Revenue Management Plus Revenue Integrity Equals Revenue Optimization
Airlines need to combine strong capabilities in revenue management and revenue integrity to achieve optimal revenue results. Much like a well-tuned racecar, the improvement in performance can be stunning.
Every airline should seriously consider if its revenue management methods are established to most effectively reap optimal revenues from traffic-influencing events, such as World Cup soccer and other major sporting series, or annual holidays.
If a carrier’s revenue management strategies are outdated or its staffing has gone through more than one turnover cycle, there is most likely ample opportunity for considerable improvement via both updated technology and enhanced business processes within the burgeoning practice known as revenue integrity.
Revenue integrity offers some of the industry’s most refined tools to best guarantee that revenue management is maximizing potential airline returns when the time is opportune.
Or to put it another way, keeping an airline’s revenue optimization working at peak efficiency and harmony is critical and well worth evaluating prior to huge special-event opportunities in the coming months and years.
Perhaps the best way to describe the relationship between revenue integrity, revenue management and revenue optimization is to use the analogy of a racecar. The fastest racecars are engineered and designed to have near-perfect harmony among all their components.
Applying strong downforce causes a racecar to travel faster around corners, but slower on the straights (due to the “drag” effect on speed resulting from the heavy downforce).
To deliver the fastest laps around the race course, the mechanics and engineering team must find the precise point of harmony between the racecar’s key components.
And this same logic applies quite readily to revenue management and optimization, in that the demand forecast is as vital to revenue optimization as the drag factor is to a racecar. If the demand forecast is accurate — taking the analogy a step further — the “driver,” in this case, squeezes out the critical extra speed for peak performance.
But what happens if the demand forecast is not accurate?
In that scenario, revenue optimization is compromised, just as the speed of a racecar becomes much too slow when downforce is overused. Race teams measure the improvements relating to their attempts at better harmonization in terms of seconds-saved-per-lap.
And it’s basically the same approach for an airline.
Typically, significantly improving the harmonization of revenue management and revenue integrity, for example, can reduce the number of passenger no-shows by between 10 percent and 30 percent.
This level of improvement can lead to a considerable increase in load factors on departure (the number of passengers actually flown as a percentage of total aircraft capacity), as well as revenue increases due to the combined effects of a reduction in revenue leakage and an improved class mix in each cabin.
Success is achieved by finding the point of harmony for revenue optimization — balancing revenue management and revenue integrity at both the strategic and tactical levels in the same way the racecar mechanics and engineers balance speed around corners and speed on the straights.
To further evaluate the racecar analogy, let’s look at the core components of both revenue management and revenue integrity as a model.
The Constituent Parts
Like a racecar, revenue management has components of people, processes and systems.
The combination of people and processes results in two additional key components: policies and decisions. So with systems, there are five key components. Likewise, revenue integrity actually consists of these same components, all of which impact revenue optimization.
Revenue integrity has the tools to enforce the policies and strategies devised in revenue management. Unfortunately, revenue integrity is far too often dismissed as simply another transactional tool and basically a robot program that cancels airline bookings. (A revenue integrity robot program is one that runs automatically, sweeping through the live booking records and checking each booking against specific conditions defined in the fare rules. When it finds a violation, the robot program takes a corrective action. For example, it can send the travel agent who owns the booking a message, or it can simply cancel the booking as being non-compliant.)
But that is a false judgment. Revenue integrity is an extremely important strategic function for enhancing revenue optimization. And the critical nature of harmonizing revenue integrity activities with revenue management cannot be overstated. The robot programs are actually the mechanism — at the transactional level — for enforcing delivery of the strategy.
Therefore, the key to success is designing the robot programs to maximize the application of the revenue optimization strategy.
Real-Time Revenue Integrity
The black line shows how many unsold seats are available as an airline approaches the departure date of a flight. The red line shows how typical revenue integrity processes canceled bookings for customers who will not travel, thereby returning those seats to availability. The typical revenue integrity processes run overnight as a batch job. However, Sabre Revenue Integrity processes run in real time and the green line displays how much more availability is created, thus allowing the airline to increase its revenue by selling seats that would otherwise have been empty on departure. The shaded area is the extra revenue value created by using Sabre Revenue Integrity.
It’s important to understand how the two disciplines — revenue management and revenue integrity — work together at both the strategic and tactical levels. In other words, although revenue management sets the strategy, revenue integrity must be designed to align with the strategy so when the robot programs run at the tactical level, they are reinforcing the intended strategy.
Looking at the revenue management and revenue integrity disciplines component by component, the primary revenue management business practices encompass pricing strategy, inventory strategy, business plans and overall commercial planning. All are critical.
For example, if the revenue management strategy for a given traffic flow (journey) is to maximize price (because volume is already strong), revenue integrity must ensure its robot programs actually enforce the pricing strategy, so when the revenue integrity robot cancels a booking for noncompliance with the fare rule it was sold against, the robot returns the seats to be resold at a time when there is significant demand for the higher-priced seats. Returning seats after the target market has finished its usual buying pattern is a serious failure and loses revenue for the airline.
