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Revenue management theory and practice

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This outlines some of the constraints to application of Revenue Management theory.

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Revenue management theory and practice

  1. 1. Revenue Management: Theory and Practice Tom Bacon Revenue Optimization June, 2014
  2. 2. Theory and Practice • Revenue Management is now an established science. The science of RM includes: – Estimation of price elasticities – Statistical analyses of demand patterns – Regression-based forecasting – Overbooking based on no-shows & cost of over-booking – Mathematical optimization including linear programming • On the other hand, there are a multitude of constraints to an individual airline’s application of the science – Strategic, Financial, Legal, Technical, Organizational, Competitive • A revenue management analyst today should understand the science but he must also understand its use – and misuse – in real world challenges his airline faces.
  3. 3. Strategic • “One size doesn’t fit all” – Legacy, LCC, ULCC – Nat’l, Int’l, Regional – Start-up, Growth, Mature • Increasing airline differentiation => increasing customization of RM -10 0 10 20 30 40 50 60 70 -20 0 20 40 60 % Ancillary Revenue % Connect Traffic Airline (Size )
  4. 4. Legal/Regulatory • In the U.S., legal constraints exist: – In both raising and lowering fares – On pricing in airline partnerships • Over the past year, the government has shown new interest in regulating ancillary fees and e-merchandising Science: Forecasts Models Legal/ Regulatory Price
  5. 5. Systems/Technical • Every RM system has data limitations and model assumptions which inhibit optimality • System providers regularly implement “improvements” – Not appropriate for all users; not fast enough for others • Pricing interaction with Operations, Marketing, Customer Service, Loyalty calls for integrated systems – In addition to links to third party systems Inputs Process Outputs Data limitations Enhancements to be released soon Links to other airlines systems Model assumptions Future, not yet identified, enhancements Reports, metrics, diagnostics
  6. 6. Organization and Culture • The “ideal” RM organization doesn’t exist – Trade-offs in costs, flexibility, responsiveness, control – …Within RM – …Between RM & rest of organization • “Culture” and capabilities are bigger than just RM – Conflict mgmt, decision-making across the airline – Skills, experience, talent management
  7. 7. Financial • Financial constraints include: • Balance Sheet – Cash – Capital/resource availability • Income statement – Cost structure – Variable costs of services – Profit margins • Investor relations/ expectations 0 1 2 3 4 5 6 7 8 9 10 Margin F/A Cost VarCost Fare; or Product Pricing
  8. 8. Competitive • “This industry is always in the grip of its dumbest competitor.” – R. L. Crandall, 1992 • Competitive issues remain the largest constraint to optimized, rational pricing
  9. 9. Practical Trade-offs Robust: Choosing an Optimum that won’t change too dramatically tomorrow Flexibility: Anticipating more change Risk of New Process Risk of Status Quo Optimized, Deliberate, well-planned VS. “In the long term, we are all dead”
  10. 10. Airline RM Report Card • In practice, RM can fall short of “theory” in every dimension Grade Fare setting F Ancillary pricing F Demand forecasting F Optimization F Overbooking F
  11. 11. Conclusion • Tom Bacon is an instructor for IATA Revenue Management courses • In addition, Tom has developed his own revenue management courses designed for all levels in RM (from analyst to executive) – Introduction to RM Theory – Heavy emphasis on Practice • How airlines actually use RM • Limitations in application of RM theory • Member of Speaker program at University of Denver Daniels School of Business
  12. 12. Contact Information • Email: tom.bacon@yahoo.com • Blog: http://makeairlineprofitssoar.wordpress. com/

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