1. Revenue Management
in the airline industry
Paul Rose
Managing Director
Paul Rose Revenue Management Ltd
2. Content
• My background
• The History of Revenue
Management
• Revenue Management an essential
business practice
• Group business and RM
• System selection & implementation
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Paul Rose Revenue Management Ltd
3. My background
• BA 1970-94 in RA, Sales but mostly RM.
• Virgin Atlantic Airways 94-97
implemented RM.
• Rejoined BA 1997-2000 RM& Pricing
• O&D and Oneworld RM projects.
• 2001 M.D. of PR RM Ltd:
• SITA – RI & RM consultant, product manages
range.
• A.R.I.G. – Owner & Chair
• Independent RM Consulting
• Conferences and publications
• IATA
• Calidris – World’s leading RI supplier 3
Paul Rose Revenue Management Ltd
4. THE HISTORY OF REVENUE
MANAGEMENT
Paul Rose Revenue Management Ltd
5. Revenue Management History
• R.M was born from the deregulation of the
USA airline industry in the early ‘70s.
• Pioneered by AA and followed by other “Mega
airlines” who could fund the R&D costs who instigated
first systems = AA, UA, DL, BA etc)
• “People express” a forerunner of LCC
airline the first casualty of “ US Price
Wars” did not have R.M. capability.
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Paul Rose Revenue Management Ltd
6. Revenue Management History
70s - “Reservations / Space control”
Basic control systems
Simple pricing with Few fares in the market place.,
Focus on space not yield, Reservations staff
resourced, US deregulation starts.
Early 80s- “Basic Yield Control”
Better inventory systems
26 selling classes evolve, European regulation
continues hence little competition.
Mid 80s - “Better Yield Control”
RM systems introduced
Yield focus through class hierarchy, deregulation &
new aggressive competition emerge!
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Paul Rose Revenue Management Ltd
7. Revenue Management History
• Early 90s - “Revenue Management”
Route Inventory & Sales Area Pricing begin to
merge, Sophisticated RM systems now available
• Mid 90’s - “Improved Revenue
Management”
Quantum leap in technology - POS introduced,
SBP / Heuristic BP introduced , Codeshare
abounds, more carriers enlisting R.M.
• 2000 – today
Majority of major airlines have a RMS, RM &
Pricing depts merged , focus on costs, profit,
and more aware of competitors
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Paul Rose Revenue Management Ltd
8. Food for thought !
• Yet RM systems are still only used by
approx 45% of the World’s >1300
airlines!
• Revenue Management typically delivers 3-9%
revenue gain, with >11% achieved at some
leading airlines!
• Most unsuccessful RM installations are due to
unsupported business processes, lack of Snr
Mngmnt support, or lack of expertise rather than
system failures !
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Paul Rose Revenue Management Ltd
9. Industries employing Revenue
Management
• Airlines
• Hotels
• Car rental
• Tour operators
• Cruise ships / Ferries etc.
• Healthcare
• Amusement parks, golf courses.
• Theatres, Opera.
• Energy companies
• Advertising & TV companies
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Paul Rose Revenue Management Ltd
10. REVENUE
MANAGEMENT
AN ESSENTIAL
BUSINESS PRACTICE
Paul Rose Revenue Management Ltd
11. Is R.M. the same thing as yield management?
300 seats, full fare $1,900; discounted $1,300; would you prefer:
a) 50 full fare and 250 discounted, or
b) 190 full fare and 50 discounted, or
c) 135 full fare and 135 discounted ?
The one that makes you most money (c) is not necessarily the one
that gives you the highest average yield (b) or the highest load
factor (a).
Revenue Yield Load-factor
a) (50*1900)+(250*1300)=$420,000 420000/(50+250)=$1,400 (50+250)/300)*100=
100%
b) (190*1900)+(50*1300)=$426,000 426000/(190+50)= $1,775 (190+50)/300)*100=80%
c) (135*1900)+(135*1300)= $432,000 432000/(135+135)=$1,600 (135+135)/300*100=90%
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Paul Rose Revenue Management Ltd
12. Airlines without RM
Often only consider Load Factor
Their business driver is to sell as many
seats as possible regardless of price,
dilution or increased costs.
Few limits are imposed, fewer classes
are utilised, and class availability is
often sub optimal.
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Paul Rose Revenue Management Ltd
13. Airlines without RM
• Large numbers of low yielding seats
are usually sold with this approach,
without any protections for higher
yielding late booking clients.
• The assumption is that the higher the
seat factor, the higher the profitability
for the airline, which is incorrect.
• Waste valuable resources with manual
“best guess” of likely demand.
