Revenue Management An Evolutionary Revelation A look at how the history of Revenue Management has shaped the present and insights to more creative interpretation of Revenue Management and its future ! Singapore, Aug 21-22, 2007

Presentation Outline A little revenue management history How our business environment has evolved Fundamental requirements for our success today Our customers and their changing values What is the future of revenue management?

A little revenue management history

How our business environment has evolved

Fundamental requirements for our success today

Our customers and their changing values

What is the future of revenue management?

1. A little revenue management history

Deregulation Effects of deregulation Hub-and-spoke networks Increased competition and discounted fares Frequent flyer programs

Effects of deregulation

Hub-and-spoke networks

Increased competition and discounted fares

Frequent flyer programs

Hub and Spoke Networks

Increased competition and discounted fares Scheduled carriers are high-cost Selling empty seats created increased revenues and profits at almost zero incremental cost Restricted discount fares to avoid diluting existing business-fare revenue

Scheduled carriers are high-cost

Selling empty seats created increased revenues and profits at almost zero incremental cost

Restricted discount fares to avoid diluting existing business-fare revenue

Market Segmentation Increasing number and diversity of discount fares Yield management appeared to fine-tune increasingly complex pricing structures

Increasing number and diversity of discount fares

Yield management appeared to fine-tune increasingly complex pricing structures

Integrated Pricing and RM Combinations of pricing restrictions and yield management controls allowed carriers to offer very low fares with little risk of diluting revenues Critical to airlines serving both high-revenue business customers and price-sensitive discretionary customers

Combinations of pricing restrictions and yield management controls allowed carriers to offer very low fares with little risk of diluting revenues

Critical to airlines serving both high-revenue business customers and price-sensitive discretionary customers

The Success of Revenue Management After deregulation, airlines that controlled their inventories with yield management generated much higher profits than those that did not PeopleExpress is a classic example

After deregulation, airlines that controlled their inventories with yield management generated much higher profits than those that did not

PeopleExpress is a classic example

PeopleExress In January 1985, American Airlines launched a discount-pricing campaign, “Ultimate Super Savers” to fill otherwise empty seats Overwhelming demand for discount fares and full service shifted traffic to AA and others using similar practices PeopleExpress load factors dropped and they sold out

In January 1985, American Airlines launched a discount-pricing campaign, “Ultimate Super Savers” to fill otherwise empty seats

Overwhelming demand for discount fares and full service shifted traffic to AA and others using similar practices

PeopleExpress load factors dropped and they sold out

Frequent Flyer Programs Source: Marginal revenues. www.unige.ch

Need for Revenue Management Perishable capacity Relatively fixed seating capacity and variations in demand Variable pricing and market segmentation Basic revenue management principles

Perishable capacity

Relatively fixed seating capacity and variations in demand

Variable pricing and market segmentation

Basic revenue management principles

Perishable capacity

Relatively fixed seating capacity and variations in demand

Variable Pricing

Market Segmentation

Basic revenue management principles Target customer segments according to their unique characteristics of behaviour Allocate inventory according to the dynamic balance of supply and demand in the market Manages variations in demand over time and maximises revenues

Target customer segments according to their unique characteristics of behaviour

Allocate inventory according to the dynamic balance of supply and demand in the market

Manages variations in demand over time and maximises revenues

Traditional Serial Inventory Nesting Booking Class Y M B H V Q L

2. How our business environment has evolved

The evolution ARS to CRS through GDS Online penetration and usage Online distribution e-commerce New channel types New revenue management challenges

ARS to CRS through GDS

Online penetration and usage

Online distribution

e-commerce

New channel types

New revenue management challenges

ARS to CRS through GDS Airline reservation system (ARS) Sabre 1959, Apollo 1971 Computer reservation system (CRS) Offered to Travel Agencies from 1976 The big four GDS Amadeus, Sabre, Galileo, Worldspan GDS alternatives from 2004

Airline reservation system (ARS)

Sabre 1959, Apollo 1971

Computer reservation system (CRS)

Offered to Travel Agencies from 1976

The big four GDS

Amadeus, Sabre, Galileo, Worldspan

GDS alternatives from 2004

Online distribution Disintermediation Internet travel services E-ticketing Distribution costs and screen bias

Disintermediation

Internet travel services

E-ticketing

Distribution costs and screen bias

e-commerce Dynamic pricing Focused targeting of discounted fares Promotions to individuals New channels Affecting forecasting and optimization algorithms

