Your SlideShare is downloading. ×
0
Maximizing Revenue with a Leg Revenue Management System E. Andrew Boyd Vice President, Research and Design PROS Revenue Ma...
Revenue Management Goal <ul><li>To achieve the goal of increased revenues, the value of each ticket sold must be known wit...
A Perfect World <ul><li>One flight leg </li></ul><ul><li>One fare per booking class </li></ul><ul><ul><li>Y = 800 </li></u...
Perfect Fares Fare Class Y M B Q 200 400 600 800 1000 800 600 500 350
Fares in Reality Fare Class Y M B Q 200 400 600 800 1000 Fare Range
Where Does Fare Variation Come From? Source 1:  Distribution Channel
Where Does Fare Variation Come From? <ul><li>Source 1:  Distribution Channel </li></ul><ul><li>Y class tickets on flight 1...
Distribution Channels: Front End or Back End Fare Control? <ul><li>Front End Fare Control </li></ul><ul><ul><li>Make sure ...
Front End Fare Control <ul><li>Good front end control is extremely difficult to achieve, but is the only alternative for c...
Back End Fare Control <ul><li>Seamless availability / O&D provides the opportunity to address many distribution channel is...
The Value of Back End Fare Control <ul><li>The worse fair alignment is on the front end, the greater the impact of back en...
Simulation <ul><li>Purpose: </li></ul><ul><ul><li>To simulate the effects of poor fare class rationalization </li></ul></u...
Where Does Fare Variation Come From? Source 2:  Leg Control
Where Does Fare Variation Come From? <ul><li>Source 2:  Leg Control  Fares are provided at the O&D level, but availability...
Leg Control Fare Variation: The Problem <ul><li>Example Y class fares on a simple network </li></ul>ELP IAH STL MSY 400 80...
Leg Control Fare Variation: The Problem <ul><li>Y fare tickets on the leg ELP-IAH take on the values 400, 700, and 800 – a...
Leg Control Fare Variation: The Problem <ul><li>Fare class realignment may be required </li></ul>ELP IAH STL MSY 400 800 7...
Fare Class Rationalization <ul><li>Very Important Fact: </li></ul><ul><ul><li>Fares throughout the network must be aligned...
Network Optimization for Fare Class Rationalization <ul><li>Assign O&D fares to fare classes so that a leg control revenue...
Observations <ul><li>The myriad of business constraints leads to an extremely challenging problem that is not easily handl...
Fare Class Rationalization: The Wrong Way <ul><li>Ordering O&D values from highest to lowest fare value and clustering to ...
Fare Class Rationalization: The Right Way <ul><li>O&D valuation should incorporate some measure of displacement cost </li>...
A Process For Fare Class Rationalization: Getting to Leg Class Fares <ul><li>In the case of the ELP-IAH-STL itinerary, it ...
A Process For Fare Class Rationalization: Getting to Leg Class Fares <ul><li>A way of addressing multi-leg fares is to pro...
A Process For Fare Class Rationalization: Getting to Leg Class Fares <ul><li>Important Fact: </li></ul><ul><ul><li>There a...
A Process For Fare Class Rationalization: Getting to Leg Class Fares <ul><li>With fares prorated to legs, it is possible t...
A Process For Fare Class Rationalization: Getting to Leg Class Fares <ul><li>Proration alone does not solve the problem of...
A Process For Fare Class Rationalization: Getting to Leg Class Fares <ul><li>Proration does suggest how fare class rationa...
A Process For Fare Class Rationalization: Getting to Leg Class Fares <ul><li>The problem with rationalizing fare classes o...
A Process For Fare Class Rationalization: Pseudofares <ul><li>Pseudofares are one method of prorating itinerary fares to l...
A Process For Fare Class Rationalization: Pseudofare Example 800 300 700 100 500 Displacement Costs 800 – 600 + 500 800 – ...
A Process For Fare Class Rationalization <ul><li>Pseudofares provide a good alternative for performing fare class rational...
A Process For Fare Class Rationalization <ul><li>Important Fact: Pseudofares have the special property that they preserve ...
Ultimate Fare Class Rationalization <ul><li>Fare class rationalization is a front end fare control solution </li></ul><ul>...
Ultimate Fare Class Rationalization <ul><li>The Bad News </li></ul><ul><ul><li>Restricting inventory control to availabili...
Ultimate Fare Class Rationalization <ul><li>The Good News </li></ul><ul><ul><li>Stepping outside of leg fare class control...
Conclusions:  Distribution Channel <ul><li>Fare variation as a result of different fares in different distribution channel...
Conclusions:  Leg Control <ul><li>In a leg control environment, it is vital to have fare classes rationalized at the netwo...
Maximizing Revenue with a Leg Revenue Management System E. Andrew Boyd Vice President, Research and Design PROS Revenue Ma...
Upcoming SlideShare
Loading in...5
×

