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Revenue Management is a key backbone to airline profitability.
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But what is it that is actually being done?
If an aircraft is missing wings, everyone will notice, but if RM is not the real thing, who will tell? For most people in the company, RM remains a mysterious black box.
Consequently, the label Revenue Management is often a practical overstatement.
For instance, there is still a large group of airlines that run little more than static buckets. Some out of inertia, others because they take pride in keeping things simple. Both miss out on the dynamics of the market.
A larger group of airlines -and systems(!)- focus on load factor optimization and competitor fares. Besides that a high load is not the same as a good profit, such practices are killing for yields.
A smaller group of airlines will apply more sophisticated seat protection algorithms. Still most will sub-optimize single sectors or have a poor answer when the market will not fill the flight and there is nothing to protect the seats from.
All these approaches are called Revenue Management, but they leave serious gaps.
The first misunderstanding starts with the name Revenue Management -or Yield Management-. Both are confusing terms, because in fact what we want is maximum profit contribution; the earnings that are left after deduction of direct traffic related costs.
With the costs, fees and taxes of today, there’s quite a difference between what the passenger sees and what the airline gets.
Both are relevant for RM; the first because it drives market behaviour and elasticities, the latter because it determines company profits.
Many RM processes mix up these values and do not distinguish between the elasticity effect and the profitability effect of a fare level.
Blend this with another counter-force that comes from our own intuition, which tells us that full flights are good business.
This triggers stimulation reflexes when a flight forecasts below the capacity of the aircraft.
Stimulation might work at times to get a higher load, especially in the lower fare ranges. However, that’s exactly where the above mentioned gap between fare and profitability effect grows exponentially.
Very often, the extra traffic won’t make up for the collateral price dilution and the only result is that yields on the already weakest flights in the network are driven down.
Policies like this ignore the fact that the vast majority of flights can never be 100% full, whatever we do.
In this light, there is one factor in RM that gets too little attention: the earning power of the combined sales channels.
There is always a fare level that produces optimal profit contribution. This fare level is not a constant but varies throughout the sales period, depending on demand and price acceptance levels in the market.
Everyone knows the common practice to close the lowest buckets in the last few days before departure, which reflects this logic.
But how many RM processes structurally measure sales channel performances as function of the displayed offer and the day of sales ?
This while for the vast majority of flights, the optimal contribution flow generated by the sales channels is the only real constraint for profitability. Regardless of the available capacity and final load.
This kind of optimization should be a corner-stone in RM processes.
In many cases it would result in the opposite of stimulation: Counter-intuitive pricing but better profits.
Another factor that can seriously hamper the effectivity of RM efforts, is optimizing single sectors.
This is sub-optimization and the nasty thing about sub-optimization is that it could work out in line with overall network profits, but just as well can be counter-productive. Flip a coin.
Even in a strictly point-to-point network, all the frequencies of the day –or the week- comprise an interdependent offer to the market.
For this reason they are presented together in the booking engine, so this is also how the pricing package should be designed.
In more complicated networks, with a mix of local traffic, thru-flows and connections, displacement effects ruin the validity of easy solutions. Only O&D based optimization, with network-wide bid pricing on the available seats, gives real answers.
Great bottle-neck for many airlines is that the average reservations systems does not support this, unless implementing a complicated work-around.
Even with the right methods, human intuition is a vital part of the RM process.
This requires a delicate balance. Each Revenue Management team has it’s own dynamics and focus.
Routines easily settle in. Too many teams concentrate on individual flights, implicitly taking global parameters for granted. This while keeping those parameters up to date is critical.
Further, it’s not that RM never gets challenged; from all sides, there’s always pressure on the fares, especially if they are counter-intuitive. But that’s not the kind of pressure that takes optimization to a higher level.
If management does not provide strong backing, the RM team will always be in defense and cannot take profit optimization to the edge.
This brings us to the most important success factor in RM: Top Management Attention.
RM policies touch the commercial heart of the company.
Yield is not just some greater natural force that falls upon us, but also the fruit of fundamental decisions.
It really makes a difference for the company which methods are used and which policies are applied in Revenue Management.
RM Departments need strong backing and guidance in this, while managers need to be aware of the details to assure themselves that the process is truly optimizing profits.
