Revenue management overview

11,406 views

Published on

Revenue management overview

  1. 1. Revenue Management in the airline industry Paul Rose Managing DirectorPaul Rose Revenue Management Ltd
  2. 2. Content• My background• The History of Revenue Management• Revenue Management an essential business practice• Group business and RM• System selection & implementation 2 Paul Rose Revenue Management Ltd
  3. 3. My background• BA 1970-94 in RA, Sales but mostly RM.• Virgin Atlantic Airways 94-97 implemented RM.• Rejoined BA 1997-2000 RM& Pricing • O&D and Oneworld RM projects.• 2001 M.D. of PR RM Ltd: • SITA – RI & RM consultant, product manages range. • A.R.I.G. – Owner & Chair • Independent RM Consulting • Conferences and publications • IATA • Calidris – World’s leading RI supplier 3 Paul Rose Revenue Management Ltd
  4. 4. THE HISTORY OF REVENUE MANAGEMENTPaul Rose Revenue Management Ltd
  5. 5. Revenue Management History• R.M was born from the deregulation of the USA airline industry in the early ‘70s. • Pioneered by AA and followed by other “Mega airlines” who could fund the R&D costs who instigated first systems = AA, UA, DL, BA etc)• “People express” a forerunner of LCC airline the first casualty of “ US Price Wars” did not have R.M. capability. 5 Paul Rose Revenue Management Ltd
  6. 6. Revenue Management History70s - “Reservations / Space control” Basic control systems Simple pricing with Few fares in the market place., Focus on space not yield, Reservations staff resourced, US deregulation starts.Early 80s- “Basic Yield Control” Better inventory systems 26 selling classes evolve, European regulation continues hence little competition.Mid 80s - “Better Yield Control” RM systems introduced Yield focus through class hierarchy, deregulation & new aggressive competition emerge! 6 Paul Rose Revenue Management Ltd
  7. 7. Revenue Management History• Early 90s - “Revenue Management” Route Inventory & Sales Area Pricing begin to merge, Sophisticated RM systems now available• Mid 90’s - “Improved Revenue Management” Quantum leap in technology - POS introduced, SBP / Heuristic BP introduced , Codeshare abounds, more carriers enlisting R.M.• 2000 – today Majority of major airlines have a RMS, RM & Pricing depts merged , focus on costs, profit, and more aware of competitors 7 Paul Rose Revenue Management Ltd
  8. 8. Food for thought !• Yet RM systems are still only used by approx 45% of the World’s >1300 airlines! • Revenue Management typically delivers 3-9% revenue gain, with >11% achieved at some leading airlines! • Most unsuccessful RM installations are due to unsupported business processes, lack of Snr Mngmnt support, or lack of expertise rather than system failures ! 8 Paul Rose Revenue Management Ltd
  9. 9. Industries employing RevenueManagement• Airlines• Hotels• Car rental• Tour operators• Cruise ships / Ferries etc.• Healthcare• Amusement parks, golf courses.• Theatres, Opera.• Energy companies• Advertising & TV companies 9 Paul Rose Revenue Management Ltd
  10. 10. REVENUE MANAGEMENT AN ESSENTIAL BUSINESS PRACTICEPaul Rose Revenue Management Ltd
  11. 11. Is R.M. the same thing as yield management?300 seats, full fare $1,900; discounted $1,300; would you prefer:a) 50 full fare and 250 discounted, orb) 190 full fare and 50 discounted, orc) 135 full fare and 135 discounted ?The one that makes you most money (c) is not necessarily the onethat gives you the highest average yield (b) or the highest loadfactor (a). Revenue Yield Load-factora) (50*1900)+(250*1300)=$420,000 420000/(50+250)=$1,400 (50+250)/300)*100=100%b) (190*1900)+(50*1300)=$426,000 426000/(190+50)= $1,775 (190+50)/300)*100=80%c) (135*1900)+(135*1300)= $432,000 432000/(135+135)=$1,600 (135+135)/300*100=90% 11 Paul Rose Revenue Management Ltd
  12. 12. Airlines without RM Often only consider Load Factor Their business driver is to sell as many seats as possible regardless of price, dilution or increased costs. Few limits are imposed, fewer classes are utilised, and class availability is often sub optimal. 12 Paul Rose Revenue Management Ltd
  13. 13. Airlines without RM• Large numbers of low yielding seats are usually sold with this approach, without any protections for higher yielding late booking clients.• The assumption is that the higher the seat factor, the higher the profitability for the airline, which is incorrect.• Waste valuable resources with manual “best guess” of likely demand. 13 Paul Rose Revenue Management Ltd
