If the most sophisticated airline revenue management systems deliver over 5% more revenue, the return on investment (ROI) can be justified. Any ROI calculation would rationalize the purchase and implementation. Because the leverage on revenue is typically so large, similarly, any module that provides another 1% is a clear “go”.
Or is it? What’s wrong with a simple ROI calculation?
In actuality, airlines frequently fall short of “promised returns” on revenue management system purchases. CEOs, CFOs, and CCOs sometimes choose the most sophisticated option – that is, the most costly – because of the huge benefits possible with these systems. And in fact, studies can document such benefits with select carriers in select periods. However, there is no “one size fits all” approach to revenue management and the CEO/CFO/CCOs who make such decisions often don’t fully understand whether that particular system is one that’s most appropriate for their airline. Executives at airlines know that the “me too” strategy doesn’t work in strategic planning and that every airline needs to have a defensible niche. Similarly, “me too” doesn’t work in revenue management. Here are three important considerations when selecting the “right” revenue management system for a particular airline.
To be successful, airlines must adopt some degree of differentiation in their strategies, whether it’s network, pricing, product, service, or distribution. Similarly, various airline strategies mandate the need for different revenue management systems. It’s commonly believed that the “right” airline revenue management system for a complex hub network should be an O&D revenue management model, while more straightforward and point-to-point schedule strategies should deploy a leg-based system. However, “fit” extends beyond just the network. Airlines in highly competitive markets have greater use for competitive fare monitoring. The ones that rely more heavily on ancillary revenue, require systems that come closer to “total revenue management” than airlines with more traditional pricing. Airlines with branded fares must find systems that accommodate that feature, while those with channel-specific strategies, need revenue management systems that can properly differentiate among channels.
Staffing revenue management is a challenge for many carriers, claiming that the recruitment and training of qualified revenue management analysts is one of the most challenging tasks for airline commercial departments. Airline revenue management requires a unique combination of market-specific knowledge, general business and communication skills, as well as statistical/optimization analytics. For airlines headquartered in small countries there may not be an available skill-set to properly manage a sophisticated revenue management system. A simpler one – with a premium built on ease of use – is more likely to drive more revenue than a sophisticated system in the wrong hands. For example, for many small carriers, O&D revenue management is not going to yield the promised results because it doesn’t make sense for them to invest in competencies and manpower associated with it.
Of course, airlines need a strong ongoing relationship between the vendor and their IT departments to support and maintain a revenue management system. But additionally, given the specific needs of individual airlines, along with a lack of statistical/analytical talent, the off-the-shelf revenue management solution only goes so far. For the larger carriers, partnering with a vendor on new developments or driving such innovations to be developed by the vendor, is necessary to maintain their revenue advantage. On the other hand, smaller, less sophisticated carriers need a different level of vendor support as they will have ongoing training needs, will need to keep up to date on system changes, and will potentially rely even more heavily on the vendor for addressing airline-specific issues. Any assessment of airline revenue management system alternatives needs to include evaluation of ongoing support.
When searching for a revenue management system, a starting point for airlines is to compare the cost with the expected revenue results. However, they need to then carefully evaluate:
- Their specific strategy/competitive situation and the associated revenue management needs
- Their ability to attract and retain the appropriate manpower
- The vendor’s ongoing support
Airline revenue management systems are not “one size fits all.” Each airline needs to assess the system that best meets its unique business needs, objectives and constraints.