Dynamic pricing

Focused targeting of discounted fares

Promotions to individuals

New channels

Affecting forecasting and optimization algorithms

New channel types RM Res GDS Direct Travel Agents Direct Travel Agents Call Centre Distressed Outlets Package Outlets Call Centre Corporate Direct

New revenue management challenges Increased competition Passenger Traffic Growth Average airline yields decline Restriction free pricing A new pricing model Price simplification Value positioning for market segmentation

Increased competition

Passenger Traffic Growth

Average airline yields decline

Restriction free pricing

A new pricing model

Price simplification

Value positioning for market segmentation

Increased Competition

Passenger Traffic Growth Source: Centre for Asia Pacific Aviation & ACI

Avg Airline Yields/RPK (in real terms) Source: Airline Cost Performance. IATA Economics Briefing No. 5.

Restriction Free Pricing 199 L 229 Q 259 V 289 H 319 B 399 M 499 Y 0 3 5 7 14 21 APUR Booking Class

A New Pricing Model Cumulative Bookings

3. Fundamental requirements for our success today

Simplify fare product structure Differentiation strategy Value positioning extract value through trade up Reduce internal processing cost Maximise revenue through effective class usage and inventory control Be competitively aware with pricing and RM processes Fundamental Requirements for our Success Today

Simplify fare product structure

Differentiation strategy

Value positioning extract value through trade up

Reduce internal processing cost

Maximise revenue through effective class usage and inventory control

Be competitively aware with pricing and RM processes

Price Simplification Move to a simple base price with trade-up steps Integrate pricing and inventory management processes so prices can be effectively managed by flight departure Market and deliver a consistent customer proposition (ie. It is better to book early) Efficient fare filing Transparent fares facilitate the increase of dot.com sales Source: Jerry Foran, British Airways, IATA RM & Pricing, Oct. 2004

Move to a simple base price with trade-up steps

Integrate pricing and inventory management processes so prices can be effectively managed by flight departure

Market and deliver a consistent customer proposition (ie. It is better to book early)

Efficient fare filing

Transparent fares facilitate the increase of dot.com sales

Differentiation Strategy A strategy to differentiate one self from the lowest price is to build stronger brands targeted to market segment, and advertise. This reduces price sensitivity and the amount price alone can impact customer decision. Relationship marketing programs are one example of increasing loyalty, and reducing the likelihood of response to competitor pricing.

A strategy to differentiate one self from the lowest price is to build stronger brands targeted to market segment, and advertise.

This reduces price sensitivity and the amount price alone can impact customer decision.

Relationship marketing programs are one example of increasing loyalty, and reducing the likelihood of response to competitor pricing.

Value Positioning For Market Segmentation

Reduce Internal Processing Cost Strategies and Policies Low LF Mixed Flow Leisure Flow Protect business Prevent buy down High Med Business Leisure Mixed Flow Attract additional traffic 1 2 3 4 5 6 7 8 9 Source: W.H.T. Blom, VP Pricing & Revenue Management Europe, KLM, Barcelona 7 & 8 March 2005

Flight Categorization PB PM PL LB LM LL Passenger Load Factor Passenger Mix Competition Prime Business Low Leisure Medium Medium Yes No MB MM ML

Flight Management Source: Jerry Foran, British Airways, IATA RM & Pricing, Oct. 2004

Integrating Pricing & Inventory Management Source: W.H.T. Blom, VP Pricing & Revenue Management Europe, KLM, Barcelona 7 & 8 March 2005 More effective Pricing Structures Improved Inventory Control Improve LF Improve yield

“ Competitively Aware” Pricing and RM Processes Role of customer choice models and low fare shopping Growing need for advanced RM optimisation methods ‘ Smart’ controls for realtime availability and pricing adjustments Source: Richard Ratliff and Ben Vinod, Journal of Revenue and Pricing Management, Volume 4 Number 3.

Role of customer choice models and low fare shopping

Growing need for advanced RM optimisation methods

‘ Smart’ controls for realtime availability and pricing adjustments

Price Competition and the Internet Four factors strengthen the buyer’s position and intensify the competition between vendors. Instant choice . Competition and an alternative price is just a click away. Comparison shopping is easy on the net. Purchasing power . Consumers and corporate buyers are joining together to get volume discounts. Global reach . The net eliminates geographical boundaries.

