Merchandising: Behind the Scenes

Revenue Accounting, Back-office Processing And Business Intelligence

More-effective revenue accounting and back-office processing is fundamental to the success of an end-to-end airline merchandising strategy. Combining historical revenue accounting data with business intelligence and advanced analytics allows airlines to obtain valuable insights into customer behaviors and preferences as well as strengthen and refine their overall merchandising strategy.

Describing revenue accounting and recognition as an integral step in an airline's end-to-end merchandising strategy may raise a few eyebrows. Merchandising is dynamic, fast-paced, proactive and competitive. Revenue accounting and recognition are back-office functions — slow, tedious, time consuming, and yet precise. But when evaluated and utilized correctly, revenue data is highly beneficial to airlines in the development and adjustment of a comprehensive merchandising strategy today, and it will become increasingly critical in the future.

Prior to the development of global EMD standards, airlines sold ancillary offerings as miscellaneous sales requests. In theory, each ancillary was charged to a different account, and at the end of the month or other specified time, revenue accounting would tally each category. While a carrier could calculate with some accuracy how much total revenue was generated in each category, for example, premium seats or onboard meals, it was virtually impossible to associate the ancillary sale to the originating customer, market or flight. As well, travel agencies and other travel retailers did not have the tools necessary to sell or track ancillaries.

In addition, ancillaries were usually sold somewhat randomly and often on the day of travel, so airlines made little effort to establish a precise, standard process for tracking the specific details of each sale. However, once it became clear that travelers would indeed pay extra fees in advance for the product and service offerings they value most, ATPCO, working with airlines, realized the need to accurately track ancillary revenues and link them to the specific customer, market and flight segment using industry standard data files. IATA also saw the opportunity to complete its Simplify The Business initiative with the objective to sunset all non-electronic document types.

As mentioned in related articles in this section of Ascend, EMD standards are not merchandising in and of themselves. However, they are an enabler in that they:

  • Provide a uniform process for the handling of ancillary offerings across all distribution channels,
  • Promote a paperless environment,
  • Reduce costs,
  • Eliminate fraud by creating an electronic audit trail.

For airlines globally, the result is more- efficient revenue accounting and back-office processing that enables them to track and attribute revenues faster and more accurately. Additionally, it supports merchandising strategies by efficiently delivering historical and current data for analysis and planning, which means a significant increase in the amount of raw data now available to airlines. Data, however, is of little value unless it can be read, interpreted and used to make strategic and tactical decisions.

Data from global distribution systems, airline websites and agency sales reports — including irregular operations, segments flown (with associated ancillary revenue information) and interline sales — is automatically captured by airline revenue accounting systems using standardized files to support rules-based revenue recognition. In the future, near real-time revenue accounting reporting capabilities will deliver even greater amounts of information more efficiently.

Robust revenue accounting solutions allow carriers to upload these files to organize, store and extract data. However, this is not where the merchandising process ends. In fact, merchandising is a cycle, and when historical revenue accounting data is combined with business intelligence in conjunction with data mining and advanced analytics, airlines can gain valuable insights into customer behavior and preferences.

The results can strengthen and refine a carrier's end-to-end merchandising strategy. Even further, the data can be used to gauge the performance of each distribution channel, identify those that are under performing and better understand the overall "health" of the marketplace. And, into the future, the data will be increasingly used to make real-time pricing and revenue management decisions, similar to the way it is used today for seat inventory.

To develop and maintain an effective merchandising strategy, airlines, similar to most retailers, must employ some level of business intelligence. Simply defined, business intelligence is the use of internal and/or external industry data to help make strategic and tactical decisions that improve profitability, competitive positioning and revenue, and lower costs. The alternative is a "trial-and-error" approach, which is often quite costly and depletes resources unnecessarily.

The successful use of business intelligence is dependent on a combination of several factors, including:

  • The accuracy and newness of the data (as well as its depth and breadth),
  • Availability of a single, dependable source for data warehousing,
  • Types of solutions used to "mine" and analyze the data,
  • Quality of consulting and training provided to interpret the data.

Most areas within an airline use some facets of business intelligence to support daily operations.

Technology providers with expertise in the airline industry offer consulting services that, when coupled with advanced user-defined reporting tools and analysis capabilities, enrich an airline's merchandising efforts by enabling them to:

  • Consolidate shopping and sales data into a graphical and holistic view of results, including both historical and forward purchases,
  • Utilize a dashboard view for an "at-a-glance" assessment of product-offering performance and revenue contribution, including ancillaries,
  • Analyze results by product, customer and market, and develop actionable improvements.

When airlines understand current and historical data, they are able to influence the presentation and price of their offerings going forward, more clearly define and target preferred consumer segments, and differentiate their products and services based on attributes other than price alone — in effect, revenue manage their ancillary offerings.

Suppose, for example, an airline decides to sell airport lounge passes for US$50, but for whatever reason, sales always come in under plan. To incentivize travelers, the carrier may decide to drop the price to US$25 or US$30 in an attempt to entice visitors into the lounge and possibly sell additional passes at a later date. On the other hand, the carrier notices requests for meals during dinnertime flights are skyrocketing. If passengers are willing to pay US$10 for an onboard meal during this time, the airline rationalizes perhaps they might pay US$2 more, therefore generating additional ancillary revenues. By closely evaluating the data, the carrier is able to adjust its strategy and pricing quickly in response to current and potential consumer demand.

While merchandising is sometimes viewed by the public with a fair amount of both suspicion and annoyance, the good news is the airline industry's transition to retailing is placing the focus directly on consumers. Carriers are intensely interested in what their customers want and what they are willing to pay for it. In turn, customers feel empowered and in control of their travel experience. Merchandising, when handled correctly, can be a win-win experience for both consumers and carriers.

Accelerating the availability of data will enable airlines to deliver precisely targeted product and service offerings to market faster. It will also enable dynamic, limited-time campaigns for individual consumers or customer segments at specific times or special events, such as the Super Bowl or World Series, family summer and winter vacations, or an international business conference. This type of interactive, individualized merchandising requires an airline to thoroughly understand what the data indicates about its product and service offerings, markets where it operates, competitive landscape, actual performance versus planned performance, as well as many other factors.

Airline loyalty programs, in particular, will benefit from the range and volume of detailed revenue data that can be stored in their databases. Because EMD standards allow ticket and ancillary purchases to be linked to individual passengers and air segments, in the future, carriers can associate revenue data (at virtually any level of detail) with specific program members and destinations. Once based almost entirely on segments flown, loyalty programs can be revenue based, as is currently the case with incentive and reward programs in most other business sectors, increasing their value to airlines and customers.

The transition to retailing and necessity of developing an end-to-end merchandising strategy in support of this evolution are undoubtedly driving airlines to delve deeper into what were once considered standard, tedious back-office functions. Revenue recognition and accounting no longer constitute the final step in a long series of events and tasks. Instead, the information amassed from these processes can offer unique insights to assist carriers in critical decision-making and future initiatives.

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