Presentation on theme: "Integration of Pricing and Revenue Management for a Future without Booking Classes AGIFORS Reservation and Yield Management Study Group Annual Meeting,"— Presentation transcript:
1 Integration of Pricing and Revenue Management for a Future without Booking Classes AGIFORSReservation and Yield Management Study Group Annual Meeting, Bangkok, May , 2001Natascha Jung Senior Operations Research SpecialistKlaus Weber Senior Scientific Analyst
2 Presentation on behalf of my colleague Natascha ...and her boss
4 Motivation The Customer Typical Travel Agency Situation?I see, ...Are you looking fora last minute offer?Do you have anyidea when and how you would like to fly?I would like to booka flight fromBangkok toRio de Janeiro.No, ...Yes, I would prefer athree leg itinerary via Frankfurt andMadrid.That’s not important! I just like to travel in M class ... I mean, from BKK to FRA in M, and then H class to MAD. But for transatlantic flights I prefer class Q!!travel agentcustomer
5 Motivation The Customer (cont.) Typical Travel Agency Situation?Do you have any idea when and how you would like to fly?I understand. You need a comfortable seat with power supply for your laptop.If you don’t mind the risk of thrombosis N I can offer you a discounted fare in Eco?I would like to book a flight from Bangkok to Rio de Janeiro.I am going to take part in the annualmeeting of Nobellaureates which starts next month and will take 8 days.Oh, no! I just like to sit and think about a new formula.Great! I take it!travel agentcustomer
6 Motivation The Customer (cont.) ResumeCustomer does not care about booking classes!Customer demand depends onTravel dayPrices (offered at ticketing day)ServiceRestrictions (minimum stay, day application, ...)faresDemand is controlled by fares, i.e. customer needs!Revenue management systemsForecast is estimated on basis of historical demandBooking histories are stored w.r.t. booking class!!!! Contradiction !!!
8 Booking Classes Historical Review Historical Development of Revenue Management at Lufthansa1955Central Reservation1965Overbooking1972Currency Control1977Segment Pricing1989Fare Mix / Control1994Network Management / Bid Pricing1972 Littlewood’s rule1989 EMSRbBooking classesCurrency Control: Lower availability for countries with weak currency.Network Management: Availability concerning Routing and Point of booking. A passenger flying from A to B to C is maybe paying less than a passenger just flying from B to C.
9 Booking Classes Why Booking Classes? Revenue management point of viewBooking classes reflect ‘somehow’ the customers’ will to paybooking classes are the basis for demand forecastReservation systems use them to indicate availabilityHowever, there are other means toreflect customer will to pay (fares)compute customer demand (customer choice model)We do not truly need booking classes but we are used to use them.
10 Booking Classes Why Booking Classes? (cont.) Pricing point of viewBooking classes are not important at allOnly fares are important!Fares are richer in information than booking classes
11 Booking Classes Problems with Booking Classes Booking classes are inaccurate, e.g.Quite different fares in same booking classDistortion of average revenue of booking classAnother indicatorBooking class harmonisation in airline alliances usually increases number of booking classes
12 Booking Classes Problems with Booking Classes (cont.) RM systems forecast on historical data!!! Meanwhile fares might have been changed !!!Different demandDifferent average values of corresponding booking classes
13 Booking Classes Booking Classes - pros and cons Booking classes consHistory building for demand forecast(generally possible for fares as well, however: too many fares)Bid price control requires calculation of bid pricesBooking class protects not necessaryBooking classes only indirectly used for BP calculationBooking class corresponds to class value (‘somehow’)Booking class can be identified with restrictions (‘somehow’)Inexactness of booking classesrestricts opportunity of additional revenue gain ... in 0.1 % range (which are millions of € or $)‘approximation’inexact, but works
