Revenue Management in the airline industry

1. Revenue Management in the airline industry Paul Rose Managing Director

2. Content • My background • The History of Revenue Management • Revenue Management an essential business practice • Group business and RM • System selection & implementation

3. 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

4. THE HISTORY OF REVENUE MANAGEMENT

5. 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.

6. RevenueManagement History 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!

7. Revenue Management History • 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 – today Majority of major airlines have a RMS, RM & Pricing depts merged , focus on costs, profit, and more aware of competitors

8. 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 !

9. 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

10. REVENUE MANAGEMENTAN ESSENTIAL BUSINESS PRACTICE

11. 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). RevenueYieldLoad-factor a) (50*1900)+(250*1300)=$420,000 420000/(50+250)=$1,400 (50+250)/300)*100= 100% b) (190*1900)+(50*1300)=$426,000 426000/(190+50)= $1,775 (190+50)/300)*100=80% c) (135*1900)+(135*1300)= $432,000 432000/(135+135)=$1,600 (135+135)/300*100=90%

12. Airlines without RM • Often only consider Load Factor • Their business driver is to sell as many seats as possible regardless of price, dilution or increased costs. • Few limits are imposed, fewer classes are utilised, and class availability is often sub optimal.

13. 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.

14. Why RM is important • Revenue Management maximizes profitability by selling the correct number of seats at various fare levels based on demand and pricing elasticity • Sometimes the number of passengers carried may be lower than when compared to a simple load factor driven methodology. • BUT, the result of correctly optimised number of seats sold, with lower costs, will still provide higher revenue than an uncontrolled load factor approach.

15. Why RM is important • Managing an airline’s most important asset - its perishable seat inventory • Accurately predict future demand • Maximise revenue on every flight departure by setting optimal inventory allocations, that reflect the passenger demand forecast and allows for cancellations and no-shows. • Minimise seat spoilage, spillage and risk of denied boardings and /or downgrades.

16. 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.

17. 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

18. 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

19. 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

20. 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

21. 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)

22. 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

23. 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.

24. 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.

25. 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.

26. 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.

27. 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 ).

28. 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 )

29. 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

30. RMS functionality • Unconstrained Demand Forecasting • Optimisation Process using complex algorithms. • Recommendations with Auto-Pilot options. • Automated No-shows / cancellation management • Management reporting • Group evaluation tools

31. Process map FORECAST DEMAND PLUS CURRENT BOOKED PASSENGERS EXCEPTIONS RECOMMENDED CONTROLS NET YIELD OPTIMISE AUTOMATIC CRS & GDSs NOSHOWS & CANCELLATIONS

32. Daily process cycle Daily analysis Performance Measurement R.M. systems & people Exception reports Implementation Forecasting & Optimisation

33. Overbooking and upgrading DISADVANTAGES Full fare passenger may be annoyed Frequent travellers will 'play the system' Some passengers not suitable Additional work for customer service ADVANTAGES • More seat access • More passengers accommodated • More revenue • Passengers more likely to trade up • Reward for frequent fliers and card holders

34. Balancing the network New York Copenhagen £115 £150 £100 Vienna London £175 £65 Paris San Francisco £275 Johannesburg Paris - New York £215 Vienna - New York £250 Johannesburg - New York £425 (1) All LH flights full = Take local traffic (2) If JFK, or SFO, JNB empty => Take connecting traffic Danger of “ First come, first served” for many airlines.

35. Declining Yield Over Time Actual versus comparative2009 - LONDON - LOS ANGELES- FIJI - AUCKLAND - SYDNEY - SINGAPORE - LONDON1991- LONDON - LOS ANGELES - TAHITI- SYDNEY- BANGKOK-LONDON1984 - 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 1 2 0 0 9

36. GROUP BUSINESS& REVENENUE MANAGEMENT

37. What is wrong with most airlines Groups business process • 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

38. 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.

39. 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

40. 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

41. 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

42. 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

43. 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

44. SYSTEM SELECTION & IMPLEMENTATION

45. 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?

46. PROJECT INITIALISATION • 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

47. PROJECT INITIALISATION • 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 !

48. PROJECT INITIALISATION • 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.

49. 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

50. 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.