  14. 14. Why RM is important Revenue Management maximizes profitability by selling the correct number of seats at various fare levels based on demand and pricing elasticity – Sometimes the number of passengers carried may be lower than when compared to a simple load factor driven methodology. BUT, the result of correctly optimised number of seats sold, with lower costs, will still provide higher revenue than an uncontrolled load factor approach. 14 Paul Rose Revenue Management Ltd
  15. 15. Why RM is important Managing an airline’s most important asset - its perishable seat inventory  Accurately predict future demand  Maximise revenue on every flight departure by setting optimal inventory allocations, that reflect the passenger demand forecast and allows for cancellations and no-shows.  Minimise seat spoilage, spillage and risk of denied boardings and /or downgrades. 15 Paul Rose Revenue Management Ltd
  16. 16. RM is important as itallows a carrier to• Accurately accept Group business without diluting revenue or spilling high individual demand and focus on the best performing Tour Operators• Immediate benefit by using Historic data from the RMS db• Side benefits such as using passenger forecasts for Network planning,Catering, Customer Services resource planning and future aircraft acquisition. 16 Paul Rose Revenue Management Ltd
  17. 17. So what is Revenue Management?• A “must-have” for high-fixed-cost, low- margin, price-segmentable businesses• A process of maximising revenue from perishable products, through the integrated control of capacity and price.• Although RMS can now be bought off the shelf, systems-integration, data- quality, and business-process- improvement still remain major challenges 17 Paul Rose Revenue Management Ltd
  18. 18. What is Revenue Management?In other words:- • Selling the right product • To the right customer • In the right place • At the right time • For the optimum price • Via the best channel 18 Paul Rose Revenue Management Ltd
  19. 19. RM benefits• Has demonstrated the ability to generate of 3 – 9% in additional Revenue• Better management of group and tour operator performance• Better Pricing actions where Pricing and RM depts are integrated• Increased speed to market• Superior Management Information leading to better decisions 19 Paul Rose Revenue Management Ltd
  20. 20. The major steps in RM• Planning • Produce business plan and set up flights based on historic performance with required inputs to reflect the future.• Forecasting • Produce Detailed Forecasts of Unconstrained Demand for Each Future Flight Departure Paul Rose Revenue Management Ltd
  21. 21. The major steps in RM• Overbooking • Overbook Future Flight Departures Based on Historic Patterns of No-Shows and Late Cancellations• Optimisation • Determine best authorisation levels for each Booking Class to maximise a flight’s Revenue using EMSR (Expected Marginal Seat Revenue algorithm) 21 Paul Rose Revenue Management Ltd
  22. 22. Why we need computers for demand forecasting?There are too many human biases in forecasting:- Treat easily available or recallable data as more significant Attach higher validity to info which confirms previously held beliefs, seeking information to support views. Overemphasise conclusions from small samples: anecdotal evidence Conservatism: failing to use new info to significantly revise estimates Failure to regress to the mean, extreme values expected to continue 22 Paul Rose Revenue Management Ltd
  23. 23. 5 Key elements of airline R.M.CABIN SPOILAGE PROBLEM – Loss of revenue occurring due to passengers who No- Show or cancel late on full flights. SOLUTION – Identify revenue opportunities available and apply accurate overbooking levels. 23 Paul Rose Revenue Management Ltd
  24. 24. 5 Key elements of airline R.M.DISCOUNT SPOILAGE PROBLEM – Loss of revenue resulting from turning away discount customers because discount seats were not available at the time of booking, subsequently the flight departs with a significant number of empty seats. SOLUTION – Identify revenue opportunities lost on flights that departed with a significant number of empty seats, yet had discount class restrictions at some point prior to departure, and reforecast and re-optimise future flights. 24 Paul Rose Revenue Management Ltd
  25. 25. 5 Key elements of airline R.M.HIGHER YIELD SPILL PROBLEM – The loss of revenue resulting from turning away late high yield demand because too many lower yield seats were sold early. SOLUTION – Quantify the opportunity from flights that fill prior to departure leaving no seats for higher yield passengers, and protect on future flights. 25 Paul Rose Revenue Management Ltd
  26. 26. 5 Key elements of airline R.M.UPGRADE OPPORTUNITY PROBLEM – The loss of revenue from failing to accommodate demand in a lower cabin from available seats in a higher cabin. SOLUTION – Quantify revenue potential from more accurate setting of overbooking profiles & utilise adjustment of capacity between cabins. 26 Paul Rose Revenue Management Ltd