Four factors strengthen the buyer’s position and intensify the competition between vendors.

Instant choice . Competition and an alternative price is just a click away.

Comparison shopping is easy on the net.

Purchasing power . Consumers and corporate buyers are joining together to get volume discounts.

Global reach . The net eliminates geographical boundaries.

Conditions Affecting Price Competition The conditions that favor price cooperation: The number of competitors . Cooperation is more difficult if there are a large number of competitors. Differences among competitors . Where companies have very different cost structures, market shares, and product ranges, it is more difficult to reach agreement. The short-run gain from price cutting . Price competition is more likely to start with substantial excess capacity and when products are relatively similar. Price transparency encourages cooperation.

The conditions that favor price cooperation:

The number of competitors . Cooperation is more difficult if there are a large number of competitors.

Differences among competitors . Where companies have very different cost structures, market shares, and product ranges, it is more difficult to reach agreement.

The short-run gain from price cutting . Price competition is more likely to start with substantial excess capacity and when products are relatively similar.

Price transparency encourages cooperation.

Assessing Competitor’s Values Customers will choose products that offer the best perceived value. Value can be increased by improving perceived product quality or lowering the price. Here is an example of direct customer research: Identify the dimensions of quality. Use focus groups to find out what product and service attributes customers are looking for. Weight quality dimensions. Determine which attributes customers perceive as most important. Measure competitors along attributes. Conduct a survey to determine how customers rate competitors’ offers along the attributes. Discover value preferences. Ask customers to rate which combinations of price and quality they prefer. Segment customers according to their preferences.

Customers will choose products that offer the best perceived value. Value can be increased by improving perceived product quality or lowering the price.

Here is an example of direct customer research:

Identify the dimensions of quality. Use focus groups to find out what product and service attributes customers are looking for.

Weight quality dimensions. Determine which attributes customers perceive as most important.

Measure competitors along attributes. Conduct a survey to determine how customers rate competitors’ offers along the attributes.

Discover value preferences. Ask customers to rate which combinations of price and quality they prefer. Segment customers according to their preferences.

Competitive Flight Optimisation Yellow: Own fare is below competitor and has no availability Orange: Own fare is below competitor and is available Blue: Own fare is equal to competitor and has availability Source: Lufthansa Systems ProfitLine Yield Rembrandt.

New Business Model Design Criteria Competitive Minimize dilution of high-yield flow traffic Create acceptable sell-up price points to capture incremental revenue opportunities Fine tune flight management by day-of-week, departure time, local vs flow traffic Offer value-based brands to cross sell for incremental revenue opportunities Top-up PLF with local or flow as per route characteristics

Competitive

Minimize dilution of high-yield flow traffic

Create acceptable sell-up price points to capture incremental revenue opportunities

Fine tune flight management by day-of-week, departure time, local vs flow traffic

Offer value-based brands to cross sell for incremental revenue opportunities

Top-up PLF with local or flow as per route characteristics

4. Our customers and their changing values

Understanding our customers and their changing values Increased price sensitivity Perceived commoditization of airline products Perception of price and value

Increased price sensitivity

Perceived commoditization of airline products

Perception of price and value

Understanding Our Customers While price is king, there are other factors which significantly contribute to customer choice Percentage increase over the lowest price Brand Number of stops Schedule Screen position Advance purchase period Number of people in itinerary Day of the week of shop Number of choices at specified price Merchandising

While price is king, there are other factors which significantly contribute to customer choice

Percentage increase over the lowest price

Brand

Number of stops

Schedule

Screen position

Advance purchase period

Number of people in itinerary

Day of the week of shop

Number of choices at specified price

Merchandising

What Matters to Travellers? Flight problems 28.1% Baggage 26.7% Reservations, ticketing and boarding 11.7% Customer service 10.6% Fares 2.6% Source: The U.S. Department of Transportation’s Air Travel Consumer Reports.

