The issues and challenges of a pricing system implementation Mike Mooney Received: 14th April, 2003 Midwest Express Airlines, 8744 Nicholson Road, Caledonia, $3108 WI, USA Tel; +1 414 570 3660; Fax: +1 414 570 0199; E-mail: mmooney@midwestexpress.com Mike Mooney has with Express for almost 19 years. He rently responsible for a staff of 11 people and the planning, pricing, scheduling and been Midwest revenue management functions. During his ten re at Midwest Express, Mike has also been responsible for managing the aicli- ne's Operational Coordination Center and its crew planning/scheduling function. Mike also has extensive experience and training in team facilitation and leadership and other aspects of corporate organisational development. Prior to working at Midwest Express, Mike worked in airline customer service and in airline operational coordina: tion for several airlines. Mike holds an FAA Aircratt Dispatcher's licence and has sig- nificant knowledge and experience in air- line operations and US domestic airport slot access issues, Mike holds a Bachelor of Science Degree in Transportation trom the University of Dubuque, Dubuque, lowa Aasraac KEYWORDS: airline, pricing, software, Midwest Airlines, SMG software Midwest Airlines, as a medium-sized, specialty carrier operating in the midst of the highly com petitive and dynamic US domestic market, nst rive for both the cost efficiencies and th market competitiveness of the US. majors and the mew low-cost entrants, Pricing area here this dynamisn is most wh y numbers of fare and rule changes bei With g staff 1's fires are competitive in all markets? The potential for lost revenue is very k Midwest Airlines decided that it was preferab to maintain a small, top-class pricing group bi fo leverage their effectiveness with advanced pport, rather than increasing person nel, with the challenges of retaining efficiency and effectiveness that this brings. This paper describes the process, from both @ husiness a tion viewpoint, thar as followed to impl ment the fare analysis control and tracking system—aitomated fares module (PACTS 1FM) product from SMG Technologies suc cessfully into the Midwest Airlines pricing department, Although this process was com pleted nearly tree years ago and applied speci: fically to the US marker, the lessons learnt and the actions taken are just as relevant today a can also be applied to many of the international BACKGROUND — US DOMESTIC AIRLINE ENVIRONMENT The US domestic airline market is the lar arki most deregulated in the world and one gest domestic 1 of the This ‘survival of the fittest” environment (or jungle ay some call it) currently has 16 ajor and national carriers, Under this is a layer comprisingalmost all of ens of regional: carriers, which are affiliated with one of the majors providing service to the thousands of small and medium-sized communities through- out the country Carriers are fre to price their product in almost they choose. Airline travel distribution channels and systems are changing rapidly, with the traditional world of published pricing and bricks and mortar travel agencies being replaced by various web-based applications and distri~ bution channels Airline pricing methods and price moni- tivities are becoming more com- plex with more than a million fare changes fon certain days and typically approxi- nately 1,000 US/CA rule changes per weekday. This is in the public, published domain only. Together with this, airlines are turning more £0 point of sale and pri- vate fares with distribution — channels and applications growing in number and omplexity All indications are that this ‘continual change’ will accelerate not stabilise MIDWEST AIRLINES IN THIS ENVIRONMENT Midwest alle first-class service concept with appropriate Airlines operates a unique seating and meal service. It focuses on tra ditionally under domestic markets from its hubs in Milwaukee and Kansas City Currently the airline operates © 58 aircraft © online service to 52 cities # code-share service to another 52 cities. This business formula requires that the company maintains a yield premium and very careful tactical pricing, This requires the mance of the fare struc close attention to pricing, are details and to the maint ture in all markets, large and small. Given these internal constraints and the apidly changing marketplace, Midwest was remarkably successful in achieving 15 consecutive years of profitable operation prior to 2001 PRICING DEPARTMENT STRUCTURE AND PROCESS PRIOR TO AUTOMATION Before bringing in the fare analysis e« and tracking system-automated fares module (PACTS-AFM) system, Midwest operated with a very small number of full- time analysts covering all the city pairs in which it published fares. The pre-automation pricing process was up of manual work: made highly _ labour-intensive @ fare and rule activity was extracted from the Airline Tariff Publishing Company through sifting’ all US/CA markets, multiple times pe day fe. screen shots of activity were printed for off-line review © computerised reservation system (CRS) fare (and cond tions) displays were then recessed using individual queries for @ the actions and reactions were manually documented and filed via ATPCO. Such a manual process when faced with typically over 100,000 fare changes per day clearly raised many challenges: © the analysts must focus first on the high priority routes. But these routes consti ture only about 5 per cent of the total published city pairs; @ some connection markets and the secondary routes were in general neglected: @ the reaction time to major marketplace initiatives was unfavourable owing to the shear volume of chan} © analysts, then, were left with little or no time for analysis and strateg© the clear result... lost revenue opportu: nity NECESSARY IMPROVEMENT IDENTIFIED It must therefore be recognised that the company had to implement some level of automation in the process while still main- taining a ‘quality’ pricing product (ie the right fare levels in the right markets at the right time). It was decided to focus on automating the manual processes but retaining an option to integrate with extended decision support at a future time The key issttes to be covered by the system (and vendor) would be © automate fare and rule extraction from ATPCO; @ automate and reduce reaction time especially on high volume days; ‘@ automate the introduction of new initia- tives to the marketplace ‘© the implementation of a historical fares database so that last year/month etc fares could be queried and cha provision of report @ an environment that would support analytical projects; @ the selection of a system that could evolve with time and as Midwest Airlines itself evolved, These requirements were documented and detailed. Then the company moved on to the next step. VENDOR SELECTION AND SEARCH There were several points that needed cov in the vendor and product search First, the available products were reviewed and demonstrated to see how well the pro- duct matched the requirements. Bue the product docs not stand by itself. Just as important was the responsiveness of the vendor Do they understand the “business problem’? Too often, vendors try to sell a product when they themselves do not really understand the business problem. This leads to so-called features’ that are not very useful and to basic fimetionalities that are missing. Is the vendor (and the product) flexible All different and their The produce and the vendor must be able to adapt to the specifics of the airli- he’s situation. This is unfortunately not always the case, bles’ Intangibles? Ultimately such a decision lays the foundation for many years of airline and staff ‘intangibles’ of cooperation between The comfortable such a long-term relationship. vendor must be with Fundamental to the final decision, how- ever, is the price/payback equation, The selection must make business sense and the product must deliver benefits that pay back the investment in the short term. Eventually, the search narrowed down to a set of three vendors with four products which, though stand-alone, had the capabil- ity to integrate later with other systems (eg When the offerings, vendors and prices were looked quickly eliminated two of the vendors for at in detail, this selection process various reasons: either cost exceeded bud or there was insufficient capability This left one vendor whose product although in carly development st appeared to be best fit for business need, in terms of both functionality and price NEXT STEPS In mid-1999, Midwest selected SMG Tech~ nologies as the Ieading contender for the provision of the system and, as a first step asked them neering, study towards this, to conduct an The objectives of this