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Integration of Pricing and Revenue Management for a Future without Booking Classes
AGIFORSReservation and Yield Management Study GroupAnnual Meeting, Bangkok, May 8 - 11, 2001
Natascha Jung Senior Operations Research Specialist
Klaus Weber Senior Scientific Analyst
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 2
Presentationon behalf of my colleague Natascha
Natascha
...and herboss
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 3
Agenda
Pricing & Revenue Management
Integrated Approach to Pricing & Revenue Management
Booking Classes
Outlook / Conclusions
Motivation
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 4
travel agent
customer
MotivationThe Customer
Typical Travel Agency Situation?
I would like to booka flight fromBangkok to
Rio de Janeiro.
No, ...Yes, I would prefer a
three leg itineraryvia Frankfurt and
Madrid.
Do you have anyidea when and how
you would like tofly?
I see, ...Are you looking fora last minute offer?
That’snot important!
I just like to travelin M class ...
I mean, from BKK toFRA in M, and then
H class to MAD.But for transatlantic
flights I preferclass Q!!
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 5
travel agent
customer
MotivationThe Customer (cont.)
I would like to booka flight fromBangkok to
Rio de Janeiro.
Do you have anyidea when and how
you would like tofly?
I understand.You need a
comfortable seatwith power supply
for your laptop.
If you don’t mindthe risk of
thrombosis I can offer you
a discounted farein Eco?
Typical Travel Agency Situation?
I am going to takepart in the annualmeeting of Nobellaureates which
starts next monthand will take 8 days.
Oh, no!I just like to sit andthink about a new
formula.
Great!I take it!
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 6
MotivationThe Customer (cont.)
Customer does not care about booking classes! Customer demand depends on
Travel day Prices (offered at ticketing day) Service Restrictions (minimum stay, day application, ...)
Demand is controlled by fares, i.e. customer needs!
Revenue management systems
Forecast is estimated on basis of historical demand Booking histories are stored w.r.t. booking class!
!!! Contradiction !!!
Resume
fares
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 7
Agenda
Pricing & Revenue Management
Integrated Approach to Pricing & Revenue Management
Booking Classes
Outlook / Conclusions
Motivation
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 8
Booking ClassesHistorical Review
1955 Central Reservation
1965 Overbooking
1972 Currency Control
1977 Segment Pricing
1989 Fare Mix / Control
1994 Network Management / Bid Pricing
Historical Development of Revenue Management at Lufthansa
1972 Littlewood’s rule
1989 EMSRb
Booking classes
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 9
Booking ClassesWhy Booking Classes?
Revenue management point of view
Booking classes reflect ‘somehow’ the customers’will to pay
booking classes are the basis for demand forecast
We do not truly need booking classes but we are used to use them.
Reservation systems use them to indicate availability
However, there are other means to
reflect customer will to pay (fares) compute customer demand (customer choice model)
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 10
Booking ClassesWhy Booking Classes? (cont.)
Pricing point of view
Booking classes are not important at all Only fares are important! Fares are richer in information than booking classes
Origin Destination Carrier Booking Cl. Fare Basis Amount CurrencyTicketing from
Ticketing to
Travel from
Travel to
Minimum Stay
Maximum Stay
Advance Purchase
Day Application
BER BKK XY C CRT 5990 DEM 01JAN01 open 01JAN01 open - - - -BER BKK XX C CRT 5650 DEM 01JAN01 open 01JAN01 open - - - -BER BKK XY U ULXAP7DE 1550 DEM 15MAR01 20JUN00 15APR01 30JUN01 SU 30 7 1234BER BKK XX V VLXAP7DE 1500 DEM 20MAR01 25JUN00 10APR01 15JUN01 SU 30 7 1234BER BKK XY U ULWAP7DE 1750 DEM 15MAR01 20JUN00 15APR01 30JUN01 SU 30 7 567BER BKK XX V VLWAP7DE 1650 DEM 20MAR01 25JUN00 10APR01 15JUN01 SU 30 7 567
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 11
Booking ClassesProblems with Booking Classes
Booking classes are inaccurate, e.g.
