Leg Revenue Management System

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Maximizing Revenuewith a

Leg Revenue Management System



E. Andrew BoydVice President, Research and Design

PROS Revenue Management

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Revenue Management GoalRevenue Management Goal

To achieve the goal of increased revenues, the value of each ticket sold must be known with some certainty

Generate increased revenues by seeking to accept the highest paying mix of passengers

Generate increased revenues by seeking to accept the highest paying mix of passengers

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A Perfect WorldA Perfect World

One flight leg One fare per booking class

Y = 800 M = 600 B = 500 Q = 350

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Perfect FaresPerfect FaresFareFare

ClassClassYY MM BB QQ

200200

400400

600600

800800

10001000

800800

600600500500

350350

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Fares in RealityFares in RealityFareFare

ClassClassYY MM BB QQ

200200

400400

600600

800800

10001000

FareRangeFare

Range

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Where Does Fare Variation Come From?


Source 1: Distribution Channel

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Where Does Fare Variation Come From?Where Does Fare Variation Come From? Source 1: Distribution Channel

Y class tickets on flight 111 may sell for different fares because of distribution channel

InventoryInventory

TravelAgencies

TravelAgencies

TourOperators

TourOperators

CorporateAccountsCorporateAccounts

Code ShareArrangementsCode Share

Arrangements

InternetSales

InternetSales

InternetAuctionInternetAuction

FrequentFlier Programs

FrequentFlier Programs

AlliancesAlliances

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Distribution Channels:Front End or Back End Fare Control?

Distribution Channels:Front End or Back End Fare Control?

Front End Fare Control Make sure fares align

across distribution channels when they are established

Back End Fare Control Assume fares will not be

aligned, and account for differences when a purchase request arrives

Front EndFront End

Back EndBack End

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Front End Fare ControlFront End Fare Control

Good front end control is extremely difficult to achieve, but is the only alternative for carriers in a non-seamless / leg environment How to assure that all Y class tickets on flight

111 sell for approximately the same price?

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Back End Fare ControlBack End Fare Control

Seamless availability / O&D provides the opportunity to address many distribution channel issues from the back end Dynamic fare calculation at time of request:

assigning the right fare to each transaction

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The Value of Back End Fare ControlThe Value of Back End Fare Control

The worse fair alignment is on the front end, the greater the impact of back end fare control

Back end fair control can have a major revenue impact-16.00%

-14.00%-12.00%-10.00%

-8.00%-6.00%-4.00%-2.00%0.00%

Bad Poor Okay Good

With Back End Fare ControlWith No Back End Fare Control

% B

elo

w U

pp

er B

ou

nd

% B

elo

w U

pp

er B

ou

nd

Quality of Front End Fare AlignmentQuality of Front End Fare Alignment

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Source 2: Leg Control

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Where Does Fare Variation Come From?Where Does Fare Variation Come From? Source 2: Leg Control

Fares are provided at the O&D level, but availability is controlled at the leg fare class level Flight networks greatly complicate the

process of defining leg fare class fares

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ELP IAH

STL

MSY

400400

800800

700700

Leg Control Fare Variation:The ProblemLeg Control Fare Variation:The Problem Example Y class fares on a simple network

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Leg Control Fare Variation:The ProblemLeg Control Fare Variation:The Problem

Y fare tickets on the leg ELP-IAH take on the values 400, 700, and 800 – a wide fare variation

Should these fares all be assigned to Y class? Should these fares be reassigned to different

classes that reduce the fare variation?

Should these fares all be assigned to Y class? Should these fares be reassigned to different

classes that reduce the fare variation?

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ELP IAH

STL

MSY

400400

800800

700700

Leg Control Fare Variation:The ProblemLeg Control Fare Variation:The Problem Fare class realignment may be required

Reassign to M ClassReassign to M Class

Reassign to B ClassReassign to B Class

Leave in Y ClassLeave in Y Class

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Fare Class RationalizationFare Class Rationalization

Very Important Fact:Fares throughout the network must be aligned within fare classes if leg control revenue management systems are to function properly

Very Important Fact:Fares throughout the network must be aligned within fare classes if leg control revenue management systems are to function properly

How can this be achieved?

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Network Optimizationfor Fare Class RationalizationNetwork Optimizationfor Fare Class Rationalization Assign O&D fares to fare classes so that a

leg control revenue management system generates maximum revenue

Determine leg fare class fares for leg optimization algorithms

Adhere to all business constraints

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ObservationsObservations

The myriad of business constraints leads to an extremely challenging problem that is not easily handled by an optimization algorithm alone

If fare class rationalization is not addressed, even a good leg revenue management system can be severely compromised

Fare class rationalization is an important aspect of aligning fare classes within an alliance

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Fare Class Rationalization:The Wrong WayFare Class Rationalization:The Wrong Way Ordering O&D values from highest to

lowest fare value and clustering to form fare classes is a poor idea

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Fare Class Rationalization:The Right WayFare Class Rationalization:The Right Way O&D valuation should incorporate some

measure of displacement cost Good leg fare class fares must be

determined

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800800

200200 600600

800800

300300 700700

A True Proration

A Pseudo-Proration

A Process For Fare Class Rationalization: Getting to Leg Class Fares

A Process For Fare Class Rationalization: Getting to Leg Class Fares Important Fact:

There are mathematically based ways to prorate itinerary fares into leg fares; itinerary fares can then be treated as consisting of leg fares for purposes of fare class rationalization

Important Fact:There are mathematically based ways to prorate itinerary fares into leg fares; itinerary fares can then be treated as consisting of leg fares for purposes of fare class rationalization

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A Process For Fare Class Rationalization: Getting to Leg Class Fares With fares prorated to legs, it is possible to

determine good leg fare class fares by taking a weighted average of the prorated fares within the fare class

Prorated fares still have the likely problem of being poorly rationalized at the leg level

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A Process For Fare Class Rationalization: Getting to Leg Class Fares Proration alone does not solve the problem of

fare class rationalization

Itinerary Y FareProrated Fare for

ELP-IAH Leg

ELP-IAH 400 400

ELP-IAH-STL 800 100

ELP-IAH-MSY 700 425

Itineraries ELP-IAH and ELP-IAH-MSY align well onleg ELP-IAH-MSY, while itinerary ELP-IAH-STLdoes not

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A Process For Fare Class Rationalization: Getting to Leg Class Fares Proration does suggest how fare class

rationalization might be achieved

Itinerary Y FareProrated Fare for

ELP-IAH Leg

ELP-IAH 400 400

ELP-IAH-STL 800 100

ELP-IAH-MSY 700 425

Y Class: ELP-IAH and ELP-IAH-MSY M Class: ELP-IAH-STL

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A Process For Fare Class Rationalization: Getting to Leg Class Fares The problem with rationalizing fare

classes on one leg is that the rationalization may not make sense for other legs

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A Process For Fare Class Rationalization:Pseudofares

A Process For Fare Class Rationalization:Pseudofares Pseudofares are one method of prorating

itinerary fares to leg fares

Pseudofarek(1,2,…,k,…,m) =

Fare(1,2,…,k,…,m) –

Displacement Cost (1,2,…,k,…,m) +

Displacement Cost (k)

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A Process For Fare Class Rationalization:Pseudofare Example

A Process For Fare Class Rationalization:Pseudofare Example

800800

300300 700700

100100 500500

Displacement CostsDisplacement Costs

800 – 600 + 500800 – 600 + 500800 – 600 + 100800 – 600 + 100

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A Process For Fare Class RationalizationA Process For Fare Class Rationalization Pseudofares provide a good alternative for

performing fare class rationalization at the leg level

Itinerary Y FareDisplacement

Cost AdjustmentPseudofare for ELP-IAH Leg

ELP-IAH 400 0 400

ELP-IAH-STL 800 700 100

ELP-IAH-MSY 700 275 425

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A Process For Fare Class RationalizationA Process For Fare Class Rationalization

Important Fact:Pseudofares have the special property that they preserve order under fare proration to different legs

Important Fact:Pseudofares have the special property that they preserve order under fare proration to different legs

This special property of pseudofares makes them ideal for the purpose of fare class rationalization

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Ultimate Fare Class RationalizationUltimate Fare Class Rationalization Fare class rationalization is a front end

fare control solution Seeks to align fares so that the allocation of

inventory through leg fare class limits yields revenue maximizing decisions

Can leg fare classes ever be fully rationalized?

Is it possible to achieve a perfect world in which every ticket sold in a leg class has the same fare?

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Ultimate Fare Class RationalizationUltimate Fare Class Rationalization The Bad News

Restricting inventory control to availability in leg fare classes, the answer is no;a perfect world cannot be achieved

Fare class rationalization is necessary to get the most from a leg control system, but there are inherent limitations

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Ultimate Fare Class RationalizationUltimate Fare Class Rationalization The Good News

Stepping outside of leg fare class control to O&D control, a perfect world can be achieved

Leg level Displacement Adjusted Virtual Nesting, for example, is the obvious and inevitable resolution of the problem of trying to rationalize fare classes

Fare class rationalization is simply thrown out the window and replaced by leg value buckets

Bid price methods achieve the same goal in a more sophisticated fashion

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Conclusions: Distribution ChannelConclusions: Distribution Channel Fare variation as a result of different fares

in different distribution channels is a huge problem that must be addressed

The move to seamless availability / O&D control opens up substantial opportunities for revenue improvement through back end inventory control

Without seamless availability / O&D control, airlines must be diligent in aligning fares onthe front end

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Conclusions: Leg ControlConclusions: Leg Control

In a leg control environment, it is vital to have fare classes rationalized at the network level in order to achieve maximum revenue gains from a leg control revenue management system

Good fare class rationalization is difficult and has inherent limitations

O&D control overcomes the limitations inherent in a leg control revenue management system

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E. Andrew BoydVice President, Research and Design

PROS Revenue Management

Technology

Leg Revenue Management System