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Paul Rose Revenue Management Ltd
14. Why RM is important
Revenue Management maximizes
profitability by selling the correct
number of seats at various fare levels
based on demand and pricing elasticity
– Sometimes the number of passengers
carried may be lower than when compared
to a simple load factor driven
methodology.
BUT, the result of correctly optimised
number of seats sold, with lower costs,
will still provide higher revenue than an
uncontrolled load factor approach.
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Paul Rose Revenue Management Ltd
15. Why RM is important
Managing an airline’s most important
asset - its perishable seat inventory
Accurately predict future demand
Maximise revenue on every flight departure
by setting optimal inventory allocations,
that reflect the passenger demand forecast
and allows for cancellations and no-shows.
Minimise seat spoilage, spillage and risk of
denied boardings and /or downgrades.
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Paul Rose Revenue Management Ltd
16. RM is important as it
allows a carrier to
• Accurately accept Group business without
diluting revenue or spilling high
individual demand and focus on the best
performing Tour Operators
• Immediate benefit by using Historic data
from the RMS db
• Side benefits such as using passenger
forecasts for Network planning,Catering,
Customer Services resource planning and
future aircraft acquisition.
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Paul Rose Revenue Management Ltd
17. So what is Revenue Management?
• A “must-have” for high-fixed-cost, low-
margin, price-segmentable businesses
• A process of maximising revenue from
perishable products, through the
integrated control of capacity and price.
• Although RMS can now be bought off
the shelf, systems-integration, data-
quality, and business-process-
improvement still remain major
challenges
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Paul Rose Revenue Management Ltd
18. What is Revenue Management?
In other words:-
• Selling the right product
• To the right customer
• In the right place
• At the right time
• For the optimum price
• Via the best channel
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Paul Rose Revenue Management Ltd
19. RM benefits
• Has demonstrated the ability to
generate of 3 – 9% in additional
Revenue
• Better management of group and tour
operator performance
• Better Pricing actions where Pricing and
RM depts are integrated
• Increased speed to market
• Superior Management Information
leading to better decisions
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Paul Rose Revenue Management Ltd
20. The major steps in RM
• Planning
• Produce business plan and set up
flights based on historic
performance with required inputs to
reflect the future.
• Forecasting
• Produce Detailed Forecasts of
Unconstrained Demand for Each
Future Flight Departure
Paul Rose Revenue Management Ltd
21. The major steps in RM
• Overbooking
• Overbook Future Flight Departures Based on
Historic Patterns of No-Shows and Late
Cancellations
• Optimisation
• Determine best authorisation levels for each
Booking Class to maximise a flight’s Revenue
using EMSR (Expected Marginal Seat Revenue
algorithm)
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Paul Rose Revenue Management Ltd
22. Why we need computers for
demand forecasting?
There are too many human biases in forecasting:-
Treat easily available or recallable data as more
significant
Attach higher validity to info which confirms previously
held beliefs, seeking information to support views.
Overemphasise conclusions from small samples:
anecdotal evidence
Conservatism: failing to use new info to significantly
revise estimates
Failure to regress to the mean, extreme values expected
to continue 22
Paul Rose Revenue Management Ltd
23. 5 Key elements of airline R.M.
CABIN SPOILAGE
PROBLEM
– Loss of revenue occurring due to passengers who No-
Show or cancel late on full flights.
SOLUTION
– Identify revenue opportunities available and apply
accurate overbooking levels.
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Paul Rose Revenue Management Ltd
24. 5 Key elements of airline R.M.
DISCOUNT SPOILAGE
PROBLEM
– Loss of revenue resulting from turning away discount
customers because discount seats were not available at
the time of booking, subsequently the flight departs
with a significant number of empty seats.
SOLUTION
– Identify revenue opportunities lost on flights that
departed with a significant number of empty seats, yet
had discount class restrictions at some point prior to
departure, and reforecast and re-optimise future flights.
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Paul Rose Revenue Management Ltd
25. 5 Key elements of airline R.M.
HIGHER YIELD SPILL
PROBLEM
– The loss of revenue resulting from turning away late
high yield demand because too many lower yield seats
were sold early.
SOLUTION
– Quantify the opportunity from flights that fill prior to
departure leaving no seats for higher yield passengers,
and protect on future flights.
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Paul Rose Revenue Management Ltd
26. 5 Key elements of airline R.M.
UPGRADE OPPORTUNITY
PROBLEM
– The loss of revenue from failing to accommodate
demand in a lower cabin from available seats in a
higher cabin.
SOLUTION
– Quantify revenue potential from more accurate setting
of overbooking profiles & utilise adjustment of capacity
between cabins.
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Paul Rose Revenue Management Ltd
27. 5 Key elements of airline R.M.