Leg Revenue Management System

1,518

Published on

Published in: Technology, Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total Views
1,518
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
116
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide
  • Transcript of "Leg Revenue Management System"

    1. 1. Maximizing Revenue with a Leg Revenue Management System E. Andrew Boyd Vice President, Research and Design PROS Revenue Management
    2. 2. Revenue Management Goal <ul><li>To achieve the goal of increased revenues, the value of each ticket sold must be known with some certainty </li></ul>Generate increased revenues by seeking to accept the highest paying mix of passengers
    3. 3. A Perfect World <ul><li>One flight leg </li></ul><ul><li>One fare per booking class </li></ul><ul><ul><li>Y = 800 </li></ul></ul><ul><ul><li>M = 600 </li></ul></ul><ul><ul><li>B = 500 </li></ul></ul><ul><ul><li>Q = 350 </li></ul></ul>
    4. 4. Perfect Fares Fare Class Y M B Q 200 400 600 800 1000 800 600 500 350
    5. 5. Fares in Reality Fare Class Y M B Q 200 400 600 800 1000 Fare Range
    6. 6. Where Does Fare Variation Come From? Source 1: Distribution Channel
    7. 7. Where Does Fare Variation Come From? <ul><li>Source 1: Distribution Channel </li></ul><ul><li>Y class tickets on flight 111 may sell for different fares because of distribution channel </li></ul>Inventory Travel Agencies Tour Operators Corporate Accounts Code Share Arrangements Internet Sales Internet Auction Frequent Flier Programs Alliances
    8. 8. Distribution Channels: Front End or Back End Fare Control? <ul><li>Front End Fare Control </li></ul><ul><ul><li>Make sure fares align across distribution channels when they are established </li></ul></ul><ul><li>Back End Fare Control </li></ul><ul><ul><li>Assume fares will not be aligned, and account for differences when a purchase request arrives </li></ul></ul>Front End Back End
    9. 9. Front End Fare Control <ul><li>Good front end control is extremely difficult to achieve, but is the only alternative for carriers in a non-seamless / leg environment </li></ul><ul><ul><li>How to assure that all Y class tickets on flight 111 sell for approximately the same price? </li></ul></ul>
    10. 10. Back End Fare Control <ul><li>Seamless availability / O&D provides the opportunity to address many distribution channel issues from the back end </li></ul><ul><ul><li>Dynamic fare calculation at time of request: assigning the right fare to each transaction </li></ul></ul>
    11. 11. The Value of Back End Fare Control <ul><li>The worse fair alignment is on the front end, the greater the impact of back end fare control </li></ul><ul><li>Back end fair control can have a major revenue impact </li></ul>% Below Upper Bound Quality of Front End Fare Alignment
    12. 12. Simulation <ul><li>Purpose: </li></ul><ul><ul><li>To simulate the effects of poor fare class rationalization </li></ul></ul><ul><li>Simulation details: </li></ul><ul><ul><li>Eight itinerary/fare classes </li></ul></ul><ul><ul><li>Four fare class scenarios established by setting upper and lower limits on fare class fares </li></ul></ul><ul><ul><li>Top fare for each itinerary established from network data </li></ul></ul><ul><ul><li>Within each fare class, each fare value between the upper and lower limit is equally likely </li></ul></ul>
    13. 13. Where Does Fare Variation Come From? Source 2: Leg Control
    14. 14. Where Does Fare Variation Come From? <ul><li>Source 2: Leg Control Fares are provided at the O&D level, but availability is controlled at the leg fare class level </li></ul><ul><ul><li>Flight networks greatly complicate the process of defining leg fare class fares </li></ul></ul>
    15. 15. Leg Control Fare Variation: The Problem <ul><li>Example Y class fares on a simple network </li></ul>ELP IAH STL MSY 400 800 700