Then on the other side of the equation, at the transactional level, revenue integrity is the process of using robot programs to protect an airline’s seat inventory from misuse. Unless the revenue integrity robot is synchronized with the revenue management strategy, a less-than-optimum outcome is achieved. In the previous example, the target market had already booked. They were either not sold or sold at a lower price than intended by the strategy. Thus, revenue was not optimized.
The revenue management and revenue integrity staffs must not only work together to ensure that the core strategy is mutually understood, but they must also define how that strategy and its constituent parts need support from the design of the revenue integrity robot program.
The robot programs then enforce the airline’s terms and conditions and remove illegal bookings, thus releasing the seats for legitimate sales.
Clarity of terms and conditions, as well as a willingness to enforce them, are crucial. And these vital factors further emphasize the absolute necessity that revenue management and revenue integrity be harmonized correctly.
The racecar analogy then holds true when delineating the basics of revenue management and revenue integrity, which must work together seamlessly.
In this context, revenue management is the “parent” function, in which pricing and inventory strategies are set. It’s where the business plans are developed and commercial planning occurs.
Revenue Optimization: Four Key Business Practices Of Revenue Management
- Management of discount allocation (Market segmentation and pricing)
- Management of Inventory
- Management of Overbooking
- Management of Group Traffic
It’s imperative, however, that the revenue integrity tools are designed to match and enforce the revenue management policies.
An airline must ensure that the revenue integrity robot program enforces the actual fare rules that apply, rather than basing robot actions on sweeping generalizations. If an airline, for example, cancels a booking on the basis of a fare rule other than the one that actually applies, it risks being found in breach of contract. Remember, each booking is against the specific conditions in the fare rules that relate to that specific price. It is bad practice to generalize rules for revenue integrity robot programs.
The scenario above, then, provides a fairly simple example in which lack of harmony between revenue management and revenue integrity can cause problems — similar to the “drag” issue in the racecar analogy.
Examining each of the four key revenue management business practices in turn yields a logical understanding of the importance of harmonization with revenue integrity. The technique specifically covers the five components identified in the model — that is, people, processes (and thus, policies and decisions) and systems.
Inventory management and design are heavily dependent on the accuracy of the demand forecast, which is critical for revenue optimization.
Revenue integrity is intended to clean up as much uncertainty as possible in each flight’s demand forecast to enable finely tuned decisions on class mix and overbooking.
Three Key Strategic Objectives Of Revenue Integrity
- Improving the quality of airline inventory and demand forecast
- Supporting inventory control
- Supporting group evaluation
- Supporting route strategies and tactical levels
- Raising load factor by supporting more accurate overbookings
- Improving revenue optimization by enforcing fare rules that drive market segmentation
- Supporting discount allocation
- Recovering all due funds on each PNR
- Supporting pricing activity at strategic and tactical levels
- Reducing airline GDS fees by avoiding unnecessary charges
- Cleaning up all dead bookings (bookings made by agents or customers, but when customers do not intend to actually travel)
- Including HL (a booking that has been waitlisted) and HX (the booking has been canceled) segments
Achieving Optimum Results
Specialized software, such as Sabre AirVision™ Revenue Integrity, can help make a significant difference in demand-forecast accuracy by ensuring the revenue-integrity rules are targeting the biggest issues. In doing so, revenue integrity software and policies should determine exactly when the canceled seats are returned to inventory so as to maximize the potential for reselling those seats.
A good real-life example is an airline that was already an advanced user of revenue integrity to boost revenue optimization.
Personnel at the carrier closely analyzed when the revenue integrity robot was actually canceling the seats. They compared that information with the demand patterns in the booking curve, while also calculating statistical probability of reselling the returned seats. The positive results (approximately US$5 million a year) enabled the airline to change its fare rules so the seats found to be in violation of the fare rules were returned much earlier with a 40 percent probability of being resold, instead of the original zero percent probability, which missed the target market.
Such a sophisticated level of fine-tuning can help a carrier effect a “step” change in its bottom-line revenue integrity benefits and, perhaps even more importantly, lead to further improvement in load factors on flights that often (or even almost always) go full (for example, raising load factors from 99.1 percent to 99.8 percent).
In the area of discount allocation, revenue integrity robot programs can determine which fare rules actually apply in the various markets at any given time and ensure the revenue integrity robot programs are properly designed to enforce these specific fare rules, in line with the revenue management strategy.
Once again, accuracy — in addition to the timing of returned seats to inventory — can contribute quite powerfully to revenue optimization.
Ensuring the highest levels of synchronization or harmony is an excellent way to boost a carrier’s revenue optimization, even if its performance is already strong.
Revenue management evaluations require accurate demand forecasts, as well as reliable yield forecasts (based on expected prices minus cost-of-sale expenses).
The accuracy of these forecasts — and the coordination between revenue management and revenue integrity — contribute significantly to revenue optimization.
The racecar analogy remains appropriate, because the harmony between revenue management and revenue integrity, first at the strategic level, then at the tactical and, finally, at the transactional level, is critical for maximizing the revenue optimization strategy.
Just as a racecar can underperform if it is not tuned and balanced correctly, an airline’s revenue optimization strategy may underperform if the harmony between revenue management and revenue integrity is not created and nurtured.