Revenue Management Overview

Paul Rose Revenue Management Ltd
Revenue Management
in the airline industry
Paul Rose
Managing Director
Content
My background
The History of Revenue
Management
Revenue Management an essential
business practice
Group business and RM
System selection & implementation
2
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 Worlds leading RI supplier
3
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.

5
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!
6
Early 90s - Revenue Management
Route Inventory & Sales Area Pricing begin to
merge, Sophisticated RM systems now available

Mid 90s - 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
7
Food for thought !
Yet RM systems are still only used by
approx 45% of the Worlds >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 !
8
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
9
REVENUE
MANAGEMENT
AN 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).
Revenue Yield Load-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%
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.

12
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.

13
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.

14
Why RM is important
Managing an airlines 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.

15
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.
16
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
17
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
18
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
19
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 flights Revenue
using EMSR (Expected Marginal Seat Revenue
algorithm)

21
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
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.
23
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.
24
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.
25
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.
26
27
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 )
28
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
29
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

30
Process map
31
PLUS CURRENT BOOKED PASSENGERS

NET YIELD
NOSHOWS &
CANCELLATIONS
EXCEPTIONS
CRS
&
GDSs
RECOMMENDED
CONTROLS
AUTOMATIC
FORECAST DEMAND
OPTIMISE
Daily process cycle
32
Daily analysis
Exception
reports
Forecasting &
Optimisation
Implementation
Performance
Measurement
R.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

33
34
Balancing the network
Copenhagen
Vienna
Paris
Johannesburg
London
New York
San Francisco
100
115
150
175
65
275
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 comparative

2009 - LONDON - LOS ANGELES- FIJI - AUCKLAND - SYDNEY - SINGAPORE - LONDON
1991- LONDON - LOS ANGELES - TAHITI- SYDNEY- BANGKOK-LONDON
1984 - LONDON - NEW YORK- LOS ANGELES - FIJI- SYDNEY- HONG KONG-LONDON
1960 - 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
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
O Receipt of request
O Economic evaluation of itineraries
O Interactive negotiating capability
O Agree on itinerary
O Agree on price and terms
O Generate the group PNRs
O Generate contracts
O Input of names
O 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
carriers 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 LCCs
Are we a LCC?

45
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
46
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
wasnt built in a day !
47
Expertise requirements:-
RM expert (s)
Project Management
Adequate IT dept/infrastructure.

Budget approval - Dont underestimate
and include everything !
Hardware, software, project management costs,
consultancy, training, travel /accommodation
costs, support & maintenance etc.

48
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

49
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.

50
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 !
51
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
52
53
Thank you

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