Revenue management overview

Revenue Management
in the airline industry
Paul Rose
Managing Director

Paul Rose Revenue Management Ltd

Content

• My background
• The History of Revenue
Management
• Revenue Management an essential
business practice
• Group business and RM
• System selection & implementation

2

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

THE HISTORY OF REVENUE
MANAGEMENT

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


70s - “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

• 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

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

Industries employing Revenue
Management
• Airlines
• Hotels
• Car rental
• Tour operators
• Cruise ships / Ferries etc.
• Healthcare
• Amusement parks, golf courses.
• Theatres, Opera.
• Energy companies
• Advertising & TV companies
9

REVENUE
MANAGEMENT
AN ESSENTIAL
BUSINESS PRACTICE


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, or
b) 190 full fare and 50 discounted, or
c) 135 full fare and 135 discounted ?
The one that makes you most money (c) is not necessarily the one
that gives you the highest average yield (b) or the highest load
factor (a).
Revenue Yield Load-factor
a) (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

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

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

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

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

RM is important as it
allows 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

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

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

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

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


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

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

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

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


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

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


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

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

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

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

Process map

FORECAST DEMAND

PLUS CURRENT BOOKED
PASSENGERS EXCEPTIONS

RECOMMENDED
NET YIELD OPTIMISE AUTOMATIC CRS
CONTROLS
&
GDSs
NOSHOWS &
CANCELLATIONS

31

Daily process cycle

Daily analysis

Performance
Measurement
R.M. systems
Exception
& people reports
Implementation

Forecasting &
Optimisation
32

Overbooking and upgrading
ADVANTAGES 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

Balancing the network

New York Copenhagen
£150 £115

£100 Vienna
London
£175 £65
Paris
San 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

Declining Yield Over Time
Actual versus comparative
2009 - 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

GROUP BUSINESS
& REVENENUE
MANAGEMENT


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

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.


The objectives of a good Groups
system
• 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

The objectives of a good Groups
system
• 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


Group Evaluation Business
Process
 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

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

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


SYSTEM SELECTION &
IMPLEMENTATION


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

• 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

• 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

• 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

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

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

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

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

Thank you

53

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