Reacting to Market Changes using Revenue Management Strategies Revenue Management for Aviation Asia, Sheraton Grande Sukhumvit, Bangkok 28 th – 30 th November, 2006

Presentation Overview Revenue management strategies A new business environment Value positioning for market segmentation Price simplification and fare categories Competitive Challenges New business model criteria The future of airline pricing

Revenue management strategies

A new business environment

Value positioning for market segmentation

Price simplification and fare categories

Competitive Challenges

New business model criteria

The future of airline pricing

Revenue Management Objectives Produce a demand forecast based on market data, commercial objectives, and calendar-related events Adjust demand forecasts based on environmental changes, management guidelines, and performance metrics Set up and manage an allocation strategy using the revenue management system tools in a systematic and efficient manner Prioritize administrative tasks

Produce a demand forecast based on market data, commercial objectives, and calendar-related events

Adjust demand forecasts based on environmental changes, management guidelines, and performance metrics

Set up and manage an allocation strategy using the revenue management system tools in a systematic and efficient manner

Prioritize administrative tasks

Reacting to Market Changes using Revenue Management Strategies Workflow Control Trigger Triggers require specific (re)actions Process What reaction is required in order to respond to trigger Tool How to apply the tool to cover the business process? Feedback & Control Performance measurement and evaluation. Theoretical Basis Concepts, terms and theory RM Basics Market Knowledge and Analysis Business Process Orientation

Market Change Triggers Demand management Price Proactive pricing Reactive pricing Market growth /decline (share) Market demand is growing or declining Competitive schedule change Group management Group acceptance evaluation Event management Identifying the event in the RM system Managing events (moving dates) Schedule management A new flight departure Creating a new forecast Copying booking class history Setting overbooking Evaluating schedule change impact on demand Capacity planning

Demand management

Price

Proactive pricing

Reactive pricing

Market growth /decline (share)

Market demand is growing or declining

Competitive schedule change

Group management

Group acceptance evaluation

Event management

Identifying the event in the RM system

Managing events (moving dates)

Schedule management

A new flight departure

Creating a new forecast

Copying booking class history

Setting overbooking

Evaluating schedule change impact on demand

Capacity planning

A New Business Environment Continuous growth of the Low Cost Carriers (LCC) One-way fare structures Extremely low bottom prices Non-transparent pricing structure Full service network carriers reduce fare conditions Capacity is continuously expanding Yield and traffic volume under pressure Resulting in declining revenues Rapidly changing environment Increasing costs Fuel Airport fees

Continuous growth of the Low Cost Carriers (LCC)

One-way fare structures

Extremely low bottom prices

Non-transparent pricing structure

Full service network carriers reduce fare conditions

Capacity is continuously expanding

Yield and traffic volume under pressure

Resulting in declining revenues

Rapidly changing environment

Increasing costs

Fuel

Airport fees

The Growth in Market Share of LCCs Source: SRS Analyser

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

The Customer 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

Value Positioning For Market Segmentation

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) 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)

Multiple Value Propositions (Fare Categories) Multiple value propositions facilitate revenue optimization within and across brands

A New Pricing Model Cumulative Bookings

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

Traditional Fare Structure 199 L 229 Q 259 V 289 H 319 B 399 M 499 Y 0 3 5 7 14 21 APUR Booking Class

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

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

Hybrid Inventory Management 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 Strategies Source: Jerry Foran, British Airways, IATA RM & Pricing, Oct. 2004

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

Monitor and Adjust

Restriction Free Pricing Changes Need for a new generation of forecasting and optimisation techniques that consider: Passenger price elasticity Current competition Optimal timing of fare class closures

Need for a new generation of forecasting and optimisation techniques that consider:

Passenger price elasticity

Current competition

Optimal timing of fare class closures

“ 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

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.

Competition Match Rule-Based Control Scan the internet for the lowest available price on selected routes Define the correlation between each flight departure and the competition Establish business rules for matching lowest available price on a flight departure basis

Scan the internet for the lowest available price on selected routes

Define the correlation between each flight departure and the competition

Establish business rules for matching lowest available price on a flight departure basis

The Right Price In some cases (A), the fare is too high to maximize market revenue Moving to point B generates more revenue for the carriers In some cases (C), airlines price too low Pricing at a higher point (B) generates more revenue Source: Travelocity Ticket Price $3000 $4500 A B C Optimum Market Revenue Ticket Volume $600 $250 $400 5 12 $4800 18

In some cases (A), the fare is too high to maximize market revenue

Moving to point B generates more revenue for the carriers

In some cases (C), airlines price too low

Pricing at a higher point (B) generates more revenue

The Future of Airline Pricing Airline pricing is going a la carte United’s “Economy Plus Access” Tools to price a la carte on website Seat location pricing Special check-in and security lines Any reasonable proposition Ultimately individual customer pricing A La Carte: The Future Of Airline Pricing, USA TODAY - Original Article, Aug-28-2005, David Grossman

Airline pricing is going a la carte

United’s “Economy Plus Access”

Tools to price a la carte on website

Seat location pricing

Special check-in and security lines

Any reasonable proposition

Ultimately individual customer pricing

Source: www.aircanada.com     

Source: www.aircanada.com

Source: www.aircanada.com

Source: www.aircanada.com

Source: www.aircanada.com

Source: www.aircanada.com

Source: www.aircanada.com

Source: www.aircanada.com

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

Simplify fare product structure Value pricing : extract customer value through trade up Reduce internal processing cost Maximise revenue through effective class usage and inventory control Key Drivers for Success Source: Nadja Helal, British Airways, Revenue Development Manager, North Central Europe, Barcelona, 07.03.05

Simplify fare product structure

Value pricing : extract customer value through trade up

Reduce internal processing cost

Maximise revenue through effective class usage and inventory control

Source: Nadja Helal, British Airways, Revenue Development Manager, North Central Europe, Barcelona, 07.03.05

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)

Reacting to Market Changes using Revenue Management Strategies [email_address] Revenue Management for Aviation Asia, Sheraton Grande Sukhumvit, Bangkok 28 th – 30 th November, 2006