Integration of Pricing and Revenue Management for a Future without Booking Classes

1. Integration of Pricing and Revenue Management for a Future without Booking Classes AGIFORS Reservation and Yield Management Study GroupAnnual Meeting, Bangkok, May 8 - 11, 2001 Natascha JungSenior Operations Research Specialist Klaus WeberSenior Scientific Analyst

2. Presentationon behalf of my colleague Natascha Natascha ... and herboss

3. Agenda • Motivation • Booking Classes • Pricing & Revenue Management • Integrated Approach to Pricing & Revenue Management • Outlook / Conclusions

4. travel agent customer MotivationThe Customer I see, ... Are you looking for a last minute offer? Do you have any idea when and howyou would like tofly? • Typical Travel Agency Situation? I would like to book a flight from Bangkok to Rio de Janeiro. No, ... Yes, I would prefer a three leg itineraryvia Frankfurt and Madrid. That’snot important!I just like to travelin M class ...I mean, from BKK toFRA in M, and thenH class to MAD.But for transatlanticflights I preferclass Q!!

5. travel agent customer MotivationThe Customer (cont.) Do you have anyidea when and howyou would like tofly? I understand.You need acomfortable seatwith power supplyfor your laptop. If you don’t mindthe risk ofthrombosis NI can offer youa discounted farein Eco? • Typical Travel Agency Situation? I would like to booka flight fromBangkok toRio de Janeiro. I am going to takepart in the annual meeting of Nobel laureates whichstarts next monthand will take 8 days. Oh, no!I just like to sit andthink about a newformula. Great!I take it!

6. fares Demand is controlled by fares, i.e. customer needs! MotivationThe Customer (cont.) • Resume • Customer does not care about booking classes! • Customer demand depends on • Travel day • Prices (offered at ticketing day) • Service • Restrictions (minimum stay, day application, ...) • Revenue management systems • Forecast is estimated on basis of historical demand • Booking histories are stored w.r.t. booking class! !!! Contradiction !!!

7. Agenda • Motivation • Booking Classes • Pricing & Revenue Management • Integrated Approach to Pricing & Revenue Management • Outlook / Conclusions

8. 1955 Central Reservation 1965 Overbooking 1972 Littlewood’s rule 1972 Currency Control Booking classes 1977 Segment Pricing 1989 EMSRb 1989 Fare Mix / Control 1994 Network Management / Bid Pricing Booking ClassesHistorical Review Historical Development of Revenue Management at Lufthansa

9. We do not truly need booking classes but we are used to use them. 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 • 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)

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

11. Distortion of average revenue of booking class Booking ClassesProblems with Booking Classes • Booking classes are inaccurate, e.g. Quite different fares in same booking class • Another indicator • Booking class harmonisation in airline alliances usually increases number of booking classes

12. Different demand • Different average values of corresponding booking classes Booking ClassesProblems with Booking Classes (cont.) • RM systems forecast on historical data !!! Meanwhile fares might have been changed !!!

13. ‘approximation’ • inexact, but works 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 correspondsto class value (‘somehow’) • Booking class can be identified with restrictions (‘somehow’) • Inexactness of booking classes • restricts opportunity of additional revenue gain... in 0.1 % range (which are millions of € or $)

14. Booking ClassesBooking Classes - pros and cons (cont.) Booking classespros Booking classescons • ‘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’

15. Agenda • Motivation • Booking Classes • Pricing & Revenue Management • Integrated Approach to Pricing & Revenue Management • Outlook / Conclusions

16. Trigger Output Demand Shift Fare Change Traveller Preference Analyser Market Stimulation Model Competitor Reaction Analyser Fare Analyser Pricing & Revenue ManagementOverview: Pricing System - Price Elasticity Model Price Elasticity Model Market Share Model

17. O&D Forecast Engine GDS Forecast Building ForecastInterface DB GDS Inventory ... Demand Forecasts O&D Optimiser GDS Control Parameters OptimiserInterface DB GDS Pricing & Revenue ManagementOverview: Revenue Management System

