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AIRLINE REVENUE MANAGEMENT

TABLE OF CONTENTS

Introduction .......................................................................................................................................................... 1

Module 1 Introduction to Revenue Management ........................................................................................... 5


1.1 Deregulation in the Airline Industry ..................................................................................................... 6
1.1.1 Airline Deregulation ................................................................................................................ 6
1.1.2 Effects of Deregulation........................................................................................................... 6
1.1.2.1 Hub-and-spoke Networks ...................................................................................... 7
1.1.2.2 Increased Competition and Discounted Fares ...................................................... 9
1.1.2.3 Frequent Flyer Programs ..................................................................................... 11
1.2 Why Do We Need Revenue Management?...................................................................................... 16
1.2.1 Perishable Capacity ............................................................................................................. 16
1.2.2 Seating Capacity and Variations in Demand ....................................................................... 17
1.2.3 Variable Pricing and Market Segmentation.......................................................................... 19
1.2.4 Basic Revenue Management Principles .............................................................................. 21
1.3 The Role of the Internet .................................................................................................................... 27
1.3.1 How are Airline Tickets Distributed? .................................................................................... 27
1.3.1.1 Airline Reservation Systems ................................................................................ 27
1.3.1.2 Global Distribution Systems................................................................................. 27
1.3.1.3 Fare Distribution Companies ............................................................................... 28
1.3.2 What is the Role of the Internet?.......................................................................................... 28
1.3.2.1 Online Ticket Sales .............................................................................................. 28
1.3.2.2 Increased Competition ......................................................................................... 29
1.3.2.3 Challenges and Opportunities ............................................................................. 29

Module 2 Managing Airline Passenger Demand .......................................................................................... 37


2.1 Airline Travel Demand....................................................................................................................... 38
2.1.1 Understanding Variations in Demand .................................................................................. 38
2.1.2 Seasonal Variations in Demand........................................................................................... 39
2.1.3 Holidays and Special Events................................................................................................ 39
2.1.4 Time of Day and Day of Week ............................................................................................. 40
2.1.5 Economic Conditions ........................................................................................................... 41
2.1.6 Schedule Changes ............................................................................................................... 41
2.1.7 Time of Booking ................................................................................................................... 41
2.1.8 Cancellations and No-shows................................................................................................ 42
2.1.9 Price ..................................................................................................................................... 43

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2.3

Demand Strategies............................................................................................................................ 49
2.2.1 What are the Options? ......................................................................................................... 49
2.2.2 Improving Efficiency ............................................................................................................. 50
2.2.3 Adjusting Marketing Variables.............................................................................................. 50
2.2.3.1 Price ..................................................................................................................... 50
2.2.3.2 Product................................................................................................................. 51
2.2.3.3 Place .................................................................................................................... 52
2.2.3.4 Promotion............................................................................................................. 52
2.2.4 Managing Demand in a Competitive Market........................................................................ 52
Forecasting Demand in the Airline Industry ...................................................................................... 58
2.3.1 Importance of Forecasting Demand..................................................................................... 59
2.3.2 Forecasting Demand Based on History ............................................................................... 59
2.3.3 The Revenue Analyst........................................................................................................... 61
2.3.4 Computerised Revenue Management Systems .................................................................. 62
2.3.5 Best Practices ...................................................................................................................... 63

Module 3 Airline Pricing.................................................................................................................................. 71


3.1 Airline and Customer Costs .............................................................................................................. 72
3.1.1 Airline Costs ......................................................................................................................... 72
3.1.2 Customer Costs.................................................................................................................... 73
3.2 The Price Demand Relationship and Inventory Control................................................................. 78
3.2.1 Differential Pricing ................................................................................................................ 78
3.2.1.1 Market Segmentation and Variable Fares ........................................................... 78
3.2.1.2 Pricing and Demand ............................................................................................ 79
3.2.1.3 Price Elasticity...................................................................................................... 80
3.2.1.4 Disadvantages of Variable Pricing....................................................................... 80
3.2.2 Fare Rules and Restrictions................................................................................................. 80
3.2.3 Inventory Management and Pricing ..................................................................................... 82
3.3 Pricing Strategies .............................................................................................................................. 88
3.3.1 How Do Airlines Determine Prices? ..................................................................................... 88
3.3.2 Cost-based Pricing ............................................................................................................... 89
3.3.3 Competition-based Pricing ................................................................................................... 89
3.3.4 Value-based Pricing ............................................................................................................. 90
3.3.5 Pricing and the Internet ........................................................................................................ 92