Origin Destination Carrier Booking Cl. Fare Basis Amount CurrencyTicketing from
Ticketing to
Travel from
Travel to
Minimum Stay
Maximum Stay
Advance Purchase
Day Application
BER BKK XY U ULXAP7DE 1550 DEM 15MAR01 20JUN00 15APR01 30JUN01 SU 30 7 1234BER BKK XY U UDUMMY 4990 DEM 01JAN01 open 01JAN01 open - - - -BER BKK XX V VLXAP7DE 1550 DEM 15MAR01 20JUN00 15APR01 30JUN01 SU 30 7 1234BER BKK XX V VDUMMY 4750 DEM 01JAN01 open 01JAN01 open - - - -
Quite different fares in same booking class
Distortion of average revenue of booking class
Another indicator
Booking class harmonisation in airline alliances usually increases number of booking classes
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 12
Booking ClassesProblems with Booking Classes (cont.)
RM systems forecast on historical data
Different demand
Different average values of corresponding booking classes
!!! Meanwhile fares might have been changed !!!
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 13
Booking ClassesBooking Classes - pros and cons
Booking classespros
Booking classescons
History building for demand forecast(generally possible for fares as well, however: too many fares)
Bid price control requires calculation of bid prices
Booking class protectsnot necessary
Booking classes only indirectly used for BP calculation Booking class corresponds
to class value (‘somehow’)
Inexactness of booking classes restricts opportunity of
additional revenue gain... in 0.1 % range (which are millions of € or $)
Booking class can be identified with restrictions (‘somehow’)
‘approximation’ inexact, but works
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 14
Booking classescons
Booking classespros
Booking ClassesBooking Classes - pros and cons (cont.)
‘customer pricing’ (priceline.com, tallyman.de) shows
Booking classes are not necessary
!!! Approach not generally applicable to airlines !!!
restrictions (not refundable) are necessary to avoid down selling
not possible to sell ‘open tickets’
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 15
Agenda
Pricing & Revenue Management
Integrated Approach to Pricing & Revenue Management
Booking Classes
Outlook / Conclusions
Motivation
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 16
Pricing & Revenue ManagementOverview: Pricing System - Price Elasticity Model
CompetitorReactionAnalyser
Market ShareModel
Market Stimulation
Model
Price Elasticity ModelTrigger
Fare Change
Output
Demand Shift
Traveller Preference Analyser
FareAnalyser
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 17
Pricing & Revenue ManagementOverview: Revenue Management System
O&D Forecast Engine
O&D Optimiser
ForecastInterface DB
OptimiserInterface DBIn
vent
ory
GDS
GDS
GDS
GDS
...
Forecast Building
Demand Forecasts
ControlParameters
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 18
Pricing & Revenue ManagementComparison
Pricing Revenue Management
Market - ODorigin destinationFares given on this level.
ODIF POSorigin destination itinerary fare class point of saleBooking values given on this level.
customer oriented
Market size Market share Fares
Target level(What shall be controlled?)
Value / revenue oriented coarse level fine level
Target quantities(Which quantities are focused on?)
ODIF POS demand ODIF POS values marginal seats revenues bid prices
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 19
Pricing & Revenue ManagementComparison (cont.)
CompetitorReactionAnalyser
Market ShareModel
MarketStimulation
Model
Price Elasticity ModelTrigger
Price Change
Output
Demand Shift
TravellerPreferenceAnalyser
FareAnalyser
O&D Forecast Engine
O&D Optimiser
ForecastInterface DB
OptimiserInterface DB
Inve
nto
ry
GDS
GDS
GDS
GDS
...
Forecast Building
Demand Forecasts
ControlParameters
Market size Market share Fares
Target quantities(Which quantities are focused on?)
