Revenue Management Recipe
Maximizing Network Revenues Through Operations Research And Analytics
People, processes and IT systems are the key ingredients airlines need to boost network revenues. To ensure these key ingredients produce the best possible results, airlines should look to operations research and analytics to identify strengths, weaknesses and opportunities for improvement in their revenue management practice.
Revenue management is at the heart of an airline‘s commercial planning department and serves the important function of setting inventory controls to accept the right customer at the right price at the right time to maximize network revenues. There are three important drivers in deriving value from revenue management:
- People with pricing and revenue management expertise who are aligned with the airline‘s objectives and strategy,
- Processes by which different functions within the airline interact with each other and how they interact with the revenue management system to accomplish the network revenue objectives,
- Technology and systems that enhance analyst productivity by providing automation and decision-support tools.
All of these drivers need to work together toward the common goal of maximizing network revenues. Only then can an airline reap the maximum benefit from its revenue management practice.
To reach this objective, airlines must first identify the business challenges on the systems front and then implement the right solutions to address them.
“The OR Analytics team at Sabre Airline Solutions helped us understand the true potential of moving to the O&D solution,” said Amar Pethe, general manager of revenue management strategy and systems for Jet Airways. “It added more value as they used our own data and demonstrated the potential, than worked on some industry standards, which, otherwise, would not have given the true picture.”
The last decade bore witness to a lot of change in the airline business such as restriction-free pricing, fare families, increased ancillary revenues, and growth of connecting traffic flows with network alliances/codeshares and low-cost competitors. These changes affected the way airlines practice revenue management, and the existing traditional revenue management technology was incapable of producing optimal inventory controls in this environment.
A lot of research has since gone into improving revenue management technology to handle these additional complexities. Some of the factors such as passenger buy-up, increased connecting flow traffic, fare families and ancillary revenues have already been modeled. With advances in airline business and revenue management systems, airlines must select a robust revenue management system that best fits their business needs and adopt the system throughout the entire operation to achieve maximum value from it.
There are two main business challenges airline executives face concerning revenue management systems:
- Which revenue management system should my airline use?
- How do I get the maximum value from my existing system?
Sabre Airline Solutions® operations research analytics (OR analytics) team has conducted extensive research and developed solutions that address these business challenges for any type of airline, anywhere in the world.
RM: Much More Than A System
Revenue management is not just a system. Rather, it‘s a necessary business practice that comprises people, processes and systems technology.
Selecting The Right Revenue Management System
While today‘s revenue management systems are increasingly sophisticated, there is no one-size-fits-all solution. Broadly speaking, there are three different types of systems available today (listed below in order of increasing complexity and revenue benefit):
- Standard point-to-point leg/segment system:
- Forecasting and optimization at leg/segment level
- Segment-level fares
- Leg/segment-nested authorization controls
- Suited for carriers with high point-to-point traffic
- Intermediate origin-and-destination (O&D) system:
- Forecasting and optimization at leg/segment level
- O&D fares prorated to segment level based on network displacement costs
- Leg/segment-nested authorization controls and bid-price curves
- Optional stepping stone for carriers to manage flow traffic before moving to full O&D
- Full O&D system:
- Forecasting and optimization at the O&D level
- O&D fares
- Leg/segment-nested authorization controls and bid-price curves
- For carriers with significant flow traffic
The benefits of moving from a point-to-point-based revenue management system to a pure O&D-based system are well known. However, an intermediate O&D system can capture some of the revenue benefits offered by O&D, and it is much easier to use in comparison.
When changing from one type of revenue management system to the other, an airline must invest time, effort and money. The trade off is easy to understand but isn‘t as straightforward to measure in numbers and to predict what the net benefit might be. Changing revenue management systems without understanding this net benefit is a bit of a gamble. Two of the main reasons why the net benefit is hard to measure, among others, include:
- The theoretical (practical disconnect) — Various academic studies have determined the costs and benefits of different types of revenue management. These studies are typically conducted in lab conditions for generalized scenarios. Each airline has its own characteristics in terms of style of operations, business model and market behavior, and it is highly possible that the experimental scenarios do not replicate that well enough. This disconnect could be the reason behind the difference between the 1 percent to 5 percent incremental benefit an O&D system promises versus what an airline might actually realize. It is the same force that holds back the mileage of a car from reaching the lofty heights the advertisement said it would.
- Realistic measurement of the realized benefit post implementation — While the new type of revenue management system was being rolled out, life elsewhere was going on. Although widely accepted as a good thing, it prevents the measurement of the true impact of the change in the revenue management system. Most likely, there would have been changes in the market, in the competition and even in other business policies. A comparison of the “after state” with the “before state” would not give a true picture of the benefit. The optimal comparison to make would involve changing the revenue management system ceteris paribus (with all things being equal) and then measuring the benefit, but that is not possible.
Airline Planning And Operations Simulator
The Airline Planning and Operations Simulator (APOS), a Sabre Airline Solutions simulator, addresses these two problems. APOS uses historical data to simulate passenger behavior across an airline‘s network. It then runs multiple iterations of the user‘s choice of scenarios against passenger behavior. Detailed analysis of these results is possible at various levels, which enable the identification of better and worse performers, as well as the scope for improvement.
Compared to the generalized results in the academic literature, these results are highly realistic, airline-specific and immune to changes over time. Airlines can use these results to make better-informed decisions, end-users can extract focus points for them to act upon and, at Sabre Airline Solutions, they are used to test our models and choose the best set possible for the global airline community.
