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The revenue trinity for airlines

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By now airlines have done all they can to squeeze efficient use of fuel. That said, let us focus on a trinity of basic components industry experts believe must be employed by airline revenue managers …

By now airlines have done all they can to squeeze efficient use of fuel. That said, let us focus on a trinity of basic components industry experts believe must be employed by airline revenue managers to effectively and efficiently handle revenue streams.
Revenue Management
Revenue Integrity
Revenue Accounting

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  • 1. Industry Report The Revenue Trinity Three Components of Revenue Management
  • 2. Current economic conditions have wreaked havoc on the Aviation Industry. Right from fluctuating fuelprices to economic downturn has pulled many airlines into deep red. Today, airlines everywhere arestill searching to find increase and retain their revenues.By now airlines have done all they can to squeeze efficient use of fuel. That said, let us focus on atrinity of basic components industry experts believe must be employed by airline revenue managers toeffectively and efficiently handle revenue streams. 1. Revenue Management 2. Revenue Integrity 3. Revenue AccountingIndividually, they are incapable of protecting airline revenue streams against current economicconditions but together they can certainly lessen the impact of an economic downturn. This documentwill attempt to identify three of the most important weapons that revenue managers should have in theirarsenal if they want to survive during tough economic conditions.1. Revenue Management The first tool that airline executives think of most often is a Revenue Management (RM) tool. RM toolsare designed to maximize the revenues an airline can expect to earn on each flight. RM is amainstream business practice that has become a daily routine in airline operations. It’s sole functionalgoal is the optimization of total revenue through the use of tools and techniques. This goal combinedwith market segmentation achieved by the introduction of a plethora of booking rules makes it possibleto predict an optimal passenger manifest. RM tools are intimately tied to each airline’s business model.Usually RM is considered to be a computer/software system having capabilities of forecasting demand,optimizing reservation – inventory allocations, and limiting discount availability.But in reality RM is neither a computer system nor a set of mathematical techniques. Put simply, it isan approach to increasing revenues and improving service by responding to current demand. It is goodold capitalism at its finest…a process and a way of conducting business based on supply and demand.The full range of the benefits one can expect from a RM program cannot be achieved withoutcomputer-based tools. However, certain RM practices can be implemented with little or no investmentin computer hardware, software or resources. We will discuss those practices in a moment.As you know, RM enables airlines to optimize their inventory through a variety of techniques including;overbooking, improved discounted space allocation, superior management information, and betterallocations for group or tour operator business. The right mix of these techniques will improveoperational efficiencies resulting in decreased costs through: • A high level of accuracy in forecasting passengers boarded leading to a reduction in both denied boarding costs, late departure fees and empty seats. • Advanced flight optimization profiles enable proactive planning of future applicable discount compared to full fare seat allocation. • Reduced human dependency through partial automation of many revenue management decisions • Customer satisfaction improves through proactive seat allocation.RM revolutionized the airline industry and most airlines still use the guiding principles that establishedthis program back in the 80’s. © InterGlobe Technologies Ltd. 2011: www.igt.in
  • 3. 2. Revenue AccountingThe next tool is Revenue Accounting (RA). Revenue Accounting & Integrity tools, like revenuemanagement tools, are also vitally important to airline business models. RA is a critical function thatinvolves the sharing of revenue on a prorate basis between interline carriers. Ideally, a typical airlineRA process is characterized by: • Critical impact on financial performance of an airline • High level of complexity requiring specialized handling • Demand for specialized trained professionals – having intimate knowledge of business and airline accounting practice • Highly people-intensive • Time consuming operationsAs more and more system automation is introduced into the market the need for integration isheightened and the opportunity for error increases. Most of these systems are fully integrated, end-to-end RA solutions developed exclusively for the airline industry. These systems are designed to provideairline revenue managers with sophisticated tracking and collection tools that can deal with the mostcomplex revenue accounting environments.Revenue accounting provides revenue managers the mechanism to monitor the complete life cycle ofdocuments (tickets, coupons or other sales vouchers). All