Aviation Training Program

AIRLINE REVENUE MANAGEMENT

TABLE OF CONTENTS

Introduction ................................................................................................................................................ 1
Module 1 Introduction to Revenue Management.................................................................................... 5
1.1
Deregulation in the Airline Industry .......................................................................................... 6
1.1.1 Airline Deregulation ..................................................................................................... 6
1.1.2 Effects of Deregulation ................................................................................................ 7
1.2
Why Do We Need Revenue Management? ........................................................................... 15
1.2.1 Perishable Capacity .................................................................................................. 15
1.2.2 Seating Capacity and Variations in Demand ............................................................ 16
1.2.3 Variable Pricing and Market Segmentation............................................................... 18
1.2.4 Basic Revenue Management Principles ................................................................... 20
1.3
Airline Reservations and Product Distribution........................................................................ 26
1.3.1 How are Airline Products Distributed? ...................................................................... 26
1.3.2 What is the Role of the Internet? .............................................................................. 28
Module 2 Managing Passenger Demand ............................................................................................... 39
2.1
Airline Travel Demand............................................................................................................ 40
2.1.1 Understanding Variations in Demand ....................................................................... 40
2.1.2 Seasonal Variations in Demand ................................................................................ 41
2.1.3 Holidays and Special Events..................................................................................... 42
2.1.4 Time of Day and Day of Week .................................................................................. 43
2.1.5 Economic Conditions ................................................................................................ 43
2.1.6 Schedule Changes .................................................................................................... 43
2.1.7 Time of Booking ........................................................................................................ 44
2.1.8 Cancellations and No-shows .................................................................................... 44
2.1.9 Price .......................................................................................................................... 45
2.2
Demand Strategies ................................................................................................................ 50
2.2.1 What are the Options? .............................................................................................. 50
2.2.2 Improving Efficiency .................................................................................................. 51
2.2.3 Adjusting Marketing Variables .................................................................................. 52
2.2.4 Managing Demand in a Competitive Market ............................................................. 54
2.3
Forecasting Demand in the Airline Industry ........................................................................... 59
2.3.1 Importance of Forecasting Demand .......................................................................... 59
2.3.2 Forecasting Demand Based on History .................................................................... 60
2.3.3 The Revenue Analyst ................................................................................................ 63
2.3.4 Computerised Revenue Management Systems ....................................................... 63
2.3.5 Best Practices ........................................................................................................... 65
Module 3 Pricing ...................................................................................................................................... 75
3.1
Airline and Customer Costs ................................................................................................... 76
3.1.1 Airline Costs .............................................................................................................. 76
3.1.2 Customer Costs ........................................................................................................ 77

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3.2

3.3

The Price Demand Relationship and Inventory Control ...................................................... 81

3.2.1 Differential Pricing ..................................................................................................... 81
3.2.2 Fare Rules and Restrictions ...................................................................................... 84
3.2.3 Inventory Management and Pricing .......................................................................... 87
Pricing Strategies ................................................................................................................... 92
3.3.1 How Do Airlines Determine Prices? .......................................................................... 92
3.3.2 Cost-based Pricing .................................................................................................... 93
3.3.3 Competition-based Pricing ........................................................................................ 94
3.3.4 Value-based Pricing .................................................................................................. 94
3.3.5 Trends in Pricing and Marketing ............................................................................... 97

Module 4 Booking Class Assignment ................................................................................................. 111

