Paul Rose Revenue Management Ltd Revenue Management in the airline industry Paul Rose Managing...

Paul Rose Revenue Management Ltd

Revenue Management in the airline industry

Paul RoseManaging Director


Content

• My background• The History of Revenue

Management• Revenue Management an essential

business practice• Group business and RM• System selection & implementation

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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

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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.

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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!

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• 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 – todayMajority of major airlines have a RMS, RM &

Pricing depts merged , focus on costs, profit, and more aware of competitors

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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 !

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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

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REVENUE MANAGEMENTAN ESSENTIAL

BUSINESS PRACTICE

Paul Rose Revenue Management Ltd11

Is R.M. the same thing as yield management?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%100%

b) (190*1900)+(50*1300)=$426,000 426000/(190+50)= $1,775$1,775 (190+50)/300)*100=80%

c) (135*1900)+(135*1300)= $432,000$432,000 432000/(135+135)=$1,600 (135+135)/300*100=90%


Airlines without RM

Often only consider Load FactorOften only consider Load Factor Their business driver is to sell as many Their business driver is to sell as many

seats as possible regardless of price, seats as possible regardless of price, dilution or increased costs.dilution or increased costs.

Few limits are imposed, fewer classes Few limits are imposed, fewer classes are utilised, and class availability is are utilised, and class availability is often sub optimal.often sub optimal.

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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.

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Why RM is important

Revenue Management maximizes Revenue Management maximizes profitability by selling the correct profitability by selling the correct number of seats at various fare levels number of seats at various fare levels based on demand and pricing elasticitybased on demand and pricing elasticity– Sometimes the number of passengers Sometimes the number of passengers

carried may be lower than when compared carried may be lower than when compared to a simple load factor driven to a simple load factor driven methodology.methodology.

BUT, the result of correctly optimised BUT, the result of correctly optimised number of seats sold, with lower costs, number of seats sold, with lower costs, will still provide higher revenue than an will still provide higher revenue than an uncontrolled load factor approach.uncontrolled load factor approach.

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Why RM is important

Managing an airline’s most important Managing an airline’s most important asset - its perishable seat inventoryasset - its perishable seat inventory Accurately predict future demand Accurately predict future demand Maximise revenue on every flight departure Maximise revenue on every flight departure

by setting optimal inventory allocations, by setting optimal inventory allocations, that reflect the passenger demand forecast that reflect the passenger demand forecast and allows for cancellations and no-shows.and allows for cancellations and no-shows.

Minimise seat spoilage, spillage and risk of Minimise seat spoilage, spillage and risk of denied boardings and /or downgrades.denied boardings and /or downgrades.

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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.

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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

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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

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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

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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)

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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


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.

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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.

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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.

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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.

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5 Key elements of airline R.M.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 ).


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 )

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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

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RMS functionality

Unconstrained Demand ForecastingUnconstrained Demand Forecasting Optimisation Process using complex Optimisation Process using complex

algorithms. algorithms. Recommendations with Auto-Pilot Recommendations with Auto-Pilot

options. options. Automated No-shows / cancellation Automated No-shows / cancellation

managementmanagement Management reporting Management reporting Group evaluation toolsGroup evaluation tools

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Process map

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PLUS CURRENT BOOKED PASSENGERS

NET YIELD

NOSHOWS &CANCELLATIONS

EXCEPTIONS

CRS &GDSs

RECOMMENDEDCONTROLS AUTOMATIC

FORECAST DEMAND

OPTIMISE


Daily process cycle

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Daily analysis

Exception reports

Forecasting & Optimisation

Implementation

Performance

MeasurementR.M. systems

& people


Overbooking and upgrading

ADVANTAGES

More seat access

More passengers accommodated

More revenue

Passengers more likely to trade up

Reward for frequent fliers and card holders

DISADVANTAGES

Full fare passenger may be annoyed

Frequent travellers will 'play the system'

Some passengers not suitable

Additional work for customer service

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Balancing the networkBalancing the network

Copenhagen

Vienna

Paris

Johannesburg

London

New York

San Francisco

£100

£115£150

£175 £65

£275Paris - New York £215 Vienna - New York £250Johannesburg - New York £425

(1) All LH flights full = Take local traffic(2) If JFK, or SFO, JNB empty => Take connecting trafficDanger of “ First come, first served” for many airlines.


Declining Yield Over TimeDeclining Yield Over Time Actual versus comparative

2009 - LONDON - LOS ANGELES- FIJI - AUCKLAND - SYDNEY - SINGAPORE - LONDON1991- LONDON - LOS ANGELES - TAHITI- SYDNEY- BANGKOK-LONDON

1984 - LONDON - NEW YORK- LOS ANGELES - FIJI- SYDNEY- HONG KONG-LONDON1960 - LONDON - BERMUDA- ACAPULCO- TAHITI- SYDNEY- DARWIN-SINGAPORE-

BOMBAY- BAHRAIN- LONDON

1

9

6

0

1

9

8

4

1

9

9

12009


GROUP BUSINESS& REVENENUE MANAGEMENT


• 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

What is wrong with most airlines Groups business process


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?

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• 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

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• 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 !

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• 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.

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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

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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.

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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 !

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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

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Thank you

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