Revenue_Management_overview.ppt

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Paul Rose Revenue Management Ltd

Revenue Managementin the airline industry

Paul RoseManaging Director


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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 managesrange.

A.R.I.G. Owner & Chair Independent RM Consulting Conferences and publications IATA Calidris Worlds leading RI supplier

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THE HISTORY OF REVENUEMANAGEMENT


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Revenue Management History

R.M was born from the deregulation of theUSA airline industry in the early 70s. Pioneered by AA and followed by other Mega

airlines who could fund the R&D costs who instigatedfirst systems = AA, UA, DL, BA etc)

People express a forerunner of LCCairline the first casualty of US PriceWars 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 regulationcontinues 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 RevenueManagement Quantum leap in technology - POS introduced,

SBP / Heuristic BP introduced , Codeshareabounds, 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 >1300airlines! Revenue Management typically delivers 3-9%

revenue gain, with >11% achieved at someleading airlines!

Most unsuccessful RM installations are due tounsupported business processes, lack of Snr

Mngmnt support, or lack of expertise rather thansystem failures !

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Industries employing RevenueManagement 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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REVENUEMANAGEMENT

AN ESSENTIALBUSINESS PRACTICE


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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, orb) 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 onethat gives you the highest average yield (b) or the highest loadfactor (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 FactorTheir business driver is to sell as manyseats as possible regardless of price,

dilution or increased costs.Few limits are imposed, fewer classesare utilised, and class availability isoften sub optimal.

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Airlines without RM

Large numbers of low yielding seatsare usually sold with this approach,without any protections for higher

yielding late booking clients. The assumption is that the higher theseat factor, the higher the profitabilityfor the airline, which is incorrect.

Waste valuable resources with manualbest guess of likely demand.

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Why RM is important

Revenue Management maximizesprofitability by selling the correctnumber of seats at various fare levelsbased on demand and pricing elasticity

Sometimes the number of passengerscarried may be lower than when comparedto a simple load factor drivenmethodology.

BUT, the result of correctly optimisednumber of seats sold, with lower costs,will still provide higher revenue than anuncontrolled load factor approach.

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Why RM is important

Managing an airline s most importantasset - its perishable seat inventory

Accurately predict future demand

Maximise revenue on every flight departureby setting optimal inventory allocations,that reflect the passenger demand forecastand allows for cancellations and no-shows.

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

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RM is important as itallows a carrier to Accurately accept Group business without

diluting revenue or spilling high individualdemand and focus on the best performingTour Operators

Immediate benefit by using Historic datafrom the RMS db

Side benefits such as using passenger

forecasts for Network planning,Catering,Customer Services resource planning andfuture 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 fromperishable products, through theintegrated control of capacity andprice.

Although RMS can now be bought off the shelf, systems-integration, data-quality, and business-process-improvement still remain majorchallenges 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

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RM benefits

Has demonstrated the ability togenerate of 3 9% in additionalRevenue

Better management of group and touroperator 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 toreflect the future.

Forecasting

Produce Detailed Forecasts of Unconstrained Demand for EachFuture 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 Revenueusing EMSR (Expected Marginal Seat Revenuealgorithm)

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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 moresignificant

Attach higher validity to info which confirms previouslyheld beliefs, seeking information to support views.

Overemphasise conclusions from small samples:anecdotal evidence

Conservatism: failing to use new info to significantlyrevise estimates

Failure to regress to the mean, extreme values expected

to continue


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5 Key elements of airline R.M.

CABIN SPOILAGEPROBLEM

Loss of revenue occurring due to passengers who No-Show or cancel late on full flights.

SOLUTION

Identify revenue opportunities available and applyaccurate overbooking levels.

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5 Key elements of airline R.M.DISCOUNT SPOILAGE

PROBLEM

Loss of revenue resulting from turning away discountcustomers because discount seats were not available atthe time of booking, subsequently the flight departswith a significant number of empty seats.

SOLUTION Identify revenue opportunities lost on flights that

departed with a significant number of empty seats, yethad discount class restrictions at some point prior todeparture, and reforecast and re-optimise future flights.