18. Pricing Pricing & Revenue ManagementComparison Revenue Management Target level(What shall be controlled?) • Market - ODorigin destinationFares given on this level. • ODIF POSorigin destination itinerary fare class point of saleBooking values given on this level. • Value / revenue oriented • customer oriented • fine level • coarse level Target quantities(Which quantities are focused on?) • Market size • Market share • Fares • ODIF POS demand • ODIF POS values • marginal seats revenues • bid prices

19. Pricing & Revenue ManagementComparison (cont.) Pricing Revenue Management • Linking both spheres means • replace booking classes in RM sphere by fares (properly) • integrate both spheres Target quantities(Which quantities are focused on?) • Market size • Market share • Fares • ODIF POS demand • ODIF POS values • marginal seats revenues • bid prices

20. PNR PNR Pricing & Revenue ManagementRequirements for Integration Current Demand Forecast Booking histories Current booking level • Booking classes • Booking classes

21. In the future? ... together with other usefull, quantities,e.g. bid prices fare fare(inexact) restrictions etc. class info Pricing & Revenue ManagementRequirements for Integration Integrated Demand Forecast Booking histories Current booking level • 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 Pricing DB

22. av. valueno. of bkgs. Example • Value900 - 1100 • restrictionsunday return • advanced purchase14 days av. valueno. of bkgs. av. valueno. of bkgs. ... For optimisation we need to forecast the number of bookings in each fare bucket. Pricing & Revenue ManagementRequirements for Integration (cont.) Bookings Fare buckets

23. Agenda • Motivation • Booking Classes • Pricing & Revenue Management • Integrated Approach to Pricing & Revenue Management • Outlook / Conclusions

24. Price Elasticity Model Customer choice model multinomial logit model • customer’s choice depends on • amount • minimum stay • advanced purchase • ... Utility factors Datasources Market Share Model Traveller Preference Analyser Market Stimulation Model Competitor Reaction Analyser Alternative Analyser Separate for business and leisure passengers Integrated Approach Pricing & RMPrice Elasticity Model Forecast of demand for each fare bucket - step 1 Internalfare data ATPCO MIDT

25. Forecast basis Datasources Demand forecast Internalfare data ATPCO MIDT Integrated Approach Pricing & RMMarket Size Forecaster Forecast of demand for each fare bucket - step 2 Market SizeForecaster Currentbookings

26. Price ElasticityModel Per ticketing/travel combination Per departuredate av. valueno. of bkgs. av. valueno. of bkgs. av. valueno. of bkgs. ... Fare buckets Integrated Approach Pricing & RMFare Buckets Forecast Forecast of demand for each fare basket - step 3 Market SizeForecaster

27. Market Size Forecast Market Shares GDS Market Size Price Elasticity Model GDS Bookingswith FareInformation ForecastInterface DB Inventory ... Demand Forecasts GDS O&D Optimiser Control Parameters OptimiserInterface DB GDS Integrated Approach Pricing & RMSystem Overview

28. Previous èNew Forecast Price Elasticity Model Current Demand Re-Optimisation Previous Forecast Demand Shift Demand Shift Fare Change Learning Floating dcp Snap shot Integrated Approach Pricing & RMDemand Changes

29. Agenda • Motivation • Booking Classes • Pricing & Revenue Management • Integrated Approach to Pricing & Revenue Management • Outlook / Conclusions

30. Separate customer choice models PNR Mine PNR data to decide to which type passenger belongs to Outlook / ConclusionsOutlook -Mining PNRs • Business passengers behave different from leisure passengers Problem: Identification of passenger types • history data • current booking data ü Fare information available (insufficient?) !! PNR may not contain fare information! e.g. • pax travels single... or with family • pax is frequent traveller • ...

31. There is need for strong integration of Pricing and RM 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!!!

32. Interested airlines are kindly invited forproving the concept 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 forecastfor scheduling NetLine/Plan

33. Thank you for your attention!Any questions?