ODIF POS demand ODIF POS values marginal seats revenues bid prices
Pricing Revenue Management
Linking both spheres means
replace booking classes in RM sphere by fares (properly) integrate both spheres
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 20
”COPY PNR_ - RT IN AMADEUS FOR MODIFICATION. 1.WEBER/KLAUSMR(001) 2.JUNG/NATASCHAMRS(001)017 X3.SSR OTHS LH PLS DAPO TO CNFM LH 729 24 OR 25 APR (017)... LH 721 H 24APR01PEKFRA XL2 1025 1425 NN(009) LL(009) HL(009) PE(009) HL(009) XL(010) LH3002 H 24APR01FRAHEL XL2 1720 2050 NN(009) LL(009) HL(009) PE(009) HL(009) XL(010)011 05APR01 0906 998 MUCRM1A /05090651/SHALH0100//SHA/LH/A/CN//GS/SHAGXLH...015 10APR01 0215 998 MUCRM1A /10021609/SHALH0100//SHA/LH/A/CN//GS/SHAGXLH LH 729 H 10APR01PVGFRA XX2 1110 1625 NN(004) LL(004) HK(004) LK(004) HK(004) XX(015) LH3002 H 10APR01FRAHEL XX2 1720 2050 NN(004) LL(004) HK(004) LK(004) HK(004) XX(015)
Pricing & Revenue ManagementRequirements for Integration
Current Demand Forecast
Booking histories Current booking level
Booking classes Booking classes
PN
R
PN
R
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 21
Pricing & Revenue ManagementRequirements for Integration
Fare buckets= fares clustered with respect to
value / revenue restrictions
Fare buckets??? Source ???
Why buckets?
Optimisation requires competition among customers for same seat
Why not take fares, i.e. one fare per bucket?
Too many buckets
Integrated Demand Forecast
”COPY PNR_ - RT IN AMADEUS FOR MODIFICATION. 1.WEBER/KLAUSMR(001) 2.JUNG/NATASCHAMRS(001)017 X3.SSR OTHS LH PLS DAPO TO CNFM LH 729 24 OR 25 APR (017)... LH 721 H 24APR01PEKFRA XL2 1025 1425 NN(009) LL(009) HL(009) PE(009) HL(009) XL(010) LH3002 H 24APR01FRAHEL XL2 1720 2050 NN(009) LL(009) HL(009) PE(009) HL(009) XL(010)011 05APR01 0906 998 MUCRM1A /05090651/SHALH0100//SHA/LH/A/CN//GS/SHAGXLH...015 10APR01 0215 998 MUCRM1A /10021609/SHALH0100//SHA/LH/A/CN//GS/SHAGXLH LH 729 H 10APR01PVGFRA XX2 1110 1625 NN(004) LL(004) HK(004) LK(004) HK(004) XX(015) LH3002 H 10APR01FRAHEL XX2 1720 2050 NN(004) LL(004) HK(004) LK(004) HK(004) XX(015)
fare
In the future?... together withother usefull,quantities,e.g. bid prices
PricingDB
restrictions etc.
fare
(ine
xact
)
class info
Booking histories Current booking level
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 22
Pricing & Revenue ManagementRequirements for Integration (cont.)
Bookings
bkgno.
fare amount
1 CRT 5990
2 CRT 5990
3 VLXAP7DE 1500
4 CRT 5990
5 VLWAP7DE 1650
6 VLWAP7DE 1650
... ... ...
Fare buckets
value /revenue2515
2515
670
2515
705
705
...
...
av. valueno. of bkgs.
av. valueno. of bkgs.
av. valueno. of bkgs.
Example
Value900 - 1100
restrictionsunday return
advanced purchase14 days
For optimisation we need to forecast the number of bookings in each fare bucket.
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 23
Agenda
Pricing & Revenue Management
Integrated Approach to Pricing & Revenue Management
Booking Classes
Outlook / Conclusions
Motivation
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 24
CompetitorReactionAnalyser
Market ShareModel
Market Stimulation
Model
Price Elasticity Model
Traveller Preference Analyser
AlternativeAnalyser
Datasources
Integrated Approach Pricing & RMPrice Elasticity Model
MIDT
ATPCO
Internalfare data
1
2
n
Utilityfactors
Customer choice modelmultinomial logit model
customer’s choice depends on
amount minimum stay advanced
purchase ...
Forecast of demand for each fare bucket - step 1
Separate for business and leisure passengers
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 25
Demand forecast
Forecast basis
Market SizeForecaster
Integrated Approach Pricing & RMMarket Size Forecaster
Datasources
MIDT
ATPCO
Internalfare data
bkgno.
fare
1 CRT
2 CRT
3 VLXAP7DE
4 CRT
5 VLWAP7DE
6 VLWAP7DE
... ...