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5 Key elements of airline R.M.

HIGHER YIELD SPILLPROBLEM

The loss of revenue resulting from turning away late

high yield demand because too many lower yield seatswere sold early.

SOLUTION

Quantify the opportunity from flights that fill prior todeparture 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 ahigher cabin.

SOLUTION Quantify revenue potential from more accurate setting

of overbooking profiles & utilise adjustment of capacitybetween cabins.

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5 K ey elem en ts o f a ir l in e R.M.

DIFFERENTIAL PRICINGPROBLEM

An airline seat can be viewed by a purchaser as a

single commodity, the desire is to purchase at thelowest price.

SOLUTION Differentiate brands ( e.g. First, Business, Economy )

to offer added value and create products within abrand utilising micro-segmentation of the marketplace and price fences ( e.g. Advance purchasetickets, Corporate rates, Tour operator fares, Frequentflyer redemption rates etc ).


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What is Revenue Management?

MANAGEMENT OF SEAT FACTOR Overbooking capacity to ensure maximum

seat-factors with minimal offloads anddowngrades.

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 yieldbusiness books early.

Average industry No-show rate of 15%,

with variation between 5 - 50% ! Pluscancellation 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 ForecastingOptimisation Process using complexalgorithms.

Recommendations with Auto-Pilotoptions.Automated No-shows / cancellationmanagementManagement reportingGroup 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


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Daily process cycle

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Daily analysis

Exceptionreports

Forecasting &Optimisation

Implementation

Performance

MeasurementR.M. systems

& people


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Overbooking and upgrading

ADVANTAGES

More seat access

More passengersaccommodated

More revenue

Passengers more likelyto trade up

Reward for frequentfliers and card holders

DISADVANTAGES

Full fare passengermay be annoyed

Frequent travellers will'play the system'

Some passengers not

suitable

Additional work forcustomer service

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Balancing the network

Copenhagen

Vienna

Paris

Johannesburg

London

New York

San Francisco

100

115150

175 65

275Paris - New York 215Vienna - 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 manyairlines.

Declining Yield Over Time


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Declining Yield Over TimeActual versus comparative

2009 - LONDON - LOS ANGELES- FIJI - AUCKLAND - SYDNEY - SINGAPORE - LONDON

1991- 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

96

0

1

98

4

1

9

9

1 2009


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GROUP BUSINESS& REVENENUE

MANAGEMENT

h h l


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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 performancemeasurement and no managementreporting

What is wrong with most airlinesGroups business process


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The objectives of a good Groupssystem

Convert group data into valuabledecision support information andreports

Provide facilities to forecast andcontinuously monitor grouputilisation behaviour

Mechanise mundane manual

processes e.g. contracts. Enhance user productivity


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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 acrossalternatives. Agent commissions Free tour conductor passes (dependant upon

carriers policy )

Channel groups toward itineraries withhighest incremental revenue potential(offer connections)

Management reporting system


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Series Groups decision support

Evaluate Series requests spanningmultiple itineraries and travel patterns

Analyse requests among competingtravel agents and tour operators

Determine optimal block allocations tosales offices for subsequentdistribution to individual travel agents/ tour operators

Monitor all bookings by travel agents /tour operators from time of acceptanceuntil departure


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SYSTEM SELECTION &

IMPLEMENTATION


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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?

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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 ! 47


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Expertise requirements:- RM expert (s) Project Management Adequate IT dept/infrastructure.

Budget approval - Don t underestimateand include everything ! Hardware, software, project management costs,

consultancy, training, travel /accommodationcosts, 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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COMMUNICATE !

Sell the benefits to key internalpartners e.g. Airports, Sales, RevenueAccounting, Marketing etc.

Maintain Senior Management

support. Utilise all avenues - Intranet, In-house mag, company journal,workshops, presentations.

BUT MOST IMPORTANTLY WITH THER.M. TEAM !

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Thank yo u

Documents

Revenue_Management_overview.ppt