4.1
What are Booking Classes? ................................................................................................. 112
4.1.1 Booking Classes and Revenue Management ......................................................... 112
4.1.2 Evolution of Booking Classes.................................................................................. 113
4.2
Booking Class Basics ........................................................................................................... 116
4.2.1 Assigning Fare Products to Booking Classes ......................................................... 116
4.2.2 Problems with Booking Class Assignment.............................................................. 119
4.3
Booking Class Structures ..................................................................................................... 124
4.3.1 Independent versus Nested Booking Class Structures .......................................... 124
4.3.2 Other Nesting Structures......................................................................................... 129
Module 5 Seat Inventory Control ......................................................................................................... 139
5.1
Seat Allocation per Booking Class ....................................................................................... 140
5.1.1 Discount Seat Allocation Control ............................................................................ 140
5.1.2 Revenue Analyst ..................................................................................................... 142
5.1.3 Revenue Management Systems ............................................................................. 144
5.2
Economic Approach to Seat Protection ............................................................................... 149
5.2.1 Expected Marginal Seat Revenue (EMSR)............................................................. 149
5.2.2 Establishing Protection Levels using EMSR ........................................................... 150
5.2.3 Exceptions to EMSR ............................................................................................... 154
5.3
Revenue Optimisation and Seat Inventory Control .............................................................. 158
5.3.1 Terminology: Legs, Segments, and Origin and Destination (O&D) ....................... 158
5.3.2 Leg-based Seat Inventory Control .......................................................................... 160
5.3.3 Network (O&D) and Partial Network (Partial O&D) Seat Inventory Control............ 165
Module 6 Spoilage Management .......................................................................................................... 179
6.1
Why Do Airlines Overbook Flights? ..................................................................................... 180
6.1.1 What is Spoilage? ................................................................................................... 180
6.1.2 What is Overbooking? ............................................................................................. 182
6.1.3 Denied Boarding and its Costs ............................................................................... 184
6.1.4 Overbooking & Revenue Management ................................................................... 185
6.2
How do You Set Overbooking Limits? ................................................................................. 189
6.2.1 Calculating and Forecasting No-show Rates .......................................................... 189
6.2.2 Minimising Spoilage and Denied Boarding Costs ................................................... 191
6.2.3 Overbooking Risk Factors ....................................................................................... 192
6.2.4 Overbooking & Airline Operations ........................................................................... 194
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6.3

Other Overbooking Measures and Considerations .............................................................. 199

6.3.1 Pre-departure Cancellations ................................................................................... 199
6.3.2 Decrement ............................................................................................................... 200
6.3.3 Multi-cabin Upgrading ............................................................................................. 202

Module 7 Group Management .............................................................................................................. 211

7.1
Group Travel ........................................................................................................................ 212
7.1.1 Types of Group Travel ............................................................................................ 212
7.1.2 Characteristics of Group Travel .............................................................................. 213
7.2
Group Request Evaluation ................................................................................................... 216
7.2.1 What is Group Evaluation? ..................................................................................... 216
7.2.2 Who does Group Evaluation? ................................................................................. 217
7.2.3 What is Displacement Cost? ................................................................................... 218
7.2.4 Booking Class Protection and Allocation Levels ..................................................... 221
7.2.5 Special Handling Considerations ............................................................................ 223
7.3
Group Attrition ...................................................................................................................... 227
7.3.1 Group Cancellation Behaviours .............................................................................. 227
7.3.2 Compensating for Group Cancellations .................................................................. 229
7.3.3 Hedging ................................................................................................................... 231
Module 8 Scheduling and Capacity Adjustments .............................................................................. 241
8.1
Airline Scheduling Process .................................................................................................. 242
8.1.1 Why is Scheduling Important? ................................................................................ 242
8.1.2 Network Perspective ............................................................................................... 243
8.1.3 Timeline and Organisational Perspectives.............................................................. 245
8.2
Schedule Design and Fleet Assignment .............................................................................. 252
8.2.1 Core Schedule ........................................................................................................ 252
8.2.2 Schedule Design Process ....................................................................................... 253
8.2.3 Schedule Design Parameters ................................................................................. 254
8.2.4 Decision Support Tools ........................................................................................... 255
8.2.5 Evaluation Criteria ................................................................................................... 256
8.3
Schedule and Capacity Adjustment ..................................................................................... 260
8.3.1 Ad Hoc Flight Cancellations .................................................................................... 260
8.3.2 Upgauges and Downgauges ................................................................................... 262
8.3.3 Special Events Capacity Management ................................................................... 263
Module 9 Monitoring Performance ...................................................................................................... 273
9.1
Performance Measurement.................................................................................................. 274
9.1.1 Background ............................................................................................................. 274
9.1.2 Key Performance Indicators .................................................................................... 275
9.1.3 Sharing Information ................................................................................................. 276
9.2
Establishing and Updating Performance Measures ............................................................. 280
9.2.1 Selecting Appropriate Measures ............................................................................. 280
9.2.2 Generating Useful Information ................................................................................ 281
9.3
Performance Measurement Reports .................................................................................... 285
9.3.1 Using and Creating Performance Reports .............................................................. 285
9.3.2 Advance Booking Report ........................................................................................ 287

