Ryanair & Yield Management - Lesson for yield and revenue management at airlines. Airline Intelligence & Research AIR Academy Course Dates on Yield Management Revenue Management and Strategy

1. March 2017 | issue 1
Ryanair has Rockstar Yield Management:
Lessons Learnt from Peak and Off-Peak Pricing
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In this post we take a moment to look
at one of the rock stars of yield
management and airfare pricing
strategies – Ryanair. If you’ve ever
wondered why average fares are €60
during the high period and half that
during the low periods, then Airline
Intelligence & Research explains in this
article why this may be the case and
how it affects airline profits.
Seasonal and Peak Demand
Airlines are very low margin, high
volume businesses that make most of
their money during peak travelling
periods. These peaks might be in the
morning and afternoon, they might be
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on Friday afternoons and Sunday, or they
may be during school holidays scattered
throughout the year. Given that the true
low cost carriers (LCCs) like Ryanair
predominantly cater for highly price
sensitive travelers, then it is more
imperative for them to get their prices
right. This is as opposed to full service
airlines (FSAs) like British Airways and
Qantas, where product is just as important
as price, perhaps more so in the case of
some passengers.
That being the case, often the difference
between poor airline earnings and
outstanding airline earnings thus comes
down to how analysts use revenue
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management systems to drive yield at the
peak; in other words, how well a yield
manager uses the pricing methods
available to them to capture as much of
the willingness to pay of peak passengers
as possible and leave no money on the
table.
One airline that has used its yield
management and revenue systems to great
effect in differentiating between peak and
off-peak fares is Ryanair. Ryanair has the
peakiest average airfare profile in world
aviation, according to the Airline
Intelligence & Research (AIR) Database –
see Figure 1 below.
Airline Intelligence & Research | Consulting | AIR Academy Training
Dr Tony Webber | 0423 028 720 | tony.webber@airintelligence.com.au | @ air_economist
www.airintelligence.com.au | https://www.linkedin.com/in/drtonywebber
Airline intelligence & rESEarch
AIR Academy Course Dates
5 April 2017 – Modelling and
Forecasting PRASK
12 April 2017 – Impact of
Capacity on Revenue and
Cannibalisation Effects
Photo Credit | Pixabay | Hans Mont Blanc Peaks

2. Airline Intelligence & Research
AIR Academy Workshop 1
Sydney | 5 April 2017 | 9 am – 4 pm
Modelling and Forecasting PRASK
and Revenue
This course is designed for Strategy
Managers, Yield and Revenue Managers
and Airline Analysts.
• Demand for ASKs
• Supply of ASKs
• Equilibrium PRASK
• Difference between Yield and
PRASK
• What Drives Downward and Upward
Movements in PRASK? What’s
Airline-controllable and
uncontrollable?
• Organic PRASK-flation
• Where do you Find the Driver Data?
• Why might Share Prices be a More
Important Driver of PRASK than
GDP?
• Linear versus Logarithmic Models of
PRASK
• Seasonality in PRASK
• Estimating a PRASK Relationship
using Regression Analysis
• PRASK Decompositions
§ What is this?
§ Why is it Important?
• Using Regression Analysis for
Forecasting PRASK and Revenue
• Using Elasticity Estimates for
Forecasting PRASK and Revenue
• Case Study
Cost $990 (incl. GST) pp.
Early-bird rate $790 (incl. GST) pp
(Where payment is received 2 weeks prior
to course date.)
Course needs a minimum of 6 to go ahead.
For more information and bookings or in-
house training queries please email
admin@airintelligence.com.au
We can see in Figure 1 that during the
September quarter 2016 the average
airfare of Ryanair in the case of its
scheduled services was 59 Euro whereas
during the March quarter 2016 the
average scheduled airfare was just 29
Euro.
The September quarter (which involves
travel during the months July, August
and September) are the key summer
months in Europe where most
Europeans do their travelling and school
kids are on holidays, thus allowing family
vacations. The March quarter (January,
February and March) are the winter
months where families tend to stay at
home and indeed indoors.
A sense for the dramatic seasonality in
Ryanair’s average airfare is best seen
when it is compared to the average
of other carriers that operate in a
similar segment of the market
(European leisure segment). Figure
2 below presents Air Berlin’s
quarterly average airfare over the
past 9 years.
Compared to Ryanair there is very
little seasonality in Air Berlin’s
quarterly average fare movements.
Given the two carriers are likely to
experience similar travel demand
seasonality, most notably strong
demand during the summer months
and weak demand during the winter
months, this would suggest that the
yield and revenue management
approaches of the two airlines in
dealing with seasonal peaks are
decidedly different. This in turn
implies that one carrier must be
leaving money on the table.