DIFFERENTIAL PRICING
PROBLEM
– An airline seat can be viewed by a purchaser as a
single commodity, the desire is to purchase at the
lowest price.
SOLUTION
– Differentiate brands ( e.g. First, Business, Economy )
to offer added value and create products within a
brand utilising micro-segmentation of the market
place and price fences ( e.g. Advance purchase
tickets, Corporate rates, Tour operator fares,
Frequent flyer redemption rates etc ). 27
Paul Rose Revenue Management Ltd
28. What is Revenue Management?
MANAGEMENT OF SEAT FACTOR
• Overbooking capacity to ensure maximum
seat-factors with minimal offloads and
downgrades.
MANAGEMENT OF REVENUE MIX
• Cabin mix via market segmentation
• Seat access & Group acceptance.
ADDED SOPHISTICATION
• Sales area mix ( POS - Point of sale )
• Managing traffic flows (O&D )
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Paul Rose Revenue Management Ltd
29. Airline business environment
• High yield business books late, low yield
business books early.
• Average industry No-show rate of 15%,
with variation between 5 - 50% ! Plus
cancellation effects
• Group Management - Materialisation &
Rates
• Multiple World-wide distribution channels
• Many Business segments
• Complex dynamic pricing structure
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Paul Rose Revenue Management Ltd
30. RMS functionality
Unconstrained Demand Forecasting
Optimisation Process using complex
algorithms.
Recommendations with Auto-Pilot
options.
Automated No-shows / cancellation
management
Management reporting
Group evaluation tools
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Paul Rose Revenue Management Ltd
31. Process map
FORECAST DEMAND
PLUS CURRENT BOOKED
PASSENGERS EXCEPTIONS
RECOMMENDED
NET YIELD OPTIMISE AUTOMATIC CRS
CONTROLS
&
GDSs
NOSHOWS &
CANCELLATIONS
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Paul Rose Revenue Management Ltd
32. Daily process cycle
Daily analysis
Performance
Measurement
R.M. systems
Exception
& people reports
Implementation
Forecasting &
Optimisation
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Paul Rose Revenue Management Ltd
33. Overbooking and upgrading
ADVANTAGES DISADVANTAGES
More seat access Full fare passenger
may be annoyed
More passengers
accommodated Frequent travellers will
'play the system'
More revenue
Some passengers not
Passengers more likely suitable
to trade up
Additional work for
Reward for frequent customer service
fliers and card holders
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Paul Rose Revenue Management Ltd
34. Balancing the network
New York Copenhagen
£150 £115
£100 Vienna
London
£175 £65
Paris
San Francisco £275
Johannesburg Paris - New York £215
Vienna - New York £250
(1) All LH flights full = Take local traffic
(2) If JFK, or SFO, JNB empty => Take connecting traffic Johannesburg - New York £425
Danger of “ First come, first served” for many
airlines.
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35. Declining Yield Over Time
Actual versus comparative
2009 - LONDON - LOS ANGELES- FIJI - AUCKLAND - SYDNEY - SINGAPORE - LONDON
1991- LONDON - LOS ANGELES - TAHITI- SYDNEY- BANGKOK-LONDON
1984 - LONDON - NEW YORK- LOS ANGELES - FIJI- SYDNEY- HONG KONG-LONDON
1960 - LONDON - BERMUDA- ACAPULCO- TAHITI- SYDNEY- DARWIN-SINGAPORE-
BOMBAY- BAHRAIN- LONDON
1 1 1
9 9 9
8 9
6
4 2
1
0 0
0
9
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36. GROUP BUSINESS
& REVENENUE
MANAGEMENT
Paul Rose Revenue Management Ltd
37. What is wrong with most airlines
Groups business process
• No economic evaluation of groups
• Limited evaluation of the possible route
itineraries
• Limited estimation and very little
planning of group utilisation rates.
• Response times slow, typically 3-5 days
• No automated monitoring & tracking of
Group bookings
• No comprehensive performance
measurement and no management
reporting
Paul Rose Revenue Management Ltd
38. Results are lost revenue
• Airlines say ‘YES’ - when they should
say ‘NO’
• Which can potentially displace higher-revenue passengers
• Airlines say ‘NO’ - when they should
say ‘YES’
• Which can potentially reduce load factor
• Airlines respond too slowly – clients
shop around
• First airline to offer good rate and space usually gets sale.
