airline revenue management

airline revenue management

Optimizing Airline Revenue Management Strategies

1. Introduction to Airline Revenue Management

Each company that presents product and service pricing and sales in time in such a framework must also be capable of successfully procuring as much income as it can manage from this system at a satisfied cost. It is enterprise in producing income after the product is established, i.e. it is the choice that the best income for the enterprise can be provided. If a product is not a particular product, it is not possible to procure income. In the area of services, the superior money capture is often understood to be the provision of a fast, high-quality, and individualized service, but such an understanding varies depending on the service. No matter what it is, the intent is generally understood as the capture of the highest margin, but it can also be high volume or the mix of these two income capture options.

Today’s technological advances help airline companies perform more efficient and effective revenue management capabilities in sync with a demand-driven economy. Airlines employ various probabilistic booking models to determine estimated booking trends and group bookings of different classes. These models use the job of overbooking, dynamic adjustment of open class, and expected marginal revenue as optimizing objectives to close groups. Demands for perishable air travel inventory are dynamic and related to factors such as proximity to the flying day, time frame for the event, time frame for booking, and stay time for both destination and origination. If these factors are associated with supply and demand, it is apparent that pricing and distribution turn into tricky functions, and dynamic methods are required to satisfy demand as effectively as possible so that the available revenue opportunity is reflected.

2. Key Concepts and Techniques in Airline Revenue Management

Another critical decision concerns overbooking acceptance levels – the probability of accommodating all reservations accepted for sale subject to overbooking constraints. Traditionally, overbooking limits are set for single leg instances based on estimated no-show probabilities and compensations vary as a function of the traveler’s choice characteristics. Up to now, in most airlines, these inventory control decisions are decentralized and assigned to individual senior revenue managers. Inefficiently enforced control strategies can cause substantial revenue losses, so mobile closed-loop pricing optimization systems are put in place to assist decision-making under the high complexity and dynamic routing environment of the airlines and railroad sectors. In addition to closed-loop decision support, manual controls and full-information static models are used to calibrate pricing performance in both contexts.

Airline revenue management has been studied extensively in the academic literature over the past four decades. The most widely studied problem is the capacity control problem, where a given number of seats have to be sold over a multi-period planning horizon. Based on historic demand data and their understanding of the underlying booking process, revenue managers play a key role in determining over which flight departures demand has fallen enough to accept cheaper reservations to stimulate lower-fare demand, or over which flight departures demand is so strong that only high-fare reservations are accepted and lower-fare capacity is closed.

3. Challenges and Opportunities in the Airline Industry

While on-board service requirements are tailored to the major categories of UIS emanating from the bookings, the on-board environment itself is experiencing a number of modifications in response to cabin factors such as the parallel growth in first-class and business-class cabin space, the increased usage of first-class lounges and related facilities at departure and arrival airports, and the provision of in-flight work and entertainment equipment in the more expensive seats. These changes should produce higher yields from premium passengers, but whether they will attract enough additional high-yield traffic to fill the extra seats (or to pay the relatively low club fares charged for the unsold seats between each pair of premium-grade passengers in first and business class) must be determined by research. Keep in mind that heightened competition and overall cost sensitivity are likely to cause the airlines to equate the RPS advantage to the income possible from premium passengers, if the RPS is indeed as high as it seems. The frequent flyer, whose loyalty is in reality to various additional services or cross-alliance positive discrimination, receives the benefits of these investments.

Today’s airline industry operates in a business environment previously unknown. In deregulated markets, airlines have to be ready and able to react quickly to constantly changing market conditions. Load factors and average yields are closely watched management targets, and individual airlines are becoming increasingly effective in managing their capacity and revenues to maintain and increase their market shares. Customers have grown with the airline industry and they set high standards for service at the lowest possible cost. At the same time, the airlines are extremely price-sensitive, which makes revenue maximization a precarious balancing act. The consumer’s additional leeway is an open channel for many different distribution channels. The large number of booking classes and restrictions makes it increasingly difficult to calculate the revenue from a single booking (e.g. frequent flyer usage, coupon order transactions). The simplicity of revenue accounting from a single fare class breaks down, and the potential for revenue maximization is high. In practice, several hurdles have to be overcome.

4. Case Studies and Best Practices in Airline Revenue Management

This presentation explains the principles of RM and shows how real-world companies use them. It covers key concepts from the theory and practice of Revenue Management and describes the risk inherent in making predictions (forecasts) and implementing them in a dynamic and uncertain environment. With the increasing demand for delivering professional services that offer immediate commercial impact, this implementation will concentrate on cases of business-to-consumer industries, such as passenger airlines.

Revenue Management – Case Study

In this section, we introduce the readers to optimization models and interesting case studies for Airline Revenue Management.

Case Studies and Best Practices

Information and communication technologies offer today unseen opportunities for the air transport industry. Airline reorganization is playing a critical role, considering the integration and strategic use of advanced electronic ticketing, sophisticated revenue accounting and reporting, iterated and next-generation systems. Marketing and Distribution Channels are also tightly associated and must be provided into the company’s business model. Pricing, negotiation strategies, decision-support tools, inventory control systems, and revenue optimization methods have also a major part in offer management and control in such an industry.

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5. Future Trends and Innovations in Airline Revenue Management

The NGS will give the pricing pressure a better knowledge of the system and how real customers are purchasing valuable last-minute inventory, may very well allow airlines to increase the proportion of inventory protected at a higher fare due to the reduction in overbooking, and will enable more effective changes and communication strategies as soon as it is clear that revenue expectations are not being met. This will be a meaningful change.

The NGS are the result of the evolution towards a better strategic decision making and profit optimization platform. The development of new and more robust optimization models and the willingness to experiment with new revenue streams have opened up a flexibility and responsiveness in the commercial department’s tool set which can deliver real profitability to the bottom-line. This is a world away from the image of revenue management as an arcane practice only understood by the chosen few.

Next generation systems (NGS) will enable a revenue manager to make the right decisions based on valid data about real passenger behavior. They will enable what-if analysis to predict how a change will affect performance and enable a range of users from senior management to marketing managers to effectively use revenue management to shape sales and marketing strategy.

The discussion of Airline Revenue Management (ARM) cannot be concluded without mentioning next generation systems which are expected to change the way airlines manage revenues in the future. Next Generation Revenue Management Systems are not simply an optimization program in search of extra user-friendliness. They are a much broader package of tools and planners which will deliver the real potential of revenue management, and in doing so, bring a wide-ranging commercial advantage to airline management.

5.1. Next Generation Systems in Airline Revenue Management