  27. 27. 5 Key elements of airline R.M.DIFFERENTIAL PRICING PROBLEM – An airline seat can be viewed by a purchaser as a single commodity, the desire is to purchase at the lowest price. SOLUTION – Differentiate brands ( e.g. First, Business, Economy ) to offer added value and create products within a brand utilising micro-segmentation of the market place and price fences ( e.g. Advance purchase tickets, Corporate rates, Tour operator fares, Frequent flyer redemption rates etc ). 27 Paul Rose Revenue Management Ltd
  28. 28. What is Revenue Management?MANAGEMENT OF SEAT FACTOR • Overbooking capacity to ensure maximum seat-factors with minimal offloads and downgrades.MANAGEMENT OF REVENUE MIX • Cabin mix via market segmentation • Seat access & Group acceptance.ADDED SOPHISTICATION • Sales area mix ( POS - Point of sale ) • Managing traffic flows (O&D ) 28 Paul Rose Revenue Management Ltd
  29. 29. Airline business environment• High yield business books late, low yield business books early.• Average industry No-show rate of 15%, with variation between 5 - 50% ! Plus cancellation effects• Group Management - Materialisation & Rates• Multiple World-wide distribution channels• Many Business segments• Complex dynamic pricing structure 29 Paul Rose Revenue Management Ltd
  30. 30. RMS functionality Unconstrained Demand Forecasting Optimisation Process using complex algorithms. Recommendations with Auto-Pilot options. Automated No-shows / cancellation management Management reporting Group evaluation tools 30 Paul Rose Revenue Management Ltd
  31. 31. Process mapFORECAST DEMAND PLUS CURRENT BOOKED PASSENGERS EXCEPTIONS RECOMMENDEDNET YIELD OPTIMISE AUTOMATIC CRS CONTROLS & GDSs NOSHOWS & CANCELLATIONS 31 Paul Rose Revenue Management Ltd
  32. 32. Daily process cycle Daily analysisPerformanceMeasurement R.M. systems Exception & people reportsImplementation Forecasting & Optimisation 32 Paul Rose Revenue Management Ltd
  33. 33. Overbooking and upgradingADVANTAGES DISADVANTAGES More seat access  Full fare passenger may be annoyed More passengers accommodated  Frequent travellers will play the system More revenue  Some passengers not Passengers more likely suitable to trade up  Additional work for Reward for frequent customer service fliers and card holders 33 Paul Rose Revenue Management Ltd
  34. 34. Balancing the network New York Copenhagen £150 £115 £100 Vienna London £175 £65 ParisSan Francisco £275 Johannesburg Paris - New York £215 Vienna - New York £250 (1) All LH flights full = Take local traffic (2) If JFK, or SFO, JNB empty => Take connecting traffic Johannesburg - New York £425 Danger of “ First come, first served” for many airlines. 34 Paul Rose Revenue Management Ltd
  35. 35. Declining Yield Over Time Actual versus comparative2009 - LONDON - LOS ANGELES- FIJI - AUCKLAND - SYDNEY - SINGAPORE - LONDON 1991- LONDON - LOS ANGELES - TAHITI- SYDNEY- BANGKOK-LONDON 1984 - LONDON - NEW YORK- LOS ANGELES - FIJI- SYDNEY- HONG KONG-LONDON 1960 - LONDON - BERMUDA- ACAPULCO- TAHITI- SYDNEY- DARWIN-SINGAPORE- BOMBAY- BAHRAIN- LONDON 1 1 1 9 9 9 8 9 6 4 2 1 0 0 0 9 35 Paul Rose Revenue Management Ltd
  36. 36. GROUP BUSINESS & REVENENUE MANAGEMENTPaul Rose Revenue Management Ltd
  37. 37. What is wrong with most airlines Groups business process• No economic evaluation of groups• Limited evaluation of the possible route itineraries• Limited estimation and very little planning of group utilisation rates.• Response times slow, typically 3-5 days• No automated monitoring & tracking of Group bookings• No comprehensive performance measurement and no management reporting Paul Rose Revenue Management Ltd
  38. 38. Results are lost revenue• Airlines say ‘YES’ - when they should say ‘NO’ • Which can potentially displace higher-revenue passengers• Airlines say ‘NO’ - when they should say ‘YES’ • Which can potentially reduce load factor• Airlines respond too slowly – clients shop around • First airline to offer good rate and space usually gets sale. Paul Rose Revenue Management Ltd
  39. 39. The objectives of a good Groupssystem • Maximise revenue opportunities from groups by analysing trade- offs between price, seat quantity & time • Provide real-time decision support capability to perform economic evaluation on all requests • Evaluate all possible scenarios for acceptance • Create “win-win” situation where airline remains in control Paul Rose Revenue Management Ltd
