Multi-Channel Revenue Management

1. Multi-Channel Revenue Management Shankar Mishra & Vish Viswanathan AGIFORS RYM Study Group Berlin, 16-19 April 2002

2. Introduction • The Proliferation and Diversification of Distribution Channels appear Irreversible Sales: $2.3B Visitors: 47.5M Online Travel Sites in U.S. January 2002 In 2001 Travelocity & Expedia sold $3B worth of Travel Products

3. Online Channel Growth $50B • 50% of all travel sales will be from supplier’s own website • 13% of all U.S. travel in 2002 will be booked online $31B 29% Increase over 2001 2002 2005

4. Different Distribution Channels CRS/GDS CRS/GDS CRS/GDS CRS/GDS Allotments Online Travel Sites Airline Website Airline Inventory Email Campaigns Online Corporate Bookings Airline Sales Others

5. Channel Characteristics Airline Website • Emerged as most popular online travel channel • Least Cost, High Visibility • Majority of Demand (not all) coming through may be “Price Sensitive” • Detailed Customer Information Available • Reliable Customer Segmentation • Targeted Campaigns in Practice

6. Channel Characteristics Online Travel Sites • Market Converging to few Dominant Players • Travelocity, Expedia, Orbitz • Includes Opaque Sites • Priceline, Hotwire • Published & Opaque Fares • Price Sensitive Demand

7. Channel Characteristics Online Corporate • Includes Special Negotiated Price • Low Fare Search Engines • May Include Last Seat Availability Others • Auction, Reverse Auction Sites • Negotiated Availability & Price Email Campaigns • Effective Demand Stimulation • Low Cost Medium

8. Channel Characteristics Airline Sales • Dominance of this channel varies by region • At times ‘Inventory Controls’ are at odds with ‘Sales Allocations’ • Depending upon volume/quality, other channels may be preferred over sales allocations • If Airline Sales is the only channel • Maximizing revenue translates to inventory control of sales allocations • If not • Common view of inventory

9. Is Fare the Only Differentiator? Airline Website Group Demand by Fare Online Travel Agencies Email Campaigns Fare-Class Fare-Class Fare-Class Fare-Class Online Corporate Airline Sales Group Demand by Fare Airline Inventory

10. Common Inventory View • Common Inventory with Price as only differentiator among channels • Current O&D Revenue Management Model should suffice • Availability Decision will be independent of Channel • Based on Bid Prices • An extension would be to define product at ODF & Channel level • Still Current O&D Revenue Management Models should suffice • Problem size increases due to added dimension A Bid Price based O&D RM is the First Step

11. And the Solution… Airline Website Online Travel Agencies Demand Aggregation Email Campaigns Online Corporate Fare Analysis Airline Sales • Data Interface between distribution channels & RM system • Demand & Value aggregation to appropriate level Fare Management System O&D Revenue Management System Physical & Financial Inventory Controls

12. Common Inventory View Differentiation beyond Price Demand Stimulation Response to pricing changes differ by distribution channel Sell-up within & across channel Effect of sell-up strategies vary by distribution channel

13. Growing Complexity Channel Analytics • Ability to create fare promotions dynamically at the point of sale • Minimize spoilage without diluting revenue • Gain/Protect Market Share • Personalized Product Definition • Promotions & related Strategic Initiatives by Channel • Channel importance for distressed inventory • Using strategic data in forecasting • Better passenger segmentation Dynamic Pricing Module

14. And the Solution… Airline Website Online Travel Agencies Demand Aggregation Email Campaigns Online Corporate Fare Analysis Airline Sales Dynamic Pricing Module Channel Analytics Fare Management System O&D Revenue Management System Physical & Financial Inventory Controls

15. Implications of “Airline Sales” Channel • Initial Sales Allocations are set early in the booking process • Closing availability with “open allocation” • Not necessarily the preferred option for sales • If Sales Allocation were to be protected? • Only option may be to refine “Allocation Mix” on a periodic basis Pax Valuation thru this channel Needed Info… Channel Performance

16. Value of Growing Complexity Valuation Module • Valuation of a passenger thru a particular channel • Channel profitability taken into account • Availability Bias can be incorporated • Protection for special offers, sales allocations etc. Performance Measures • A Feedback Loop to Revenue Management System & Processes (Channel Analytics) • Performance of promotional campaigns by channel • Value creation linked to strategic initiatives • Performance of “Sales” channel – Observed Vs. Allocation

17. And the Solution… Airline Website Online Travel Agencies Demand Aggregation Email Campaigns Online Corporate Fare Analysis Airline Sales Dynamic Pricing Module Channel Analytics Fare Management System O&D Revenue Management System Valuation Module Performance Measures Physical & Financial Inventory Controls

18. So what’re we saying? • At a macro level airlines should maintain a single view of supply and demand • Forecast free value of inventory • Financial Inventory Control, preferably at ODF level is the first step • Exploiting channel characteristics further • Maintain market response & product control in each channel • Linking Pricing & Inventory to channel characteristics • Merging Pricing, Revenue Management & Distribution?

19. The Other Viewpoint • All the channels will have extensive overlap in terms of “Passenger Value” • Let us consider distribution channel as merely “Inventory Access Medium” for Passengers… • Understanding passengers with a preferred channel becomes important • Passenger Value remains the most important decision criteria • Importance of channels is limited to the related cost • Promotions, Strategic Initiatives can be directly linked to passenger segment (broader definition than grouped by distribution channels)

20. The Other Viewpoint Customer-Centric Revenue Management Promotions & Strategic Initiatives based on “Passenger Segmentation” Inventory Controls based on “Passenger Value” Continuous Tracking of Passenger Profile & Behavior

21. Same Solution? Demand Aggregation By Pax segment Fare Analysis Dynamic Pricing Module Pax Segment Analytics O&D Revenue Management System Fare Management System Valuation Module Performance Measures Physical & Financial Inventory Controls Distribution thru Preferred channels

22. System View RM System must support “Common View of Supply & Demand” “Financial Inventory Controls” should be the base to build upon Fare Management System is no less important than RM System • Integration of Pricing, Revenue Management & Distribution • Bound by limitations of CRS/GDS – Airline.com may be first step

23. Common Process View • Migration of revenue management analysts • Route Controllers • Market Analysts • Strategic/Tactical Analysts Planning • Strategic Initiatives • Campaigns & Promotions • Customer Segmentation Valuation • Passenger Valuation • Market/Flight Valuation • Control over all Variables Affecting Valuation Operation • Critical Flight Handling • Tactical Planning • Day of Departure Support Distribution • Link between Passenger & CCRM • Communication Channel for other departments (Pricing, Scheduling, etc.)

24. Conclusion • The Proliferation and Diversification of Distribution Channels appear Irreversible • Can we afford to ignore alternate distribution channels in our RM perspective? • A common look at all channels together may bring us closer to Utopia • Integrated Pricing, RM, Distribution • This common look must see both Supply & Demand side • Convergence of Systems & Processes towards customer-centric environment seems to be the next step You don’t have to beat the bear!!!

25. Questions?