Revenue Management

1
Revenue Management

• Louis Busuttil
• Consultant
• lbusuttil_at_hotmail.com

2
Frequently asked questions about revenue
management

• Why sell more seats than you have seats available
  for sale?
• Why charge so many different prices for the same
  product?
• Why do your prices have so many conditions
  attached?
• So what is revenue management?
• Is it the same thing as yield management?
• Why do you need computers to help with
  forecasting?
• Why do you need computers to help with
  optimisation?
• Are there real-world external barriers to
  implementation?
• Are there real world internal barriers to
  implementation?
• Whats the current state-of-the-art in revenue
  management?

3
Why sell more seats than you have seats available
for sale?
300
C
A
P
economy class booking curve
A
C
I
T
Y
0
365
Days prior to departure
4
Why charge so many different prices for the same
product?
P
R
I
economy
C
class
E
demand
curve
CAPACITY
CAPACITY
CAPACITY
price/demand relationship, market segmentation,
rev area under curve
5
Why do your prices have so many conditions
attached?

• Anti-marketing or how to make your product less
  attractive to the late-booking high-yield customer

• stay Saturday night
• book three months in advance
• non refundable/endorseable/reroutable
• you can even get them to dress as Elvis!

People will still shop around for the lowest
price they can get, but you can force them to
progressively trade up to the more expensive
seats as you approach day of departure.
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So what is revenue management?
Revenue mgt is the integrated control of capacity
and price - pioneered by mega airlines who could
fund the RD costs, rev mgt systems can now be
bought off the shelf, but systems-integration,
data-quality, and business-process- improvement
remain major challenges - other industries
following (hotel, car rental, broadcasting) - a
must-have for high-fixed-cost, low-margin,
price-segmentable businesses The airline
business is won and lost at the margins Don
Burr An airline applying rev mgt techniques
head-to-head with one which doesnt, can enjoy a
10 rev advantage Peter Belobaba
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Is it the same thing as yield management?
300 seats full fare at 1,900 discounted at
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)100100 b) (1901900)(501300)
426,000 426000/(19050)1,775 ((19050)/300)10
080 c) (1351900)(1351300)432,000 432000/(13
5135)1,600 ((135135)/30010090
Revenue management processes need to be supported
by systems to help with passenger demand
forecasting and fare mix optimisation.
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Why do you need computers for demand forecasting?
There are many human biases in forecasting
- treat more easily available / recallable data
as more significant
- confidence in uncertain estimates often higher
than warranted
- gamblers fallacy assume that random processes
self-correct
- overemphasise conclusions from small samples
anecdotal evidence
- distorted perceptions from order of data,
scaling of graphs, summaries
- start from solution and insufficiently correct
for current situation
- failure to regress to the mean, extreme values
expected to continue
- attach higher validity to info which confirms
previously held beliefs
- fact/value confusion strongly held beliefs are
presented as facts
- success attributed to personal ability, failure
to bad luck
- order effects eg undue importance on first and
last items presented
- seeking information to support views, wishful
thinking
- conservatism failing to use new info to
significantly revise estimates
9
Why do you need computers for fare mix
optimisation?
Y B H T
10
Are there real-world, external barriers to
implementation?
Even if you get the algorithms and the systems
and the internal business processes right, you
cant do this without external market discipline,
and that means stopping distributors from
undermining your efforts at revenue management
through abusive practices.
11
Are there real-world, internal barriers to
implementation?
Sales dont buy in to discipline well lose
business to our competition
12
Whats the current state of the art in revenue
management?
AMS
TYO
NGO
LHR
FRA
OSA
SEL
FUK
PAR ZRH
ROM
TPE
YTO
IST
YVR
NYC
BAH
HKG
SFO
BKK
DXB
LAX
MNL
KUL
BOM
CEB
PEN
SIN
CHB
JKT
SUB
CNS
DPS
JNB
BNE
ADL
PER
AKL
SYD
MEL
OD control managing the trade-offs between
high-yielding point-to-point (eg 3rd/4th freedom)
versus low-yielding connecting-traffic (eg 6th
freedom) to maximise net-net revenue in real-time
on a network-wide basis.