  40. 40. The objectives of a good Groupssystem • Convert group data into valuable decision support information and reports • Provide facilities to forecast and continuously monitor group utilisation behaviour • Mechanise mundane manual processes e.g. contracts. • Enhance user productivity Paul Rose Revenue Management Ltd
  41. 41. Group Evaluation BusinessProcess Receipt of request Economic evaluation of itineraries Interactive negotiating capability Agree on itinerary Agree on price and terms Generate the group PNRs Generate contracts Input of names Continuous monitoring through post- departure Paul Rose Revenue Management Ltd
  42. 42. Ad Hoc Groups decision support• Forecasting group utilisation (take up)• Evaluation of complete itinerary• Determination of minimum acceptance price for each itinerary option • Whole and / or break-up of Group across alternatives. • Agent commissions • Free tour conductor passes (dependant upon carrier’s policy )• Channel groups toward itineraries with highest incremental revenue potential (offer connections)• Management reporting system Paul Rose Revenue Management Ltd
  43. 43. Series Groups decision support• Evaluate Series requests spanning multiple itineraries and travel patterns• Analyse requests among competing travel agents and tour operators• Determine optimal block allocations to sales offices for subsequent distribution to individual travel agents / tour operators• Monitor all bookings by travel agents / tour operators from time of acceptance until departure Paul Rose Revenue Management Ltd
  44. 44. SYSTEM SELECTION & IMPLEMENTATIONPaul Rose Revenue Management Ltd
  45. 45. PROJECT INITIALISATION• Assessing the current position • No RM at all • Base inventory controls • Market segmentation - crude or sophisticated? • First generation RM system looking towards an upgrade ? • What are the business drivers / aims ? • Size of network, nature of the traffic ? • Do we need an O&D system? • Do we compete with LCC’s • Are we a LCC? 45 Paul Rose Revenue Management Ltd
  46. 46. PROJECT INITIALISATION• Needs analysis study.= What is needed, when, how ? Options :- • Independent consultant. • Software supplier• Enlist Senior Management support.• Understand the basics:- - Forecasting - Optimisation - Yield - Market segmentation 46 Paul Rose Revenue Management Ltd
  47. 47. PROJECT INITIALISATION• Simulations • Provides proof of concepts. • Provides insight into current data, uncovers problems. • Optimal/Actual/System only/No control• Requirements & Scope:- • Understand your current business processes:- • Strengths, weaknesses, need for change. • Phased deliveries. • Budget available - $1 - 10M ?• MANAGING EXPECTATIONS - Rome wasn’t built in a day ! 47 Paul Rose Revenue Management Ltd
  48. 48. PROJECT INITIALISATION• Expertise requirements:- • RM expert (s) • Project Management • Adequate IT dept/infrastructure.• Budget approval - Don’t underestimate and include everything ! • Hardware, software, project management costs, consultancy, training, travel /accommodation costs, support & maintenance etc. 48 Paul Rose Revenue Management Ltd
  49. 49. SOFTWARE SUPPLIERS• Narrowing the field:- • System Demos • Range of modules available - RM, Groups etc. • Integration between RMS and other systems. • Who understands your business the most ? • Speak to other airlines, visit reference sites. • Timescales - can supplier meet desires ? • Price - best option for what airline can afford, that matches requirements. • Upgrade options for the future 49 Paul Rose Revenue Management Ltd
  50. 50. PROJECT INTIALISATION• Select supplier.- Sign contract, build relationships• Visible Project plan. • Key milestones, deliveries. • Track costs, resources.• Does the airline have the right people for the future in the R.M dept ? • What are their current skills vs required future skills? • Do they want to be part of the future ? • Education & training of team. 50 Paul Rose Revenue Management Ltd
  51. 51. COMMUNICATE !• Sell the benefits to key internal partners e.g. Airports, Sales, Revenue Accounting, Marketing etc.• Maintain Senior Management support.• Utilise all avenues - Intranet, In- house mag, company journal, workshops, presentations.• BUT MOST IMPORTANTLY WITH THE R.M. TEAM ! 51 Paul Rose Revenue Management Ltd
  52. 52. IMPLEMENTATION• Start measurements before implementation. • Benchmark against old results, against other competitors or industries. • Set targets, measure success, at macro/micro levels • Systems & People performance • Improvements in Revenue • Offloads / Downgrades • Seat access, speed to market.• Success milestones - Celebrate & Communicate 52 Paul Rose Revenue Management Ltd
  53. 53. Thank you 53Paul Rose Revenue Management Ltd

×