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Integration of Pricing and Revenue Management for a Future without Booking Classes AGIFORS Reservation and Yield Management Study Group Annual Meeting,

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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 AGIFORS Reservation and Yield Management Study Group Annual Meeting, Bangkok, May , 2001 Natascha Jung Senior Operations Research Specialist Klaus Weber Senior Scientific Analyst

2 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 2 Presentation on behalf of my colleague Natascha Natascha... and her boss

3 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 3 Agenda Pricing & Revenue Management Integrated Approach to Pricing & Revenue Management Booking Classes Outlook / Conclusions Motivation

4 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 4 travel agent customer Motivation The Customer Typical Travel Agency Situation? I would like to book a flight from Bangkok to Rio de Janeiro. No,... Yes, I would prefer a three leg itinerary via Frankfurt and Madrid. Do you have any idea when and how you would like to fly? I see,... Are you looking for a last minute offer? 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!!

5 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 5 travel agent customer Motivation The Customer (cont.) I would like to book a flight from Bangkok to Rio de Janeiro. 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  I can offer you a discounted fare in Eco? Typical Travel Agency Situation? I am going to take part in the annual meeting of Nobel laureates 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!

6 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 6 Motivation The Customer (cont.) Customer does not care about booking classes! Customer demand depends on Travel day Prices (offered at ticketing day) Service Restrictions (minimum stay, day application,...) Demand is controlled by fares, i.e. customer needs! Revenue management systems Forecast is estimated on basis of historical demand Booking histories are stored w.r.t. booking class! !!!Contradiction !!! Resume fares

7 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 7 Agenda Pricing & Revenue Management Integrated Approach to Pricing & Revenue Management Booking Classes Outlook / Conclusions Motivation

8 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 8 Booking Classes Historical Review 1955 Central Reservation 1965 Overbooking 1972 Currency Control 1977 Segment Pricing 1989 Fare Mix / Control 1994 Network Management / Bid Pricing Historical Development of Revenue Management at Lufthansa 1972 Littlewood’s rule 1989 EMSRb Booking classes

9 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 9 Booking Classes Why Booking Classes? Revenue management point of view Booking classes reflect ‘somehow’ the customers’ will to pay booking classes are the basis for demand forecast We do not truly need booking classes but we are used to use them. Reservation systems use them to indicate availability However, there are other means to reflect customer will to pay (fares) compute customer demand (customer choice model)

10 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 10 Booking Classes Why Booking Classes? (cont.) Pricing point of view Booking classes are not important at all Only fares are important! Fares are richer in information than booking classes

11 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 11 Booking Classes Problems with Booking Classes Booking classes are inaccurate, e.g. Quite different fares in same booking class Distortion of average revenue of booking class Another indicator Booking class harmonisation in airline alliances usually increases number of booking classes

12 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 12 Booking Classes Problems with Booking Classes (cont.) RM systems forecast on historical data Different demand Different average values of corresponding booking classes !!!Meanwhile fares might have been changed !!!

13 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 13 Booking Classes Booking Classes - pros and cons Booking classes pros Booking classes cons History building for demand forecast (generally possible for fares as well, however: too many fares) Bid price control requires calculation of bid prices  Booking class protects not necessary  Booking classes only indirectly used for BP calculation Booking class corresponds to class value (‘somehow’) Inexactness of booking classes  restricts opportunity of additional revenue gain... in 0.1 % range (which are millions of € or $) Booking class can be identified with restrictions (‘somehow’) ‘approximation’ inexact, but works

14 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 14 Booking classes cons Booking classes pros Booking Classes Booking Classes - pros and cons (cont.) ‘customer pricing’ (priceline.com, tallyman.de) shows  Booking classes are not necessary !!!Approach not generally applicable to airlines !!! restrictions (not refundable) are necessary to avoid down selling not possible to sell ‘open tickets’

15 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 15 Agenda Pricing & Revenue Management Integrated Approach to Pricing & Revenue Management Booking Classes Outlook / Conclusions Motivation

16 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 16 Pricing & Revenue Management Overview: Pricing System - Price Elasticity Model Competitor Reaction Analyser Market Share Model Market Stimulation Model Price Elasticity ModelTrigger Fare Change Output Demand Shift Traveller Preference Analyser Fare Analyser

17 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 17 Pricing & Revenue Management Overview: Revenue Management System O&D Forecast Engine O&D Optimiser Forecast Interface DB Optimiser Interface DB Inventory GDS... Forecast Building Demand Forecasts Control Parameters

