shows and Late CancellationsOptimisationDetermine 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 significantAttach higher validity to info which confirms previously held beliefs, seeking information to support views.Overemphasise conclusions from small samples: anecdotal evidenceConservatism: failing to use new info to significantly revise estimatesFailure to regress to the mean, extreme values expected to continue
23 5 Key elements of airline R.M. CABIN SPOILAGEPROBLEMLoss of revenue occurring due to passengers who No-Show or cancel late on full flights.SOLUTIONIdentify revenue opportunities available and apply accurate overbooking levels.
24 5 Key elements of airline R.M. DISCOUNT SPOILAGEPROBLEMLoss 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.SOLUTIONIdentify 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 SPILLPROBLEMThe loss of revenue resulting from turning away late high yield demand because too many lower yield seats were sold early.SOLUTIONQuantify 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 OPPORTUNITYPROBLEMThe loss of revenue from failing to accommodate demand in a lower cabin from available seats in a higher cabin.SOLUTIONQuantify revenue potential from more accurate setting of overbooking profiles & utilise adjustment of capacity between cabins.
27 5 Key elements of airline R.M. DIFFERENTIAL PRICINGPROBLEMAn airline seat can be viewed by a purchaser as a single commodity, the desire is to purchase at the lowest price.SOLUTIONDifferentiate 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 FACTOROverbooking capacity to ensure maximum seat-factors with minimal offloads and downgrades.MANAGEMENT OF REVENUE MIXCabin mix via market segmentationSeat access & Group acceptance.ADDED SOPHISTICATIONSales 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 effectsGroup Management - Materialisation & RatesMultiple World-wide distribution channelsMany Business segmentsComplex dynamic pricing structure
30 RMS functionality Unconstrained Demand Forecasting Optimisation Process using complex algorithms.Recommendations with Auto-Pilot options.Automated No-shows / cancellation managementManagement reportingGroup evaluation tools
31 Process map EXCEPTIONS FORECAST DEMAND OPTIMISE PLUS CURRENT BOOKED PASSENGERSEXCEPTIONSRECOMMENDEDCONTROLSNET YIELDOPTIMISEAUTOMATICCRS&GDSsNOSHOWS &CANCELLATIONS
32 Daily process cycle R.M. systems & people Daily analysis Performance MeasurementR.M. systems& peopleException reportsImplementationForecasting & Optimisation
33 Overbooking and upgrading ADVANTAGESMore seat accessMore passengers accommodatedMore revenuePassengers more likely to trade upReward for frequent fliers and card holdersDISADVANTAGESFull fare passenger may be annoyedFrequent travellers will 'play the system'Some passengers not suitableAdditional work for customer service
34 Balancing the network New York Copenhagen £115 £150 £100 Vienna London £175£65ParisSan Francisco£275JohannesburgParis - New York £215Vienna - New York £250Johannesburg - New York £425(1) All LH flights full = Take local traffic(2) If JFK, or SFO, JNB empty => Take connecting trafficDanger 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- LONDON19619841929
37 What is wrong with most airlines Groups business process No economic evaluation of groupsLimited evaluation of the possible route itinerariesLimited estimation and very little planning of group utilisation rates.Response times slow, typically 3-5 daysNo automated monitoring & tracking of Group bookingsNo 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 passengersAirlines say ‘NO’ - when they should say ‘YES’Which can potentially reduce load factorAirlines respond too slowly – clients shop aroundFirst 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 & timeProvide real-time decision support capability to perform economic evaluation on all requestsEvaluate all possible scenarios for acceptanceCreate “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 reportsProvide facilities to forecast and continuously monitor group utilisation behaviourMechanise mundane manual processes e.g. contracts.Enhance user productivity
41 Group Evaluation Business Process Receipt of requestEconomic evaluation of itinerariesInteractive negotiating capabilityAgree on itineraryAgree on price and termsGenerate the group PNRsGenerate contractsInput of namesContinuous monitoring through post-departure
42 Ad Hoc Groups decision support Forecasting group utilisation (take up)Evaluation of complete itineraryDetermination of minimum acceptance price for each itinerary optionWhole and / or break-up of Group across alternatives.Agent commissionsFree 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 patternsAnalyse requests among competing travel agents and tour operatorsDetermine optimal block allocations to sales offices for subsequent distribution to individual travel agents / tour operatorsMonitor all bookings by travel agents / tour operators from time of acceptance until departure
45 PROJECT INITIALISATION Assessing the current positionNo RM at allBase inventory controlsMarket 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’sAre we a LCC?
46 PROJECT INITIALISATION Needs analysis study.= What is needed, when, how ?Options :-Independent consultant.Software supplierEnlist Senior Management support.Understand the basics:-- Forecasting - Optimisation- Yield - Market segmentation
47 PROJECT INITIALISATION SimulationsProvides proof of concepts.Provides insight into current data, uncovers problems.Optimal/Actual/System only/No controlRequirements & 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 ManagementAdequate 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 DemosRange 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 relationshipsVisible 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 levelsSystems & People performanceImprovements in RevenueOffloads / DowngradesSeat access, speed to market.Success milestones - Celebrate & Communicate