Module 4 Booking Class Assignment ......................................................................................................... 101


4.1 What are Booking Classes?............................................................................................................ 102
4.1.1 Booking Classes and Revenue Management.................................................................... 102
4.1.2 Evolution of Booking Classes............................................................................................. 102
4.2 Booking Class Basics...................................................................................................................... 106
4.2.1 Assigning Fare Products to Booking Classes .................................................................... 106
4.2.2 Problems with Booking Class Assignment......................................................................... 108

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4.3

Booking Class Structures ................................................................................................................ 114


4.3.1 Independent versus Nested Booking Class Structures ..................................................... 114
4.3.1.1 Independent Control .......................................................................................... 114
4.3.1.2 Nested Control ................................................................................................... 115
4.3.1.3 Use of Serial Nesting ......................................................................................... 117
4.3.2 Other Nesting Structures.................................................................................................... 117
4.3.2.1 Parallel Nesting.................................................................................................. 118
4.3.2.2 Hybrid Nesting ................................................................................................... 118

Module 5 Seat Inventory Control ................................................................................................................. 127


5.1 Seat Allocation per Booking Class .................................................................................................. 128
5.1.1 Discount Seat Allocation Control........................................................................................ 128
5.1.2 Revenue Analyst ................................................................................................................ 130
5.1.3 Revenue Management Systems ........................................................................................ 132
5.2 Economic Approach to Seat Protection .......................................................................................... 136
5.2.1 Expected Marginal Seat Revenue (EMSR)........................................................................ 136
5.2.2 Establishing Protection Levels using EMSR ...................................................................... 137
5.2.3 Exceptions to EMSR .......................................................................................................... 141
5.3 Leg-based Seat Inventory Control .................................................................................................. 147
5.3.1 Terminology Legs, Segments, Origin & Destination ....................................................... 147
5.3.2 Advantages and Disadvantages of Leg-based Control ..................................................... 149
5.3.2.1 Multi-leg Flight Segment .................................................................................... 149
5.3.2.2 Flights Connecting through an Airport Hub........................................................ 151
5.3.3 Partial O&D Seat Inventory Control ................................................................................... 153

Module 6 Spoilage Management .................................................................................................................. 161


6.1 Why Do Airlines Overbook Flights? ................................................................................................ 162
6.1.1 What is Spoilage? .............................................................................................................. 162
6.1.2 What is Overbooking?........................................................................................................ 164
6.1.3 Denied Boarding and its Costs........................................................................................... 165
6.1.4 Overbooking & Revenue Management.............................................................................. 166
6.2 How do You Set Overbooking Limits? ............................................................................................ 171
6.2.1 Calculating and Forecasting No-show Rates..................................................................... 171
6.2.2 Minimising Spoilage and Denied Boarding Costs .............................................................. 172
6.2.3 Overbooking Risk Factors.................................................................................................. 173
6.2.4 Overbooking & Airline Operations...................................................................................... 175
6.3 Other Overbooking Measures and Considerations......................................................................... 182
6.3.1 Pre-departure Cancellations .............................................................................................. 182
6.3.2 Decrement.......................................................................................................................... 183
6.3.3 Multi-cabin Upgrading ........................................................................................................ 184

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Module 7 Group Management ...................................................................................................................... 191


7.1 Group Travel ................................................................................................................................... 191
7.1.1 Types of Group Travel ....................................................................................................... 192
7.1.2 Characteristics of Group Travel ......................................................................................... 193
7.2 Group Request Evaluation .............................................................................................................. 196
7.2.1 What is Group Evaluation? ................................................................................................ 197
7.2.2 Who does Group Evaluation? ............................................................................................ 197
7.2.3 What is Displacement Cost? .............................................................................................. 198
7.2.4 Booking Class Protection and Allocation Levels................................................................ 201
7.2.5 Special Handling Considerations ....................................................................................... 203
7.3 Group Attrition ................................................................................................................................. 208
7.3.1 Group Cancellation Behaviours ......................................................................................... 208
7.3.2 Compensating for Group Cancellations ............................................................................. 210
7.3.3 Hedging .............................................................................................................................. 212

Module 8 Scheduling and Capacity Adjustments ...................................................................................... 219