3. 3
AIR Academy Workshop 2
Sydney | 12 April 2017 | 9 am – 4 pm
Impact of Capacity on Revenue and
Cannibalisation Effects
This course is designed for Strategy
Managers, Yield and Revenue Managers
and Airline Analysts.
• Different capacity types
o Own
o Internal Competitor
o External Competitor
• Revenue Identities
o Revenue level
o Revenue growth
• Yield Elasticities to capacity
o Own
o Internal Competitor
o External Competitor
• Why do Yield Elasticities of Capacity
Differ Across Capacity Types
• Yield Elasticities Versus Demand
Elasticities
• Yield Elasticity Drivers
• Profitable and Unprofitable
Cannibalisation
• The Revenue Curve
• Quantifying the impact of capacity on
Revenue with and without
Competitor Follow
• Case Study
Cost $990 (incl. GST) pp.
Early-bird rate $790 (incl. GST) pp
(Where payment is received 2 weeks prior
to course date.)
Course needs a minimum of 6 to go ahead.
For more information and bookings or in-
house training queries please email
admin@airintelligence.com.au
2
2009), the seasonal amplitude has more
than doubled.
The following sections will uncover the
conditions that are required for seasonal
amplitudes of this magnitude to
maximise profit, and why these
conditions may change over time as is
implied by the sharp rise in Ryanair’s
seasonal fare premium.
Optimal Peak Premium
The key to understanding the profit
maximising seasonal amplitude in
average fares is that there is significant
seasonality in airline marginal revenue
but very little seasonality in airline
marginal cost. Profit maximisation,
however, requires that marginal
revenue equals marginal cost. This
means that fares must vary across the
peak and off-peak periods to smooth
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Peak Fare Premium
This is where we begin to get
technical. If we take the percentage
difference between the peak and off-
peak Ryanair average quarterly fares
for each calendar year over the past
decade and a half, we obtain the time
series presented in Figure 3.
At AIR aviation analytics, we refer to
the information presented in Figure 3
as the seasonal amplitude (the
difference between the peak and
trough average fares). There are two
important lessons to be learnt from the
seasonal amplitude estimates presented
in Figure 3. The first is the extent to
which the peak fare exceeds the off-
peak, which has varied between 28%
and 108% over the past fifteen years.
The second is the fact that post the
Global Financial Crisis (in and around

4. Airline Intelligence & Research
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out marginal revenue so that it is stable
and equal to marginal cost. This requires
fares to be higher during the peak than in
the off-peak.
The extent to which fares are higher in
the peak depends on the price elasticities
of demand in the peak versus off-peak.
The less elastic demand is at the peak, the
greater is the seasonal amplitude.
AIR Academy modelling has found that a
profit maximising airline will set the
seasonal peak fare at a premium to the
off-peak average fare according to the
following expression:
=
!"#$ !"#$%&'&%(!!""!!"#$ !"#$%&'&%(
(!!!"#$ !"#$%&'&%()×!""!!"#$ !"#$%&'&%(
The peak elasticity measures the
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sensitivity of airline demand to a change in
fares during peak travel periods while the
off-peak elasticity measures the same at
off-peak periods. The formula essentially
says that the more sensitive off-peak
demand is to the airfare than peak demand,
the greater will be the peak fare premium.
To illustrate, suppose that the airfare
elasticity of demand at the peak is -1.5,
and the airfare elasticity of demand at the
off-peak is -2.5. It follows that the peak
fare premium that maximises profit is:
=
!!.!!!.!
!(!!!.!)×!!.!
= 80%
To justify a seasonal peak fare premium of
108%, which is Ryanair’s current estimate
of the seasonal amplitude of fare premium,
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assuming the peak elasticity is -1.5
would require an off-peak elasticity of
around -3.3 or around double the off-
peak elasticity.
Given the way that Ryanair sets it peak
fares relative to off-peak fares, we
believe that Ryanair is likely to be very
close to profit maximization. This is
likely to be reflected in the outstanding
earnings performance of the airline
over a long horizon.
Changing Seasonal Amplitude
Our next question is: why has Ryanair
sharply increased the seasonal
amplitude? The answer is that the
airline has taken a view that the peak
time travellers have become less elastic
relative to the off-peak passengers.
How would these changes occur? A
simple explanation is that the real
incomes of those who travel during the
peak have grown faster than the real
incomes of those who travel during the
off-peak. Another explanation is that
Ryanair is attracting more business-
purpose passengers into the peak.
Whatever the reason, what we have
learnt is that one of the reasons for the
great success of Ryanair and its
management is the attention to
seasonal detail of its yield management
team. There are significantly lessons
here for other airlines if they wish to
avoid leaving money on the table.