Paul Rose Revenue Management Ltd
39. The objectives of a good Groups
system
• Maximise revenue opportunities
from groups by analysing trade-
offs between price, seat quantity &
time
• Provide real-time decision support
capability to perform economic
evaluation on all requests
• Evaluate all possible scenarios for
acceptance
• Create “win-win” situation where
airline remains in control
Paul Rose Revenue Management Ltd
40. The objectives of a good Groups
system
• Convert group data into valuable
decision support information and
reports
• Provide facilities to forecast and
continuously monitor group
utilisation behaviour
• Mechanise mundane manual
processes e.g. contracts.
• Enhance user productivity
Paul Rose Revenue Management Ltd
41. Group Evaluation Business
Process
Receipt of request
Economic evaluation of itineraries
Interactive negotiating capability
Agree on itinerary
Agree on price and terms
Generate the group PNRs
Generate contracts
Input of names
Continuous monitoring through post-
departure
Paul Rose Revenue Management Ltd
42. Ad Hoc Groups decision support
• Forecasting group utilisation (take up)
• Evaluation of complete itinerary
• Determination of minimum acceptance
price for each itinerary option
• Whole and / or break-up of Group across
alternatives.
• Agent commissions
• Free tour conductor passes (dependant upon
carrier’s policy )
• Channel groups toward itineraries with
highest incremental revenue potential
(offer connections)
• Management reporting system
Paul Rose Revenue Management Ltd
43. Series Groups decision support
• Evaluate Series requests spanning
multiple itineraries and travel patterns
• Analyse requests among competing
travel agents and tour operators
• Determine optimal block allocations to
sales offices for subsequent
distribution to individual travel
agents / tour operators
• Monitor all bookings by travel agents /
tour operators from time of acceptance
until departure
Paul Rose Revenue Management Ltd
45. PROJECT INITIALISATION
• Assessing the current position
• No RM at all
• Base inventory controls
• Market segmentation - crude or sophisticated?
• First generation RM system looking towards an
upgrade ?
• What are the business drivers / aims ?
• Size of network, nature of the traffic ?
• Do we need an O&D system?
• Do we compete with LCC’s
• Are we a LCC?
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Paul Rose Revenue Management Ltd
46. PROJECT INITIALISATION
• Needs analysis study.= What is needed,
when, how ?
Options :-
• Independent consultant.
• Software supplier
• Enlist Senior Management support.
• Understand the basics:-
- Forecasting - Optimisation
- Yield - Market segmentation
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Paul Rose Revenue Management Ltd
47. PROJECT INITIALISATION
• Simulations
• Provides proof of concepts.
• Provides insight into current data, uncovers
problems.
• Optimal/Actual/System only/No control
• Requirements & Scope:-
• Understand your current business processes:-
• Strengths, weaknesses, need for change.
• Phased deliveries.
• Budget available - $1 - 10M ?
• MANAGING EXPECTATIONS - Rome
wasn’t built in a day !
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Paul Rose Revenue Management Ltd
48. PROJECT INITIALISATION
• Expertise requirements:-
• RM expert (s)
• Project Management
• Adequate IT dept/infrastructure.
• Budget approval - Don’t underestimate
and include everything !
• Hardware, software, project management costs,
consultancy, training, travel /accommodation
costs, support & maintenance etc.
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Paul Rose Revenue Management Ltd
49. SOFTWARE SUPPLIERS
• Narrowing the field:-
• System Demos
• Range of modules available - RM, Groups etc.
• Integration between RMS and other systems.
• Who understands your business the most ?
• Speak to other airlines, visit reference sites.
• Timescales - can supplier meet desires ?
• Price - best option for what airline can afford,
that matches requirements.
• Upgrade options for the future
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Paul Rose Revenue Management Ltd
50. PROJECT INTIALISATION
• Select supplier.- Sign contract, build
relationships
• Visible Project plan.
• Key milestones, deliveries.
• Track costs, resources.
• Does the airline have the right people
for the future in the R.M dept ?
• What are their current skills vs required future
skills?
• Do they want to be part of the future ?
• Education & training of team.
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Paul Rose Revenue Management Ltd
51. COMMUNICATE !
• Sell the benefits to key internal
partners e.g. Airports, Sales, Revenue
Accounting, Marketing etc.
• Maintain Senior Management
support.
• Utilise all avenues - Intranet, In-
house mag, company journal,
workshops, presentations.
• BUT MOST IMPORTANTLY WITH THE
R.M. TEAM !
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Paul Rose Revenue Management Ltd
52. IMPLEMENTATION
• Start measurements before
implementation.
• Benchmark against old results, against other
competitors or industries.
• Set targets, measure success, at macro/micro
levels
• Systems & People performance
• Improvements in Revenue
• Offloads / Downgrades
• Seat access, speed to market.
• Success milestones - Celebrate &
Communicate 52
Paul Rose Revenue Management Ltd