    16. 16. Leg Control Fare Variation: The Problem <ul><li>Y fare tickets on the leg ELP-IAH take on the values 400, 700, and 800 – a wide fare variation </li></ul>Should these fares all be assigned to Y class? Should these fares be reassigned to different classes that reduce the fare variation?
    17. 17. Leg Control Fare Variation: The Problem <ul><li>Fare class realignment may be required </li></ul>ELP IAH STL MSY 400 800 700 Reassign to M Class Reassign to B Class Leave in Y Class
    18. 18. Fare Class Rationalization <ul><li>Very Important Fact: </li></ul><ul><ul><li>Fares throughout the network must be aligned within fare classes if leg control revenue management systems are to function properly </li></ul></ul><ul><li>How can this be achieved? </li></ul>
    19. 19. Network Optimization for Fare Class Rationalization <ul><li>Assign O&D fares to fare classes so that a leg control revenue management system generates maximum revenue </li></ul><ul><li>Determine leg fare class fares for leg optimization algorithms </li></ul><ul><li>Adhere to all business constraints </li></ul>
    20. 20. Observations <ul><li>The myriad of business constraints leads to an extremely challenging problem that is not easily handled by an optimization algorithm alone </li></ul><ul><li>If fare class rationalization is not addressed, even a good leg revenue management system can be severely compromised </li></ul><ul><li>Fare class rationalization is an important aspect of aligning fare classes within an alliance </li></ul>
    21. 21. Fare Class Rationalization: The Wrong Way <ul><li>Ordering O&D values from highest to lowest fare value and clustering to form fare classes is a poor idea </li></ul>
    22. 22. Fare Class Rationalization: The Right Way <ul><li>O&D valuation should incorporate some measure of displacement cost </li></ul><ul><li>Good leg fare class fares must be determined </li></ul>
    23. 23. A Process For Fare Class Rationalization: Getting to Leg Class Fares <ul><li>In the case of the ELP-IAH-STL itinerary, it is incorrect to attribute a revenue of 800 to the ELP-IAH leg since the itinerary uses two legs </li></ul><ul><li>The situation is the same for the ELP-IAH-MSY leg </li></ul>
    24. 24. A Process For Fare Class Rationalization: Getting to Leg Class Fares <ul><li>A way of addressing multi-leg fares is to prorate the O&D fare to the legs </li></ul>
    25. 25. A Process For Fare Class Rationalization: Getting to Leg Class Fares <ul><li>Important Fact: </li></ul><ul><ul><li>There are mathematically based ways to prorate itinerary fares into leg fares; itinerary fares can then be treated as consisting of leg fares for purposes of fare class rationalization </li></ul></ul>800 200 600 800 300 700 A True Proration A Pseudo-Proration
    26. 26. A Process For Fare Class Rationalization: Getting to Leg Class Fares <ul><li>With fares prorated to legs, it is possible to determine good leg fare class fares by taking a weighted average of the prorated fares within the fare class </li></ul><ul><li>Prorated fares still have the likely problem of being poorly rationalized at the leg level </li></ul>
    27. 27. A Process For Fare Class Rationalization: Getting to Leg Class Fares <ul><li>Proration alone does not solve the problem of fare class rationalization </li></ul><ul><li>Itineraries ELP-IAH and ELP-IAH-MSY align well on leg ELP-IAH-MSY, while itinerary ELP-IAH-STL does not </li></ul>425 700 ELP-IAH-MSY 100 800 ELP-IAH-STL 400 400 ELP-IAH Prorated Fare for ELP-IAH Leg Y Fare Itinerary
    28. 28. A Process For Fare Class Rationalization: Getting to Leg Class Fares <ul><li>Proration does suggest how fare class rationalization might be achieved </li></ul><ul><li>Y Class: ELP-IAH and ELP-IAH-MSY </li></ul><ul><li>M Class: ELP-IAH-STL </li></ul>425 700 ELP-IAH-MSY 100 800 ELP-IAH-STL 400 400 ELP-IAH Prorated Fare for ELP-IAH Leg Y Fare Itinerary
