1 Copyright © 2002 by PROS Revenue Management  Fare class rationalization is the process of aligning fares within fare classes so that leg/class revenue management systems can operate to their fullest potential.  This new fare class structure is created by considering network displacement costs, point of sale attributes, business policies and alliance requirements.  We introduce the basic premise behind fare class rationalization and describe practical experiences in applying it. Abstract

2 Experiences with Fare Class Rationalization Antonio Ruggiero April 18, 2002

3 Copyright © 2002 by PROS Revenue Management Agenda  Rationalization u Concepts u Process u Difficulties Encountered  Simulation Results  Summary and Questions

4 Copyright © 2002 by PROS Revenue Management Rationalization Concepts – The Business Problem Inventory Control – Leg/Segment Pricing - O&D Demand - O&D Sales - Regional Integrates Pricing, Planning, Sales, and Inventory Control to maximize network revenue Rationalization

5 Copyright © 2002 by PROS Revenue Management Rationalization Concepts – The Business Problem  Point-of-sale  Alliance agreements  Currency  Commercial modifiers  Negotiated deals  Interline proration  Codeshare proration  Travel agency Fare product values in a booking class may be different due to:

6 Copyright © 2002 by PROS Revenue Management Rationalization Concepts – The Business Problem  Itinerary proration to the leg-fareclass AAA BBB CCC DDD EEE $1200 $800 $350 $600

7 Copyright © 2002 by PROS Revenue Management  Problems with an improperly rationalized fare class structure. u Fare products in a Fare Class get same protection  Limit availability of highly valued seats to low paying demand u Not placing appropriate protection on fare products.  Highly protecting itineraries of low network value.  Not giving enough protection to itineraries of high network value.  Fare overlap among fare classes reduces Revenue Management’s effectiveness Rationalization Concepts – Business Problem

8 Copyright © 2002 by PROS Revenue Management Rationalization Concepts – Business Solution Rationalization u Uses O&D revenue accounting data and leg capacity information to determine the value of itineraries in the network u The objective is to group itineraries of similar value into buckets or fare classes u Provides a better understanding of network demand flows u Provides improved leg fares

9 Copyright © 2002 by PROS Revenue Management YBMQYBMQ $350 - $650 $250 - $550 $150 - $450 $110 - $290 Open Closed $500 $400 $300 $200 Avg Fare Value Range of Fares Availability Status A $450 ‘M’ passenger would get rejected, but a $250 ‘B’ passenger would be accepted. Potential lost revenue because of fare overlap. Rationalization Concepts – Leg Example

10 Copyright © 2002 by PROS Revenue Management YBMQYBMQ $530 - $650 $390 - $530 $250 - $388 $110 - $249 $590 $465 $325 $186 Avg Fare Value Range of Fares Open Closed Availability Status Rationalization Concepts – Leg Example A rationalized fare class structure. u A very involved process when all itineraries in a network are considered

11 Copyright © 2002 by PROS Revenue Management Agenda  Rationalization Concepts u Process u Difficulties  Simulation Results  Summary and Questions

12 Copyright © 2002 by PROS Revenue Management Data Input Rationalization Review Output Rationalization Process Leg Fare Input File History Realignment Fare Refiling Optimization Network Optimization Clustering Analysis Peak Season/Non-Peak Season

13 Copyright © 2002 by PROS Revenue Management Rationalization Process  Network Optimization model u Maximizes network revenue u Determines leg-compartment displacement costs  Displacement cost is the revenue gain from adding one seat to the leg-compartment u Determines optimal itinerary allocation  Calculate each itinerary’s network value u Obtain Desirability Index(DI) for each itinerary  Rationalization: u Cluster itineraries into desired fare classes based on the Desirability Index of the itineraries

14 Copyright © 2002 by PROS Revenue Management Rationalization Process  Information provided (O&D, Leg) u Stressed(Bottleneck) legs  High Displacement Cost  Desirability Index is less than the Fare  Demand is greater than capacity u Non-Stressed legs  Displacement Cost = 0  Desirability Index is equal to the Fare  Capacity is greater than demand

15 Copyright © 2002 by PROS Revenue Management Rationalization Process  Pure Rationalization Results u Peak/Non-Peak seasons u Decide DOW; no DOW; Midweek/Weekend  Business Constraints/Requirements u Define “New” fare class structure  Alliance compliance

16 Copyright © 2002 by PROS Revenue Management Rationalization Process  Business Requirements u Direct re-mappings  Frequent Flier  ID/AD – discount fares  Child/infant products  Group fare class  General consideration u Min/Max constraint u Same structure constraint u Round trip constraint

17 Copyright © 2002 by PROS Revenue Management Rationalization Process – Results Carrier A: O&D Market  Top revenue producing market  Market with greatest uplift

18 Copyright © 2002 by PROS Revenue Management Rationalization Process – Results Carrier A: O&D Market

19 Copyright © 2002 by PROS Revenue Management Rationalization Process – Results Carrier B: O&D Market  Market is approximately in the middle in terms of revenue and/or uplift

20 Copyright © 2002 by PROS Revenue Management Rationalization Process – Results Carrier B: O&D Market

21 Copyright © 2002 by PROS Revenue Management Rationalization Process  Leg Fare Input file u Populate leg fare class fares  History Realignment File u Realign the historical demand to the new structure  Fare Re-filing File u Provides the details to re-file a fare product

22 Copyright © 2002 by PROS Revenue Management Agenda  Rationalization Concepts Process u Difficulties Encountered  Simulation Results  Summary and Questions

23 Copyright © 2002 by PROS Revenue Management Rationalization Difficulties Encountered  Data u Critical issue  Deciding on the business constraints u Iterative process  Handling strange business constraints u Considerable degrees of freedom in the rationalization process  Implementation u Getting all departments on board

24 Copyright © 2002 by PROS Revenue Management Agenda Rationalization Concepts Process Difficulties Encountered  Simulation Results  Summary and Questions

25 Copyright © 2002 by PROS Revenue Management Simulations  Simulation Environment u Based on rationalization input data provided u Entire Network, not just connections to the hub u Generated 30 booking request streams based on client data  Used 10 booking request streams to get average ODIF demand forecasts  Used 20 booking request streams to test revenue improvements u Tested Old fare class structure with EMSRb u Compare revenue performance over No RM control (FCFS)

26 Copyright © 2002 by PROS Revenue Management Simulation Results – EMSRb Control

27 Copyright © 2002 by PROS Revenue Management Agenda Rationalization Concepts Process Difficulties Encountered Simulation Results  Summary and Questions

28 Copyright © 2002 by PROS Revenue Management Summary and Questions  Rationalization is the process of: u determining the network value of itineraries u grouping similar network valued itineraries into a pre- defined fareclass hierarchy  Rationalized Fare Class Structure provides: u Segmentation of fare products into the fare classes u Ability to protect for the higher valued products u Minimized fare overlap of fare classes  Revenue Simulations indicate a real benefit  The End

29 Copyright © 2002 by PROS Revenue Management The End.