18 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 18 Pricing & Revenue Management Comparison PricingRevenue Management 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 oriented Market size Market share Fares Target level (What shall be controlled?)  Value / revenue oriented  coarse level  fine level Target quantities (Which quantities are focused on?) ODIF POS demand ODIF POS values marginal seats revenues bid prices

19 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 19 Pricing & Revenue Management Comparison (cont.) Market size Market share Fares Target quantities (Which quantities are focused on?) ODIF POS demand ODIF POS values marginal seats revenues bid prices PricingRevenue Management Linking both spheres means replace booking classes in RM sphere by fares (properly) integrate both spheres

20 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 20 Pricing & Revenue Management Requirements for Integration Current Demand Forecast Booking historiesCurrent booking level Booking classes PNR

21 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 21 Pricing & Revenue Management Requirements for Integration Fare buckets =fares clustered with respect to value / revenue restrictions Fare buckets ??? Source ??? Why buckets? Optimisation requires competition among customers for same seat Why not take fares, i.e. one fare per bucket?  Too many buckets Integrated Demand Forecast fare In the future?... together with other usefull, quantities, e.g. bid prices Pricing DB restrictions etc. fare (inexact) class info Booking historiesCurrent booking level

22 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 22 Pricing & Revenue Management Requirements for Integration (cont.) Bookings Fare buckets... av. value no. of bkgs. Example Value restriction sunday return advanced purchase 14 days For optimisation we need to forecast the number of bookings in each fare bucket.

23 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 23 Agenda Pricing & Revenue Management Integrated Approach to Pricing & Revenue Management Booking Classes Outlook / Conclusions Motivation

24 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 24 Competitor Reaction Analyser Market Share Model Market Stimulation Model Price Elasticity Model Traveller Preference Analyser Alternative Analyser Data sources Integrated Approach Pricing & RM Price Elasticity Model MIDT ATPCO Internal fare data Utility factors Customer choice model multinomial logit model customer’s choice depends on amount minimum stay advanced purchase... Forecast of demand for each fare bucket - step 1 Separate for business and leisure passengers

25 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 25 Demand forecast Forecast basis Market Size Forecaster Integrated Approach Pricing & RM Market Size Forecaster Data sources MIDT ATPCO Internal fare data Forecast of demand for each fare bucket - step 2 Current bookings

26 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 26 Integrated Approach Pricing & RM Fare Buckets Forecast Price Elasticity Model Forecast of demand for each fare basket - step 3 Market Size Forecaster Per ticketing/travel combination Per departure date... av. value no. of bkgs. Fare buckets

27 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 27 Integrated Approach Pricing & RM System Overview O&D Optimiser Forecast Interface DB Optimiser Interface DB Inventory GDS... Market Shares Demand Forecasts Control Parameters Market Size Forecast Price Elasticity Model Market Size Bookings with Fare Information

28 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 28 Integrated Approach Pricing & RM Demand Changes Fare Change Floating dcp Snap shot Price Elasticity Model Demand Shift Demand Shift Current Demand Previous Forecast Learning Re-Optimisation Previous  New Forecast

29 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 29 Agenda Pricing & Revenue Management Integrated Approach to Pricing & Revenue Management Booking Classes Outlook / Conclusions Motivation

30 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 30 Outlook / Conclusions Outlook - Mining PNRs Business passengers behave different from leisure passengers Separate customer choice models Problem: Identification of passenger types history data current booking data Fare information available (insufficient?) PNR may not contain fare information! Mine PNR data to decide to which type passenger belongs to PNR e.g. pax travels single... or with family pax is frequent traveller... !!

31 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 31 Outlook / Conclusions Summary Booking classes are inaccurate w.r.t. amount of fares contained are not used directly in O&D bid price control Booking class-based forecast reflects historical customer choice only does not concern current market changes Booking class-oriented revenue management systems are sophisticated (O&D control) work well may not exhaust the full potential of RM control!!! There is need for strong integration of Pricing and RM

32 AGIFORS Reservation and Yield Management Study Group Annual Meeting May , 2001 Chart 32 Outlook / Conclusions Summary Gap between pricing and revenue management could be closed by replacement of booking classes by fare buckets by forecast concerning market size market shares Integrated approach to pricing and revenue management manages demand changes Challenges Inventory changes Information provision Good experience with pricingNetLine/Price pricing simulationNetLine/Price:PSM pax demand forecast for schedulingNetLine/Plan Interested airlines are kindly invited for proving the concept

33 Thank you for your attention! Any questions?


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