    29. 29. A Process For Fare Class Rationalization: Getting to Leg Class Fares <ul><li>The problem with rationalizing fare classes on one leg is that the rationalization may not make sense for other legs </li></ul>
    30. 30. A Process For Fare Class Rationalization: Pseudofares <ul><li>Pseudofares are one method of prorating itinerary fares to leg fares </li></ul>Pseudofare k (  1 ,  2 ,…,  k ,…,  m ) = Fare (  1 ,  2 ,…,  k ,…,  m ) – Displacement Cost (  1 ,  2 ,…,  k ,…,  m ) + Displacement Cost (  k )
    31. 31. A Process For Fare Class Rationalization: Pseudofare Example 800 300 700 100 500 Displacement Costs 800 – 600 + 500 800 – 600 + 100
    32. 32. A Process For Fare Class Rationalization <ul><li>Pseudofares provide a good alternative for performing fare class rationalization at the leg level </li></ul>425 275 700 ELP-IAH-MSY 100 700 800 ELP-IAH-STL 400 0 400 ELP-IAH Pseudofare for ELP-IAH Leg Displacement Cost Adjustment Y Fare Itinerary
    33. 33. A Process For Fare Class Rationalization <ul><li>Important Fact: Pseudofares have the special property that they preserve order under fare proration to different legs </li></ul><ul><li>This special property of pseudofares makes them ideal for the purpose of fare class rationalization </li></ul>
    34. 34. Ultimate Fare Class Rationalization <ul><li>Fare class rationalization is a front end fare control solution </li></ul><ul><ul><li>Seeks to align fares so that the allocation of inventory through leg fare class limits yields revenue maximizing decisions </li></ul></ul><ul><li>Can leg fare classes ever be fully rationalized? </li></ul><ul><li>Is it possible to achieve a perfect world in which every ticket sold in a leg class has the same fare? </li></ul>
    35. 35. Ultimate Fare Class Rationalization <ul><li>The Bad News </li></ul><ul><ul><li>Restricting inventory control to availability in leg fare classes, the answer is no; a perfect world cannot be achieved </li></ul></ul><ul><ul><li>Fare class rationalization is necessary to get the most from a leg control system, but there are inherent limitations </li></ul></ul>
    36. 36. Ultimate Fare Class Rationalization <ul><li>The Good News </li></ul><ul><ul><li>Stepping outside of leg fare class control to O&D control, a perfect world can be achieved </li></ul></ul><ul><ul><li>Leg level Displacement Adjusted Virtual Nesting, for example, is the obvious and inevitable resolution of the problem of trying to rationalize fare classes </li></ul></ul><ul><ul><ul><li>Fare class rationalization is simply thrown out the window and replaced by leg value buckets </li></ul></ul></ul><ul><ul><li>Bid price methods achieve the same goal in a more sophisticated fashion </li></ul></ul>
    37. 37. Conclusions: Distribution Channel <ul><li>Fare variation as a result of different fares in different distribution channels is a huge problem that must be addressed </li></ul><ul><li>The move to seamless availability / O&D control opens up substantial opportunities for revenue improvement through back end inventory control </li></ul><ul><li>Without seamless availability / O&D control, airlines must be diligent in aligning fares on the front end </li></ul>
    38. 38. Conclusions: Leg Control <ul><li>In a leg control environment, it is vital to have fare classes rationalized at the network level in order to achieve maximum revenue gains from a leg control revenue management system </li></ul><ul><li>Good fare class rationalization is difficult and has inherent limitations </li></ul><ul><li>O&D control overcomes the limitations inherent in a leg control revenue management system </li></ul>
    39. 39. Maximizing Revenue with a Leg Revenue Management System E. Andrew Boyd Vice President, Research and Design PROS Revenue Management
    1. A particular slide catching your eye?

      Clipping is a handy way to collect important slides you want to go back to later.

    ×