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Most people see full aircraft –yes it will happen again!- as the ultimate token of an airline’s commercial success.
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This illustrates the challenge that airline managers face to pick the right KPI’s for their commercial organization.
Defining whether a sales deal is good, is just not that easy. Also more rational parameters like revenue, or the more artificial rpk/rtk, have serious limitations.
The only figure that really counts is company profit and more revenue or a higher load factor simply do not always align with that.
The prominence of the two in the steering of departments like Sales, Marketing or Revenue Management is causing needless cash bleed for airlines.
The reason for this is that in most networks, the real fight for profits is not on the full flights but on the partly filled flights.
Sales forces tend to gravitate their efforts to peak seasons, while revenue management is at its best when demand exceeds capacity; its most sophisticated algorithms center on capacity protection.
The environment, from management to shareholders and public, does not seem to recognize that 100% load is a utopic target and that higher loads are not always in the best interest of the company. More . . .
In most airline networks, partly filled flights are the rule, yet the common reflex hardly surpasses stimulation of demand via reduced fares.
Mathematically, there are important differences between optimizing flights that are forecast to be full and those that are not expected to.
That is because on a full flight, an optimal revenue is pretty much equivalent to optimal profits.
Not so on partly filled flights.
On those, because of the growing share of traffic related costs, more revenue does not always mean more profit.
Due to both an increase of various fees and a constant drop in overall fares, the traffic contribution, or the amount that remains for the airline to cover its other expenses, can be quite different.
Thus, especially in the more competitive fare zones, a marginal reduction in fare can effectively decimate contribution.
Taking an example from the daily practice of revenue management, this can easily imply a situation where a 70% load can have a higher contribution to profits than a 95% load in that same market.
Details . . .
In order to avoid this, commercial optimization must zoom in on unit traffic contribution.
A second corner stone in optimizing poorer flights is that as soon as flight capacity is not a limitation, the new bottle-neck to profits is the capability of the company to sell.
There is only so much that a commercial team can achieve and there is a limit to the number of potential clients that can be reached via the combined sales channels.
So while we always hope for miracles, the potential sales performance of each fare is quite predictable. It will vary per flight and develop over time until flight date. It’s perfectly possible to plan a fare development on that basis, that will generate the highest contribution regardless of the available capacity and final load.
This knowledge drives experienced revenue managers; just look at how they will squeeze out the lowest fares in the final days before a flight.
However, the practical implementation of it is mostly done via a business rule override; a patch. Most RM systems don’t even support adequate forecasts per fare level.
A crucial parameter like the sales rate per fare level is rarely measured and, together with unit contribution, it is prominently missing in the reports & algorithms.
This poses a dilemma for airlines. Getting sales priorities right is a rare painless option to shore up profits; no luxury in these times.
However, it will take changes in basic conduct within the organization, as well as in the communication within and outside the company.
The parameters in use to measure performance need to be updated, revenue management methods refined and the systems will need to follow that.
Besides the effort to make this change, both in practical terms as in mindset, there will be backlash due to counter-intuitive pricing and negative trends on some of the old KPI’s.
That’s where top management has to be on the same page as they will need to lead the organization in taking commercial policies to new levels.
