Airline revenue management may be decades old, but is now virtually a necessity for any airline. While in the past, the use of sophisticated forecasting and optimization tools offered the most innovative airlines a 5+% revenue boost versus its competitors, today such tools are considered as fundamental to the business as airlines acquire revenue management tools before their aircraft are even in the air.
Having said that, there are still opportunities to gain incremental revenue – more than the competition – from the practice of revenue management techniques. Typically, it isn’t the revenue management system itself that makes the competitive difference. When we talk about “best practices”, we do not actually mean using a specific system (although different systems are better suited for different airlines). Instead, differentiation comes from using any chosen system optimally. In fact, “best practices” can still enable airlines to materially gain more revenue than its competitors.
There are three key elements to “best practices” in airline revenue management:
Revenue Management is a Team Sport (And the Team is Only Getting Bigger)
Airline revenue management and pricing have worked together since the beginning. Pricing establishes a hierarchy of competitive fares and rules that limit dilution, and revenue management, or inventory controls, maximize revenue for those fares. Other key commercial functions include schedules, marketing, loyalty and sales, each of which impact, and are impacted by, revenue management processes and performance. Operations too, must work closely with revenue management, for example, on over-sales. And now a number of newer commercial functions including e-commerce, merchandising, ancillary pricing, and even social media must align with revenue management. Pricing must be aligned with each of these other airline functions, and it cannot operate effectively as a silo. Best practices include shared databases, common objectives and metrics, cross-functional reports, meetings and coordinated action plans.
Revenue Management Must Be Accountable
Airlines track how many sales its reservations agents make and they rigorously track how long it takes a ramp services team to unload an aircraft full of bags. But many airlines have much more difficulty measuring the value-add of a revenue management analyst. Revenue performance on a particular flight is the result of so many factors outside an analyst’s control and in general, “the model” (the revenue management forecast and optimization model) makes the key decisions. Best practices, however, require accountability.
There are a variety of sophisticated statistical metrics that are intended to highlight analyst value-add. Focusing specifically on forecast accuracy – a key responsibility of demand analysts – there are metrics that calculate both total forecast accuracy and forecast “value-add” of the analyst (how much his/her interventions in the model improved accuracy). A “revenue opportunity” model calculates missed opportunities when for example, seats went out empty or alternatively too many low fare seats were sold. Despite the logic of these metrics, there are few standard, industry-wide approaches for such statistical measures.
More simplistic metrics for analyst accountability, in addition to unit revenue changes, include frequency, and documented logic for model interventions. More qualitative measures include individual expertise in analytics and participation in group and interdepartmental discussions.
Revenue Management and R&D Must Be Tied at the Hip
The industry continues to change and over the past decade we’ve seen new reliance on ancillary fees, the proliferation of branded fares, a new “basic economy” fare category, as well as the growing competition from ULCC’s, Middle East airlines, niche players, and the growth and maturation of global alliances, and ATI-protected joint ventures. Just as the industry isn’t staying still, revenue management within any individual airline cannot be static. Progress requires working closely with airline revenue management vendors on industry initiatives. While vendors are often being pushed by multiple airlines to help solve challenges that apply across the industry, they have tremendous R&D resources to apply to such industry changes. But at the same time, no airline can rely completely on revenue management vendors for the enhancement or adjustments necessary given each airline’s specific competitive and marketplace situation.
“Best practices” in the end are a set of processes. Airlines have historically invested heavily in revenue management systems expecting significant revenue gains. However, revenue gains are highly dependent on how each airline approaches and manages its system. Best practices include team collaboration, analyst and department accountability, and ongoing improvement through R&D.