14 Booking Classes Booking Classes - pros and cons (cont.) Booking classes cons‘customer pricing’ (priceline.com, tallyman.de) showsBooking classes are not necessary!!! Approach not generally applicable to airlines !!!restrictions (not refundable) are necessary to avoid down sellingnot possible to sell ‘open tickets’
18 Pricing & Revenue Management Comparison Target level (What shall be controlled?)Market - OD origin destination Fares given on this level.ODIF POS origin destination itinerary fare class point of sale Booking values given on this level.customer orientedValue / revenue orientedcoarse levelfine levelTarget quantities (Which quantities are focused on?)Market sizeMarket shareFaresODIF POS demandODIF POS valuesmarginal seats revenuesbid prices
19 Pricing & Revenue Management Comparison (cont.) Target quantities (Which quantities are focused on?)Market sizeMarket shareFaresODIF POS demandODIF POS valuesmarginal seats revenuesbid pricesLinking both spheres meansreplace booking classes in RM sphere by fares (properly)integrate both spheres
20 Pricing & Revenue Management Requirements for Integration Current Demand ForecastBooking historiesCurrent booking levelBooking classesBooking classesPNR
21 Pricing & Revenue Management Requirements for Integration Integrated Demand ForecastBooking historiesCurrent booking levelFare bucketsfares clustered with respect tovalue / revenuerestrictionsFare buckets??? Source ???fareIn the future?... together withother usefull,quantities, e.g. bid pricesfare (inexact)Why buckets?Optimisation requires competition among customers for same seatWhy not take fares, i.e. one fare per bucket?Too many bucketsPricingDBclass inforestrictions etc.
22 Pricing & Revenue Management Requirements for Integration (cont.) BookingsFare bucketsExampleValuerestriction sunday returnadvanced purchase 14 days...av. value no. of bkgs.For optimisation we need to forecast the number of bookings in each fare bucket.
24 Integrated Approach Pricing & RM Price Elasticity Model Forecast of demand for each fare bucket - step 1Data sourcesUtilityfactorsCompetitorReactionAnalyserMarket ShareModelMarket Stimulation ModelPrice Elasticity ModelTraveller Preference AnalyserAlternativeCustomer choice modelmultinomial logit modelcustomer’s choice depends onamountminimum stayadvanced purchase...Internal fare dataATPCOMIDTSeparate for business and leisure passengers
25 Integrated Approach Pricing & RM Market Size Forecaster Forecast of demand for each fare bucket - step 2Data sourcesMIDTATPCOInternal fare dataForecast basisDemand forecastMarket Size ForecasterCurrent bookings
26 Integrated Approach Pricing & RM Fare Buckets Forecast Forecast of demand for each fare basket - step 3Price Elasticity ModelPer ticketing/travel combinationPer departure date...av. value no. of bkgs.Fare bucketsMarket Size Forecaster
27 Integrated Approach Pricing & RM System Overview O&D OptimiserForecast Interface DBOptimiser Interface DBInventoryGDS...Market SharesDemand ForecastsControlParametersMarket Size ForecastPrice Elasticity ModelMarket SizeBookings with Fare Information
30 Outlook / Conclusions Outlook - Mining PNRs Business passengers behave different from leisure passengersSeparate customer choice modelsProblem: Identification of passenger typeshistory datacurrent booking dataüFare information available (insufficient?)!!PNR may not contain fare information!Mine PNR data to decide to which type passenger belongs toe.g.pax travels single ... or with familypax is frequent traveller...PNR
31 Outlook / Conclusions Summary Booking classesare inaccurate w.r.t. amount of fares containedare not used directly in O&D bid price controlBooking class-based forecastreflects historical customer choice onlydoes not concern current market changesBooking class-oriented revenue management systemsare sophisticated (O&D control)work wellmay not exhaust the full potential of RM control!!!There is need for strong integration of Pricing and RM
32 Outlook / Conclusions Summary Gap between pricing and revenue management could be closedby replacement of booking classes by fare bucketsby forecast concerningmarket sizemarket sharesIntegrated approach to pricing and revenue managementmanages demand changesChallengesInventory changesInformation provisionGood experience withpricing NetLine/Pricepricing simulation NetLine/Price:PSMpax demand forecast for scheduling NetLine/PlanInterested airlines are kindly invited for proving the concept