Many airlines find it challenging to the question ‘What is the optimal organizational structure for revenue management?’
In the January 2017 quarterly call with investors, American Airlines’ VP of Revenue Management, Don Casey, spoke of how they had undergone a major re-organization in 2015 to improve revenue performance, and that they were still adjusting. American Airlines, of course, has been a leader in airline revenue management for over three decades yet they, too, had concluded their organizational structure could be improved.
So, let’s review some organizational approaches for airline revenue management. In a leg-based system, there are two main functions, pricing and inventory controls. Each of these are potentially less aligned with one another than with some other commercial departments, namely sales and schedules, respectively.
Pricing is highly focused on monitoring the fares of competitors and insuring competitive pricing. A fare is typically filed for all O&Ds, across all fares types – often a large task. Pricing may be organized geographically by point of origin since, for example, originating customers represent a single currency, a few large corporations may account for significant business traffic (and merit special corporate pricing), and also since competition may vary significantly by point of origin (an airline may dominate its hub and close-in points but have tremendous competition in a more remote spoke city). Pricing is also often aligned with sales and marketing.
Inventory controllers utilizing a leg-based airline revenue management system must forecast demand by flight by fare level. Low fare demand receives lower availability, allowing higher fare demand to get scarce seats. Controllers monitor demand and adjust seat inventory accordingly.
Inventory controls, set up by flight, match the orientation of schedules which must likewise forecast demand by flight. Thus, a typical leg-based airline revenue management organization would be set up like this, with geographic or regional sub-departments within a primarily functional organization.
An O&D airline revenue management organization becomes more complex. Typically, an O&D system requires another function, in addition to pricing and inventory controls.
Demand forecasts must be constructed by O&D, by point of origin, by fare level, and by time of day/date. This O&D forecasting is different from the flight-level and route-level forecasting performed by leg-based inventory control analysts. Each flight, in fact, could include 20 or more O&D’s, connecting across multiple regions. Since this can easily become unwieldy, demand forecasting is typically performed only for the largest markets. The 80/20 rule often applies, and forecasts only cover markets that represent 80% of the traffic/revenue on the route. In this case, the inventory controllers are still responsible for seat allocation but they base the allocations on the O&D demand forecasts provided by the demand analysts.
A basic O&D airline revenue management organization again separates the key functions first and then, within each function, has geographically-oriented sub-functions.
Unfortunately, separation of “demand” from “inventory” diffuses accountability for unit revenue. Only accurate O&D forecasts, potentially spread across many demand analysts, will allow the controllers to properly allocate seats across demand segments. Ultimately, the inventory allocation drives the unit revenue, revenue per ASK, and the demand analyst must be held jointly accountable for flight revenue.
Having said that, the standard organizational structure for O&D airline revenue management can silo demand forecasting and inventory controls resulting in poor communication and reduced accountability. There are many alternative solutions, but none is truly ideal.
For example, the O&D organization could bring demand forecasting and inventory controls closer together, by region.
Obviously, this doesn’t perfectly align the functions and offer clear accountability. In fact, half of the traffic on any given route will likely originate outside the spoke city so this organizational solution doesn’t bring back total responsibility to one team (also note: the organization above includes a separate “hub” team to forecast demand originating at the hub city). But forecasting and inventory are closer together and jointly the two functions can work together to maximize revenue on an individual route basis.
The restructuring of American Airlines may in fact address some of the accountability issues that exist in typical airline revenue management organizations. However, there is no perfect solution. Whatever formal organizational structure is established, there remains a tremendous need for pricing, forecasting, and inventory controls to work closely together and to approach optimal revenue collectively. There is a critical need for shared reports, for joint performance metrics, for regular cross-functional meetings, and for other such integrating mechanisms.
Airline revenue management organizations require tremendous integration and communication, both within the department and with related departments. Although there is no single organizational solution, every airline revenue management function needs to be built around cross-functional coordination and communication.