Forecast of demand for each fare bucket - step 2
Currentbookings
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 26
Integrated Approach Pricing & RMFare Buckets Forecast
Price ElasticityModel
( )1 2 n K
fare marketshare
fare1 1
fare2 2
fare3 3
fare4 4
fare5 5
... ...
faren n
Forecast of demand for each fare basket - step 3
Market SizeForecaster
itinerary forecastvalue
forecasterror
ODI1 fc_val1 fc_err1ODI2 fc_val2 fc_err2ODI3 fc_val3 fc_err3ODI4 fc_val4 fc_err4ODI5 fc_val5 fc_err5... ... ...
ODIn fc_valn fc_errn
Per ticketing/travel combination
Per departuredate
...
av. valueno. of bkgs.
av. valueno. of bkgs.
av. valueno. of bkgs.
Fare buckets
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 27
Integrated Approach Pricing & RMSystem Overview
O&D Optimiser
ForecastInterface DB
OptimiserInterface DB
Inve
ntor
y
GDS
GDS
GDS
GDS
...
Market Shares
Demand Forecasts
ControlParameters
Market Size Forecast
Price Elasticity Model
Market Size
Bookingswith Fare
Information
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 28
Integrated Approach Pricing & RMDemand Changes
Fare
ChangeFloating dcp Snap shot
Price Elasticity Model
DemandShift
DemandShift
Current Demand
Previous Forecast
Learning
Re-Optimisation
Previous New
Forecast
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 29
Agenda
Pricing & Revenue Management
Integrated Approach to Pricing & Revenue Management
Booking Classes
Outlook / Conclusions
Motivation
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 30
”COPY PNR_ - RT IN AMADEUS FOR MODIFICATION. 1.WEBER/KLAUSMR(001) 2.JUNG/NATASCHAMRS(001)017 X3.SSR OTHS LH PLS DAPO TO CNFM LH 729 24 OR 25 APR (017)... LH 721 H 24APR01PEKFRA XL2 1025 1425 NN(009) LL(009) HL(009) PE(009) HL(009) XL(010) LH3002 H 24APR01FRAHEL XL2 1720 2050 NN(009) LL(009) HL(009) PE(009) HL(009) XL(010)011 05APR01 0906 998 MUCRM1A /05090651/SHALH0100//SHA/LH/A/CN//GS/SHAGXLH...015 10APR01 0215 998 MUCRM1A /10021609/SHALH0100//SHA/LH/A/CN//GS/SHAGXLH LH 729 H 10APR01PVGFRA XX2 1110 1625 NN(004) LL(004) HK(004) LK(004) HK(004) XX(015) LH3002 H 10APR01FRAHEL XX2 1720 2050 NN(004) LL(004) HK(004) LK(004) HK(004) XX(015)
Outlook / ConclusionsOutlook - Mining PNRs
Business passengers behave different from leisure passengers
Separate customer choice models
Problem: Identification of passenger types
history data
current booking data
Fare information available (insufficient?)
PNR may not contain fare information!
Mine PNR data to decide to which type passenger belongs to
PNR
e.g. pax travels single
... or with family pax is frequent
traveller ...
!!
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 31
Outlook / ConclusionsSummary
Booking classes
are inaccurate w.r.t. amount of fares contained are not used directly in O&D bid price control
Booking class-based forecast
reflects historical customer choice only does not concern current market changes
Booking class-oriented revenue management systems
are sophisticated (O&D control) work well may not exhaust the full potential of RM control!!!
There is need for strong integration of Pricing and RM
AGIFORSReservation and Yield Management Study Group Annual MeetingMay 8 - 11, 2001
Chart 32
Outlook / ConclusionsSummary Gap between pricing and revenue management could be closed
by replacement of booking classes by fare buckets by forecast concerning
market size market shares
Integrated approach to pricing and revenue management manages demand changes
Challenges Inventory changes Information provision
Good experience with pricing NetLine/Price pricing simulation NetLine/Price:PSM pax demand forecast
for schedulingNetLine/Plan
Interested airlines are kindly invited for
proving the concept