Flight problems 28.1%

Baggage 26.7%

Reservations, ticketing and boarding 11.7%

Customer service 10.6%

Fares 2.6%

Service Delivery 40 percent of marketing investment is wasted, as ill-informed or de-motivated behaviour by staff unwittingly undermines the promotional promise The result is that 68 percent of those who do buy, go away because of how they were treated

40 percent of marketing investment is wasted, as ill-informed or de-motivated behaviour by staff unwittingly undermines the promotional promise

The result is that 68 percent of those who do buy, go away because of how they were treated

5. What is the future of revenue management?

New Customer Options Airline services are going a la carte Tools to price a la carte on website Seat location pricing United’s “Economy Plus Access” Special check-in and security lines Any reasonable proposition Ultimately individual customer pricing

Airline services are going a la carte

Tools to price a la carte on website

Seat location pricing

United’s “Economy Plus Access”

Special check-in and security lines

Any reasonable proposition

Ultimately individual customer pricing

Non-Ticket Revenues Ryanair’s non-ticket revenues were 18% of the total in 2006 Profit margins on ancillaries are much higher than on seats Very low selling costs – particularly if sold online Justifies management unit Measuring performance of ancillary product sales is still in its infancy

Ryanair’s non-ticket revenues were 18% of the total in 2006

Profit margins on ancillaries are much higher than on seats

Very low selling costs – particularly if sold online

Justifies management unit

Measuring performance of ancillary product sales is still in its infancy

Source: www.aircanada.com

Source: www.aircanada.com     

Hybrid Inventory Nesting Booking Class Y M Booking Class B H Booking Class V Q L

Flight Category Treatment Booking Class Y M Booking Class B H Booking Class V Q L High Medium Low

Source: www.aircanada.com

“ A-la-carte” Access to Lounge

Source: www.aircanada.com

Change in the Air Paper tickets soon to be a thing of the past Travel agency commissions have all but disappeared in North America and Europe Online sales through airline websites continue to boom GDS and airlines have signed peace agreements GDS “a-la-carte” desktop agency solution

Paper tickets soon to be a thing of the past

Travel agency commissions have all but disappeared in North America and Europe

Online sales through airline websites continue to boom

GDS and airlines have signed peace agreements

GDS “a-la-carte” desktop agency solution

Global Distribution As long as airlines sell outside of their home countries, where they are not known presences, they will need an intermediary such as the GDS Low-cost carriers relied on their own websites But they need the reach of GDS to get corporate market and client yields

As long as airlines sell outside of their home countries, where they are not known presences, they will need an intermediary such as the GDS

Low-cost carriers relied on their own websites

But they need the reach of GDS to get corporate market and client yields

Credit Cards $3 billion spent worldwide each year on credit card merchant fees Credit card fees are trending higher (3%) Credit card companies are not negotiating

$3 billion spent worldwide each year on credit card merchant fees

Credit card fees are trending higher (3%)

Credit card companies are not negotiating

Lower-Cost Alternatives Having already cut labour, commissions and GDS costs, credit card fees are the next savings opportunity Find lower-cost alternatives to credit card payments or transfer fees to someone else Cash payments UATP cards PayPal service Western Union

Having already cut labour, commissions and GDS costs, credit card fees are the next savings opportunity

Find lower-cost alternatives to credit card payments or transfer fees to someone else

Cash payments

UATP cards

PayPal service

Western Union

Other Problems to Solve Yield Management System limitations Demand forecasts are incorrect and/or delayed with respect to recent competitive changes. Keeping up to-date with current market fares for fare class value forecasting (and optimization model input). Pricing Competitiveness Missed opportunities in identifying uncompetitive market prices O&D Insights Easily determine the relative strengths of your airline’s offering versus competitors in each market (considering both price and quality of service)

Yield Management System limitations

Demand forecasts are incorrect and/or delayed with respect to recent competitive changes.

Keeping up to-date with current market fares for fare class value forecasting (and optimization model input).

Pricing Competitiveness

Missed opportunities in identifying uncompetitive market prices

O&D Insights

Easily determine the relative strengths of your airline’s offering versus competitors in each market (considering both price and quality of service)

Conclusion Within the airline industry, market dynamics and RM are evolving. However, the basic theory of RM remains unchanged The primary objective of RM is to maximise the profitability of the company by applying knowledge about the market and the competition, and by using RM systems and tools effectively Airlines who succeed in hiring people with the right skill set, establishing robust RM processes, and applying RM principles through use of optimal systems and tools are bound to increase incremental revenues

Within the airline industry, market dynamics and RM are evolving. However, the basic theory of RM remains unchanged

The primary objective of RM is to maximise the profitability of the company by applying knowledge about the market and the competition, and by using RM systems and tools effectively

Airlines who succeed in hiring people with the right skill set, establishing robust RM processes, and applying RM principles through use of optimal systems and tools are bound to increase incremental revenues

Revenue Management An Evolutionary Revelation [email_address]