8.1 Airline Scheduling Process ............................................................................................................. 220
8.1.1 Why is Scheduling Important? ........................................................................................... 220
8.1.2 Network Perspective .......................................................................................................... 221
8.1.3 Timeline and Organisational Perspectives......................................................................... 223
8.1.3.1 Long-term Plan Fleet and Design Network..................................................... 225
8.1.3.2 Medium-term Design Schedule and Assign Fleet .......................................... 225
8.1.3.3 Short-term Current Schedule Management.................................................... 226
8.2 Schedule Design and Fleet Assignment ......................................................................................... 231
8.2.1 Core Schedule.................................................................................................................... 231
8.2.2 Schedule Design Process .................................................................................................. 232
8.2.3 Schedule Design Parameters ............................................................................................ 232
8.2.4 Decision Support Tools ...................................................................................................... 234
8.2.5 Evaluation Criteria .............................................................................................................. 234
8.3 Schedule and Capacity Adjustment ................................................................................................ 241
8.3.1 Ad Hoc Flight Cancellations ............................................................................................... 241
8.3.2 Upgauges and Downgauges.............................................................................................. 242
8.3.3 Special Events Capacity Management .............................................................................. 243

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Module 9 Monitoring Performance .............................................................................................................. 251


9.1 Performance Measurement............................................................................................................. 252
9.1.1 Background ........................................................................................................................ 252
9.1.2 Key Performance Indicators............................................................................................... 253
9.1.3 Sharing Information............................................................................................................ 253
9.2 Establishing and Updating Performance Measures........................................................................ 259
9.2.1 Selecting Appropriate Measures ........................................................................................ 259
9.2.2 Generating Useful Information ........................................................................................... 260
9.3 Performance Measurement Reports ............................................................................................... 264
9.3.1 Using and Creating Performance Reports ......................................................................... 264
9.3.2 Advance Booking Reports.................................................................................................. 265
9.3.3 Passenger Load Factor Report .......................................................................................... 268
9.3.4 Denied Boarding and Spoilage Report .............................................................................. 269
9.3.5 Spill and Stifle Reports....................................................................................................... 270
9.3.6 Flight Management Post Audit Process ............................................................................. 272
9.3.7 Schedule Comparison Report ............................................................................................ 273
9.3.8 Historical Demand Report .................................................................................................. 274
9.3.9 Revenue Reports ............................................................................................................... 274
9.3.10 Forecast Accuracy Report.................................................................................................. 276

Module 10 Product Distribution ................................................................................................................... 283


10.1 Traditional Airline Ticket Distribution............................................................................................... 284
10.1.1 Computer Reservation Systems ........................................................................................ 285
10.1.2 From CRS to GDS ............................................................................................................. 286
10.1.3 Global Distribution Systems ............................................................................................... 286
10.1.4 Distribution Costs ............................................................................................................... 287
10.1.5 Screen Position Bias .......................................................................................................... 288
10.2 Effect of the Internet ........................................................................................................................ 294
10.2.1 The Customer..................................................................................................................... 294
10.2.2 Airline Websites.................................................................................................................. 295
10.2.3 Other Travel Websites ....................................................................................................... 295
10.2.4 Distribution Costs ............................................................................................................... 296
10.2.5 Worldwide Perspective....................................................................................................... 297
10.3 New Business Models ..................................................................................................................... 302
10.3.1 Dynamic Product Packaging .............................................................................................. 302
10.3.2 Unbundled Selling and Buying Up ..................................................................................... 303

Module 11 A Revenue Management Organisation ..................................................................................... 311


11.1 People ............................................................................................................................................. 312
11.1.1 Managing People in an RM Organisation .......................................................................... 312
11.1.2 Job Descriptions and Skill Sets.......................................................................................... 313
11.1.3 Training .............................................................................................................................. 319
11.1.4 Team Building .................................................................................................................... 320
11.2 Business Processes ........................................................................................................................ 327
11.2.1 Interaction with Other Departments ................................................................................... 327
11.2.2 Communication .................................................................................................................. 328
11.2.3 Reporting............................................................................................................................ 329
11.3 Building a Revenue Management Organisation ............................................................................. 334
11.3.1 System-based RM Organisations ...................................................................................... 334
11.3.2 Market-based RM Organisations ....................................................................................... 338
11.3.3 Multi-functional RM Organisations ..................................................................................... 340
11.3.4 Designing an RM Organisation .......................................................................................... 340
11.3.5 Understanding RM across the Airline ................................................................................ 341

Addendum A Closer Look at Low Cost Carriers ..................................................................................... 349

Glossary ......................................................................................................................................................... 361

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