The Power of Adhoc Re-adjustment Techniques in Extreme Market Conditions IATA Commercial Strategy Symposium 2007, 27-29 November 2007, Athens, Greece

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

Customer Choice Source: www.aircanada.com     

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 Lowest Class Availability

Revenue Management Objectives Produce a demand forecast based on market data, commercial objectives, and calendar-related events Adjust the demand forecast 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 the demand forecast 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

Revenue 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

Reacting to Market Changes 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

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 Seasonality management Market demand varies Event/Holiday 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

Seasonality management

Market demand varies

Event/Holiday 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

Seasonal and Holiday Demand

100% 50% 97% 16% 85% 2% $500 $485 $425 $250 $80 $10

Managing Moving Holidays

Schedule and Demand Management

Evaluating Demand Shift and Stimulation

Fare Class Alignment

Linear Nesting

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

Category Criteria 88% Avg. PLF 20% Avg. Business Mix Prime (HM HP ) High (HM LP ) Medium (LM HP ) Low (LM LP )

Flight Categories

Rule-Based Control Thresholds

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

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

Performance Measurement Looking into the past Passenger load factor Distribution Variances Revenue and yields Spill Stifle Spoilage Denied boardings Patterns and trends Market share Connecting traffic Looking into the future Bookings Distribution Variances Activity and velocity Potential spill Potential stifle Available seats and price Competitive monitoring Market share Scheduled capacity

Looking into the past

Passenger load factor

Distribution

Variances

Revenue and yields

Spill

Stifle

Spoilage

Denied boardings

Patterns and trends

Market share

Connecting traffic

Looking into the future

Bookings

Distribution

Variances

Activity and velocity

Potential spill

Potential stifle

Available seats and price

Competitive monitoring

Market share

Scheduled capacity

Business Demand

Advance Booking Report Sample

Historical PLF and No-Show Trends

Load Factor Trends

Remaining Availability by Date / Class

Spill Analysis BLF > 70%, and A > 1

Stifle Analysis BLF < 50%, and A <= 1

Business Process Orientation

Forecast Accuracy (Statistical Process Control)

Things to Look For The point of making control charts is to look for variation. Several types of conditions exist that indicate that a process is out of control. Extreme point condition is when a point is either above the upper control limit (UCL) or below the lower control limit (LCL). This is the most frequent and obvious out of control condition. One point beyond a UCL or LCL is an extremely unlikely occurrence (less than 1%) when the forecast follows the normal distribution. Runs above or below the centreline (9 or more consecutive points) are also extremely unlikely. Linear trends showing 6 or more consecutive points increasing or decreasing is also extremely unlikely.

The point of making control charts is to look for variation. Several types of conditions exist that indicate that a process is out of control.

Extreme point condition is when a point is either above the upper control limit (UCL) or below the lower control limit (LCL). This is the most frequent and obvious out of control condition. One point beyond a UCL or LCL is an extremely unlikely occurrence (less than 1%) when the forecast follows the normal distribution.

Runs above or below the centreline (9 or more consecutive points) are also extremely unlikely.

Linear trends showing 6 or more consecutive points increasing or decreasing is also extremely unlikely.

Case Study – Observations Average error ≈ 3 pax Error is increasing over time Was under-forecasting in Feb, now consistently over-forecasting

Average error ≈ 3 pax

Error is increasing over time

Was under-forecasting in Feb, now consistently over-forecasting

Potential Causes Increased capacity (lower demand by flt) Demand decline (mkt share loss and/or market shrinkage) Change in booking pattern (pax starting to book earlier on) Introduction of new booking classes. RMS forecasts new classes while continuing to forecast traditional classes at same historical level (double counting)

Increased capacity (lower demand by flt)

Demand decline (mkt share loss and/or market shrinkage)

Change in booking pattern (pax starting to book earlier on)

Introduction of new booking classes. RMS forecasts new classes while continuing to forecast traditional classes at same historical level (double counting)

Possible Solutions Seasonal forecast edit to redistribute demand across flights Seasonal forecast edit to reflect new trend until RMS picks it up and/or adjust forecast mix to put more weight on more recent data Reference curve edit to shift some demand from traditional classes to new booking classes and forecast mix grid to put more weight on more recent data

Seasonal forecast edit to redistribute demand across flights

Seasonal forecast edit to reflect new trend until RMS picks it up and/or adjust forecast mix to put more weight on more recent data

Reference curve edit to shift some demand from traditional classes to new booking classes and forecast mix grid to put more weight on more recent data

Business Process Orientation

The Power of Adhoc Re-adjustment Techniques in Extreme Market Conditions [email_address] IATA Commercial Strategy Symposium 2007, 27-29 November 2007, Athens, Greece