New pressures — like skyrocketing passenger expectations — are forcing carriers to refine their strategies.
Aircraft receive heavy maintenance checks. Flight crews undergo regular line reviews. Why aren’t more airlines doing the same for their revenue management function?
Competition, globally, between airlines, with multiple business models and products, coupled with the rapid changes in market and competitive growth, requires that pricing and inventory management are optimized and respond quickly to change in the marketplace to achieve financial success.
A Brief History of Pricing and Revenue Management
In the early 1980s, the first major wave of low-cost carriers (LCC) entered the aviation market. For passengers, these carriers offered unprecedented convenience and lower fares; for major carriers, though, the entrance forced a monumental shift. To keep up with their cheaper competitors and preserve long-term relationships with customers, major carriers would need to figure out a seemingly impossible equation: how to stay competitive with the LCCs and still get passengers to pay the highest possible price.
British Airways (then known as BOAC) and American Airlines were among the first to do just that. The carriers designed an approach to revenue management that could increase total passenger revenue by applying various analytical techniques to forecast demand at various prices and optimize the sales mix of lower-fare and higher-fare passengers. This new practice gave legacy carriers the competitive edge they needed to go head-to-head with early LCCs (such as PeoplExpress) by selling some seats at or below the lowest fares charged by the new upstarts; specifically, seats that wouldn’t have sold at a higher price.
The strategy paid off. American Airlines’ revenues increased by 14.5% and profitability by a whopping 47.8%, setting the stage for a practice known as comprehensive pricing and revenue management (PRM).
Pricing in the Modern Era
Since that first successful foray into PRM, new pressures — like skyrocketing passenger expectations — have forced carriers to continuously refine their strategies.
For instance, intermediary booking resources (e.g. sites like Travelocity and Expedia) have made it easier for those passengers to shop around and compare fares — and exerted more pressure on carriers to get that pricing right. Selling a seat at a lower price is better than not selling it at all — those seats become worthless as soon as the plane departs — but airlines also can’t participate in a race to the bottom. Selling too many low-priced seats to passengers otherwise willing to pay a lot more could dilute overall profits.
Even the largest and most sophisticated of airlines can find that the most effective PRM practices have eroded over time. At United Airlines’ 2016 Investor Day, President Scott Kirby noted that “If we've decided to close inventory in a flight, two-thirds of the time an analyst is overriding the system and hand managing. So, two-thirds of our flights are getting hand-managed.”
The Missing Piece(s): Why So Many PRM Approaches Fail
Effective PRM practices are supported by three separate but equally important pillars: people and process, technology, and strategy. And while nearly all airlines maintain some sort of PRM effort, most focus too much on one pillar or another — instead of considering how all three need to work in concert.
As a typical example, often an airline will become convinced that it requires the latest and greatest RM technology with the latest forecasting and optimization techniques (for example, one with full O&D controls), but fail to provide sufficient training and support to their staff.
The team might be able to use the most basic features of that expensive system, but not the customization options and more detailed levers that warranted the system’s high price in the first place. On the flip side, an airline may invest in a well-qualified and continually trained workforce, but underinvest in the technology and select a cheaper alternative that does not provide all of the features needed by the airline.
In other cases, the airline is willing to make the technological and personnel investments, but lacks the historical data necessary to configure and calibrate these systems, the IT infrastructure to collect such data moving forward, or the business model requiring O&D. At best, this cutting edge technology will go unused; at worst it will be applied in a faulty (and likely costly) manner.
Even in departments with appropriate technology and well-trained, skilled staff, hurdles like insufficient process controls, inadequate feedback loops, and inconsistent reporting and execution standards can short-circuit comprehensive PRM approaches. Different analysts may work the same market situation in different ways, with different goals in mind, thus achieve significantly different results.
Senior level management may even be setting goals that are in direct opposition to effective PRM; for example, focusing solely on improving load factors or increasing passenger revenue per available seat mile/kilometer rather than the broader PRM strategy of maximizing total passenger revenue by successfully balancing these two key factors.
Obtaining the Full Benefits of PRM: Questions Carriers Need to Ask
Revenue management software systems are specifically designed to manage the high volume of forecasting and optimization required to maximize unit revenues in a near real time environment. Here are a few questions airlines should be asking to make sure they have all of the pieces in place.
People & Process
- Are our human resources aligned with our needs?
- How effective are our management reports?
- Do we have sound training methodologies to handle staff turnover?
- Is the RM system producing effective and accurate forecasts?
- Do users work with or against our RM system?
- Are we technologically positioned well for today and the future?
- What is our competitive landscape?
- How does our RM strategy align with our overall commercial strategy?
- How do ancillary sales factor in to RM and pricing strategy?
People & ProcessWhile today’s PRM environment highly leverages technology, people remain a key component of the entire system, both to monitor and direct these complex IT systems. And while most individuals naturally want to succeed at what they do, it is critical to make sure that PRM staff have the right knowledge, experience, and guidance to best accomplish the goals of PRM. From the departmental organizational structure and training curricula to processes for testing and experimenting with new strategies, it is important to examine the people and process factor.
TechnologyWhile all revenue management systems work off of the same principles, they vary widely in capabilities, complexity, and algorithmic breadth. Importantly, however, not every airline requires every bell and whistle—indeed, there are likely only a few dozen airlines worldwide that gain benefit from the most complex and expensive systems available. Of course, choosing an appropriate RM system is only one piece of the puzzle. The system must be fed accurate data, and forecasts and optimization algorithms must be tuned appropriately, to generate optimal results—uncalibrated or poorly calibrated systems can actually result in a revenue drag for an airline. These are just a few of the elements that need to be verified when examining an airline’s PRM technology.
Most importantly, but perhaps most often forgotten about, is ensuring that an airline’s PRM strategy is both aligned with the management and fiscal philosophies of the airline while developed enough to achieve positive results. From establishing basic KPIs to monitor performance to having playbooks on how to handle new developments internally and from competitors, whether it involves a change in frequencies, launch of a brand new market, or even an entire change in strategy (such as the launch of basic economy fares). Further, as the airline industry becomes ever-intertwined around the globe, the passenger and financial impact of codeshare, alliance, and joint ventures must be evaluated to ensure continued positive contribution for each participant.
What are other components of pricing and revenue management that have optimized unit revenue production? Let us know on Facebook or LinkedIn.