Getting the Most for That Seat

The realities of today’s airline industry—reduced capacitywith little wiggle room, a greater reliance on fare unbundling and the sale of ancillary services and products—require adjustments in the discipline of revenue management, and major providers of RM technology are developing new tools to meet the changing needs.

Lufthansa Systems believes that more than ever, revenue managers need to take into account how their actions interact with network planning, schedule management, codeshare management and other departments. To that end, the Lufthansa Group subsidiary has rolled out a new Integrated Commercial Platform that it says helps to liberate revenue managers from their silos, allowing them to gain a holistic view of their airlines’ operations. 

Some interfaces exist already, but the ICP takes into account the realities of today’s global competition, according to Senior VP-Airline Management Solutions Ulrike Gall. She says the company is developing more specific interfaces and data exchanges.

The problem, Gall says, is that different people within an airline are likely to be looking at different data, or they see the same data but react differently. For example, a Venice-Paris flight might show a booking spike owing to a major sporting event, so the revenue manager closes out the low-fare booking classes. The schedule manager sees the booking spike and decides a larger plane is in order. A common commercial platform will prevent them from working at cross-purposes.

Among the tools that are being developed in conjunction with the new platform is an Opportunity Finder, which combines information from different systems in different ways. Based on intelligent algorithms, it delivers opportunities for selling more seats.

Every airline has flights that are not performing well and have relatively low load factors. Opportunity Finder first identifies flights with load factors below 60%, analyzing the structure of the competition and market share. It then ranks them to provide the revenue management team a sense of how promising they are in terms of generating demand.

For example, if a flight is performing better in the late-booking market, it is more promising than a flight whose strength is in early bookings. There is a higher probability that the airline’s marketing activities will motivate travelers to buy earlier. If the flight serves a leisure market, Opportunity Finder will rank it as more attractive, since price-sensitive customers tend to respond to promotions. The lower the flight’s load factor, the greater the probability that more seats can be filled through promotions. The revenue manager must, of course, continue to balance the need to stimulate demand with the need to maintain yields.

Over the last five years, pricing and revenue management have been moving closer together, according to Pabitra Bhattacharya, senior product manager-SITA Reservations, Inventory and Revenue Management, who adds that most innovative airlines now are integrating the roles. As part of its investment in the next-generation Horizon passenger management portfolio, SITA is working on two developments in revenue management that will come on line this year and next.

The first is automation of the revenue process to enable airlines to use market prices as one of the key determinants in setting fares. This requires carriers to conduct a thorough market analysis and to decide on their position in that market. Automated rules then are set that use competitors’ pricing as a factor in setting their own ticket pricing. For example, an airline might feel its market position suggests that its seats should be cheaper than a full-service national flag carrier’s. At the same time, it provides more value than the cheapest low-cost carrier in the market. The new tool will monitor all ticket prices and feed the data to the airline’s internal pricing engine to ensure that its pricing falls in between its two competitors’. SITA is developing ways to monitor pricing by route, time of day, how close the booking date is to the flight date and other factors.

It also is working on more complex revenue reporting that will enable everyone in an airline to build a customized dashboard of relevant data, Bhattacharya says. The new tool will apply not only to standard revenue but to ancillary revenues as well.

Revenue management is also a planning tool, he says, while the execution tool is inventory management. SITA is developing an origin and destination-based inventory control system. Built on an open systems platform, it provides financial availability control for requests coming from different sources, including GDS and e-commerce channels. He says the new O&D Inventory model will help to resolve the “gaps” and integration issues that arise from the dissonance between real-time revenue management and conventional legacy inventory systems.

Managing Fare Unbundling

Traditional revenue management is being turned on its head by airline retailing developments, according to Sabre Airline Systems Director-Operations Research Hari Subramanian. The unbundling trend means that the revenue manager no longer is simply dealing with fares, and airlines have sought to satisfy their thirst for ancillary revenues faster than the development of methods to account for them. Sabre is working on tools to determine patterns of customer behavior: What is the propensity for a passenger who pays $300 for a ticket to purchase ancillary services? What services is a passenger likely to purchase if he pays $400 for a ticket?

Developers of revenue management tools to handle the ancillary craze are dealing with a moving target. It’s still a small portion of overall revenue for most carriers, but it is growing “really rapidly,” Subramanian says, and airlines need to know the true value of their passengers.

Branded fare families that rebundle services, such as seat selection, application of miles toward elite status and a checked bag, also present challenges to traditional revenue management. “Ten years ago, airlines had strict fare rules that segmented travelers,” he says. “They used the rules as a proxy, and travelers self-selected.” With the advent of simplified fare structures, “self-segmentation in the marketplace went away,” he says.

Offering the right fare to the right customer remains the goal of revenue management, but in a simplified fare scenario that becomes trickier. Pricing and designing the fare family is crucial, he says, and Sabre is aiming to help carriers get it right. “It’s a big, hot area,” he says. “We need to be involved very early on.”

A third challenge to traditional revenue management is the stronger ties among alliance carriers. For example, Lufthansa and Scandinavian Airlines share costs and revenues on certain Nordic routes. “In this environment, going after every penny may not be the best strategy,” Subramanian says.

A key to dealing with all three challenges is to develop customer-centric revenue management—knowing more about the customer. That is a key component of the new SabreSonic Customer Sales and Services system, he claims. “We think this is where airlines need to be.” Integration of revenue management and customer relationship management can make for a more “comprehensive” commercial strategy.

In an era of shrinking capacity, revenue integrity—the detection and removal of “junk bookings”—is more important than ever. Tony Dinsdale, director-business development for Amadeus Revenue Integrity, says it normalizes and stabilizes the no-show rate, which gives the revenue manager a more stable and accurate forecast. But he cautions that airlines using revenue integrity need to keep in mind that they can’t overbook the way they used to.

“You’re never going to prevent no-shows entirely,” he affirms, “but when you take your existing 15% no-show rate and knock it down to 4% or 5% or less, you have to adjust your overbooking downward.” The result is that customers have a better experience because there are fewer oversales to deal with at the airport. The uncertain fuel-cost environment also makes it more important to remove junk bookings, Dinsdale says. “If I’m expecting a full flight, I put on fuel to account for all that weight,” he says. “If it goes out at 80%, I’ve just wasted all that fuel.”

ARI also can help carriers deal with their ancillary revenue streams. “Because we’re looking at all an airline’s bookings anyway, we can add indicators that departure control can enforce,” he says. Those indicators might show that a passenger is exempt from a checked-bag fee, for example. In the case of fare families, the indicators could identify the services to which the customer is entitled. As more and more airlines embrace the unbundled business model, the ability to generate additional revenue from non-ticket sales is becoming a key differentiator and definitely will play a larger role in future RM developments.