sales, online, interline, receivable, payable,exchange and refund functions are monitored. Even ticket stock inventories are automaticallymonitored. RA also provides revenue managers the necessary functionality to enhance and control thefull revenue cycle.A typical revenue accounting systems would have the following features: •Complete system security •Accurate, on-time revenue reporting •Real-time data on operational and financial performance •Capture of data from all sources – sales record; ticket control number(TCN) record; •Coupon imaging capability delivering increased productivity and lower labour costs •Complete control of the flown not reported account •Automatic auditing of fare, tax and commission discrepancies •Automatic detection of over-billings •Automatic issuance of debit and credit memos •Monitoring of lost or stolen ticket usage reducing financial losses3. Revenue IntegrityLastly, and perhaps the most important tool is Revenue Integrity (RI). When utilized appropriately itcan eliminate the loss of expected revenue that can happen by accident or by deliberate humanactions. It certainly seems no secret that airlines worldwide are experiencing revenue leakage whichdirectly impacts RI. Like a small parasite, revenue leakage has been eating away at airline profits formany years and yet most airlines have taken little action to prevent it. Unfortunately, many airlines relyso heavily on their automated tools they are unable to detect or even recognize revenue leakage whenit occurs. Additionally, staff reductions have made it more difficult to stop revenue leakage even whenit’s recognized.Some experts believe revenue leakage across the airline industry is significant and could be costingairlines between 2% and 5% of their annual revenues, somewhere between $5 and $10 billion USDper annum. According to industry experts, an active RI programme is the only sure way to remedy therevenue leakage problem. © InterGlobe Technologies Ltd. 2011: www.igt.in
  • 4. Interestingly, most airlines in their desperate attempt to cut costs and optimized revenues, continue topour millions into their existing revenue management systems, failing to realize that greater ROIs maybe gained by an active revenue integrity program focused on stopping and eliminating revenueleakage.Successful revenue integrity programmes will reduce revenue leakage and create value in thefollowing ways: • Increasing passenger access to seats through the removal of fictitious Passenger Name Records (PNRs) • Improved passenger loyalty • Increased market share • Reducing departure delays, no-shows and cancellations that occur so late in the booking cycle that the unsold space cannot be re-sold. • The effective use of a revenue integrity programme will reduce costs in the following areas: •Distribution charges •Denied boarding expenditures •Delays and penalties incurred due to misconnections •Additional airport costs e.g., meal wastage, push back penalties, etc • Improvement in demand forecast and flight scheduling • Better inventory management • Increase advertising reachThe best revenue management system is only as good as the data fed into the system. Revenueleakage certainly impacts the quality of the data entered and lessens the effectiveness of the revenuemanagement system. Poor forecasting can be the result of revenue leakage and that result furtherimpacts scheduling. That said, the accuracy of revenue management systems directly depends upon asuccessful revenue integrity programme.ConclusionObviously accurate revenue forecasting is totally dependent on the integrity of the data utilized togenerate the forecasts. Forecasting itself is difficult as a multitude of events can impact the accuracy ofthe forecast generated. Events include; seasonal, inventory, competitive situations, and the economicenvironment, place constant pressure on revenue forecasting. Having less than accurate data furtherdiminishes the effectiveness of a revenue management program. Poor estimates in turn impactinventory control which leads to sub-optimal revenue performance and lower profitability. Lastly, throwin skewed historical and censored data and you have a recipe for inaccuracy.The revenue management process cost the airline industry millions annually to maintain revenue toolswhile it fails to provide the synergy that can be achieved with the combined utilization of these threetools. The current business scenario has made it imperative for revenue managers to look for ways toadminister their weak revenue streams and there is no better way to do it than this. © InterGlobe Technologies Ltd. 2011: www.igt.in
  • 5. InterGlobe Technologies (IGT) is a leading BPO & IT Services provider committed todelivering innovation and business excellence across the entire spectrum of the travel,transportation and hospitality domain.Ranked amongst the World’s Top 3 Travel Technology Solutions providers, thecompany offers integrated Application Development and Maintenance, Call CenterServices, Back Office Services, Consulting Services and Solution Frameworks to thetravel industry worldwide. InterGlobe Technologies Pvt. Ltd. InfoTech Centre, 2nd Floor 14/2, Old Delhi-Gurgaon Road Dundahera, Gurgaon – 122016 Haryana, India T +91 (0)124 458 7000 F +91 (0)124 458 7198 www.igt.in © InterGlobe Technologies Ltd. 2011: www.igt.in