APOS studies have been applied to numerous scenarios to help airlines determine the benefits of different revenue management practices. For example:
- An Asia-based carrier using a leg/segment revenue management system with 10 percent flow traffic wanted to evaluate the benefit of O&D revenue management. The carrier was undergoing capacity cuts because it was retiring old fleet and wanted to evaluate how the O&D benefit changes with capacity reductions.
- A European carrier using a leg/segment revenue management system with 20 percent flow traffic wanted to evaluate the benefit from intermediate O&D revenue management. The airline anticipated a future increase in flow traffic and wanted to find out how the revenue benefits change with the increase in flow traffic.
In addition, APOS is capable of testing a wide variety of scenarios, such as:
- Should an airline upgrade to O&D revenue management or intermediate O&D revenue management?
- How would a change in capacity impact an airline?
- What would be the impact of an increase in flow traffic?
- How much revenue does an airline stand to gain from point-of-sale-based controls?
- What would be the benefit of overbooking?
Currently, the OR analytics team at Sabre Airline Solutions is adding modules for other planning departments such as scheduling and fleeting. The idea is to develop APOS so it can run complete commercial planning simulations instead of running piecemeal simulations on each of the underlying departments.
Achieving Maximum Value
Even with the most sophisticated revenue management system in place, user adoption and best practices will always be critical to ensuring success. System settings that have been configured during the installation of the system can become outdated over time and not in sync with the current business environment.
Therefore, it is essential to periodically review the key performance indicators (KPIs) to measure the health of the system, how well it is employed by end users and challenges they face when using it. These KPIs help tune the system settings and ensure that the system is correctly set up to meet the evolving business needs.
Sabre Airline Solutions offers packages that help airlines achieve maximum value from their existing revenue management systems, including solution adoption health check and ad hoc analytical support.
“We have worked with the OR analytics team at Sabre Airline Solutions to improve our forecast and maximize the value of Sabre® AirVision™ Revenue Manager,” said Dan Rough, director of revenue management for Alaska Airlines. “We found tremendous value in their findings that gave us the tools to monitor forecast KPIs on our own. It was refreshing to have extremely knowledgeable people on-site who knew both the front and back ends of the product, were able to make smart recommendations and were then able to implement many enhancements on the spot.”
The OR analytics team has designed a KPI-based approach for checking the health of an airline‘s revenue management system. As part of the practice, it uses scorecards to determine the status of the system as well as record actionable recommendations for improvements. The following KPI metrics help measure the health of the system:
- System usage metrics:
- Analyzes flights that are on auto send and optimized by the system
- Reviews the extent of user overrides applied on the system to check for too many/too few overrides
- Reviews the effectiveness of critical alerts used in the system
- Future performance trends:
- Compares future predicted performance trends (such as load factor, revenues, bookings and revenue per available seat kilometer (RASK) with those of historic trends. This is helpful in understanding the quality of system forecasts for future dates.
- Forecast accuracy:
- Analyzes the accuracy of system forecasts and determines if they need tuning
- Analyzes the goodness of seasonality (peak and non-peak travel times) and if it needs further tuning
- Overbooking practice:
- Analyzes the trends on posted flights and the departed load factors on these flights
- Evaluates the successfulness of overbooking and identifies opportunities where the practice can be improved
- System set-up parameters:
- Reviews the system parameters that impact forecasting results and optimization and provides recommendations for required changes
- Reviews the definitions of price-sensitive and product-sensitive classes
- Data integrity audit:
- The “garbage in, garbage out” principle holds true for any revenue management system. As part of this, the quality of bookings, traffic and fares data present in the system is reviewed. It also determines if any data outliers, such as excessively low traffic counts, need to be excluded.
Ad hoc Analytical Support
The OR analytics team can also assist in airlines conducting analytical studies to help improve the value derived from the revenue management system.
Additional case studies show how APOS can be used to determine if a revenue management system is utilized to its full potential:
- User influence analysis — A European carrier using Sabre AirVision Revenue Manager wanted to understand the effectiveness of influences applied by users on a day-to-day basis. In response, Sabre Airline Solutions designed and conducted an experiment on the live system and produced recommendations for cases where user influences are effective as well as where they are and should be can be removed. The study helped the airline refine user-influence strategies and target user efforts in areas where they have been more effective.
- Forecast accuracy tuning — An Asian carrier using Sabre AirVision Revenue Manager requested help in tuning the system seasonality and calibrating forecast profiles. In doing so, Sabre Airline Solutions provided the airline with additional training and tools so its employees are self-sufficient in this area.
Operations Research Is Critical
An airline‘s ability to achieve maximum results from its revenue management system relies on advanced analytical studies and in-depth research. For those that don‘t have an in-house operations research team, Sabre Airline Solutions‘ team of OR experts are equipped to identify and solve problems in revenue management and airline commercial planning.
However, even airlines that already have in-house operations research teams can partner with Sabre Airline Solutions experts to gain valuable insights and support.
“The OR analysis performed together with the OR analytics team of Sabre Airline Solutions has been very useful and of great value,” said Roland Jaggi, head of revenue management and pricing for Aegean Airlines. “The analysis helped identify areas needing improvement including system usage by the users, system functionalities and system performance. The joint analysis exercises have shown that cooperation between vendors and customers can create true win-win situations, from which both Sabre Airline Solutions and Aegean will profit, as well as other airlines using the same system version. I‘m very happy with the achieved results and look forward to the next joint analysis.”