Revenue Management in the airline industry

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Revenue Management in the airline industry

• Paul Rose
• Managing Director

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Content

• My background
• The History of Revenue Management
• Revenue Management an essential business practice
• Group business and RM
• System selection implementation

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My background

• BA 1970-94 in RA, Sales but mostly RM.
• Virgin Atlantic Airways 94-97 implemented RM.
• Rejoined BA 1997-2000 RM Pricing
• OD 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 Worlds leading RI supplier

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THE HISTORY OF REVENUE MANAGEMENT
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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 RD 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.

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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!

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Revenue Management History

• Early 90s - Revenue Management
• Route Inventory Sales Area Pricing begin to
  merge, Sophisticated RM systems now available
• Mid 90s - 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

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Food for thought !

• Yet RM systems are still only used by approx 45
  of the Worlds gt1300 airlines!
• Revenue Management typically delivers 3-9
  revenue gain, with gt11 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 !

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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

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REVENUE MANAGEMENTAN ESSENTIAL BUSINESS PRACTICE
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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)
(501900)(2501300)420,000 420000/(50250)1,4
00 (50250)/300)100 100 b) (1901900)(501300)
426,000 426000/(19050) 1,775 (19050)/300)10
080 c) (1351900)(1351300)
432,000 432000/(135135)1,600 (135135)/300100
90
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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.

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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.

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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.

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Why RM is important

• Managing an airlines 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.

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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.

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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

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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

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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

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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

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The major steps in RM

• Overbooking
• 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 flights Revenue
  using EMSR (Expected Marginal Seat Revenue
  algorithm)

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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

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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.

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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.

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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.

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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.

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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 ).

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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 (OD )

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Airline business environment

• High yield business books late, low yield
  business books early.
• Average industry No-show rate of 15, with
  variation between 5 - 50 ! Plus cancellation
  effects
• Group Management - Materialisation Rates
• Multiple World-wide distribution channels
• Many Business segments
• Complex dynamic pricing structure

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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

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Process map
FORECAST DEMAND
PLUS CURRENT BOOKED PASSENGERS
EXCEPTIONS
RECOMMENDED CONTROLS
NET YIELD
OPTIMISE
CRS GDSs
AUTOMATIC
NOSHOWS CANCELLATIONS
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Daily process cycle
Daily analysis
Performance Measurement
R.M. systems people
Exception reports
Implementation
Forecasting Optimisation
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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

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Balancing the network
Copenhagen
New York
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 gt Take connecting
traffic Danger of First come, first served for
many airlines.
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Declining Yield Over Time Actual versus
comparative2009 - LONDON - LOS ANGELES- FIJI -
AUCKLAND - SYDNEY - SINGAPORE - LONDON1991-
LONDON - LOS ANGELES - TAHITI- SYDNEY-
BANGKOK-LONDON1984 - LONDON - NEW YORK- LOS
ANGELES - FIJI- SYDNEY- HONG KONG-LONDON1960 -
LONDON - BERMUDA- ACAPULCO- TAHITI- SYDNEY-
DARWIN-SINGAPORE- BOMBAY- BAHRAIN- LONDON
1 9 6 0
1 9 8 4
1 9 9 1
2 0 0 9
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GROUP BUSINESS REVENENUE MANAGEMENT
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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

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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.

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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

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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

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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

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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
  carriers policy )
• Channel groups toward itineraries with highest
  incremental revenue potential (offer connections)
• Management reporting system

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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

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SYSTEM SELECTION IMPLEMENTATION
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PROJECT INITIALISATION

• 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 OD system?
• Do we compete with LCCs
• Are we a LCC?

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PROJECT INITIALISATION

• 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

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PROJECT INITIALISATION

• 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 wasnt built in a
  day !

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PROJECT INITIALISATION

• Expertise requirements-
• RM expert (s)
• Project Management
• Adequate IT dept/infrastructure.
• Budget approval - Dont underestimate and include
  everything !
• Hardware, software, project management costs,
  consultancy, training, travel /accommodation
  costs, support maintenance etc.

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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

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PROJECT INTIALISATION

• 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.

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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 !

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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

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Thank you