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9.3.3
9.3.4
9.3.5
9.3.6
9.3.7
9.3.8
9.3.9

Passenger Load Factor Report ............................................................................... 289

Denied Boarding and Spoilage Report ................................................................... 290
Spill and Stifle Report.............................................................................................. 291
Schedule Comparison Report ................................................................................. 293
Historical Demand Report ....................................................................................... 294
Revenue Report ...................................................................................................... 295
Forecast Accuracy Report....................................................................................... 296

Module 10 Product Distribution ........................................................................................................... 303

10.1 Traditional Airline Ticket Distribution .................................................................................... 304
10.1.1 Computer Reservation Systems (CRSs) ................................................................ 304
10.1.2 From CRS to GDS .................................................................................................. 305
10.1.3 Global Distribution Systems (GDSs) ....................................................................... 306
10.1.4 Distribution Costs .................................................................................................... 307
10.1.5 Screen Position Bias ............................................................................................... 308
10.2 Effect of the Internet ............................................................................................................. 312
10.2.1 The Customer ......................................................................................................... 312
10.2.2 Airline Websites ...................................................................................................... 313
10.2.3 Other Travel Websites ............................................................................................ 314
10.2.4 Distribution Costs .................................................................................................... 315
10.2.5 Worldwide Perspective............................................................................................ 316
10.3 Trends in Product Distribution .............................................................................................. 321
10.3.1 Global Distribution Systems (GDSs) ....................................................................... 321
10.3.2 Customer-Centric Product Distribution ................................................................... 323
10.3.3 Best Practices ......................................................................................................... 324
Module 11 A Revenue Management Organization ............................................................................. 333
11.1 People .................................................................................................................................. 334
11.1.1 Managing People in a Revenue Management Organization .................................. 334
11.1.2 Job Descriptions and Skill Sets ............................................................................... 335
11.1.3 Training ................................................................................................................... 342
11.1.4 Team-Building ......................................................................................................... 343
11.2 Business Processes ............................................................................................................. 348
11.2.1 Interaction with Other Departments ........................................................................ 348
11.2.2 Communication ....................................................................................................... 349
11.2.3 Reporting ................................................................................................................. 350
11.3 Building a Revenue Management Organization .................................................................. 354
11.3.1 System-based Revenue Management Organizations ............................................ 354
11.3.2 Market-based Revenue Management Organizations ............................................. 358
11.3.3 Multi-functional Revenue Management Organizations ........................................... 360
11.3.4 Designing a RM Organization ................................................................................. 360
11.3.5 Understanding Revenue Management across the Airline ...................................... 361
Addendum - Revenue Management Current and Future
Challenges and Opportunities: A Closer Look ............................................................................... 369
Glossary.................................................................................................................................................. 377

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AIRLINE REVENUE MANAGEMENT

What is revenue management and why is it needed in the airline
industry of today and tomorrow? As competition and various
economic pressures increase, all airlines, full service and lowcost carriers alike, need to maximise revenue in order to
succeed and grow. As airlines adapt their business processes
and models to meet the current challenges facing the industry,
revenue management provides a number of strategies to help
increase and maximise revenue.
This book provides an introduction to the basic principles,
strategies, and goals of airline revenue management. After
offering a brief history of the airline industry and how revenue
management evolved in response to industry changes, this
book covers a number of topics pertaining to the theory and
practice of revenue management. Several topics address what
could be considered the core of revenue management theory
and practice. These topics are managing passenger demand,
pricing, booking class assignment, seat inventory control,
spoilage management, and group management. The other
topics covered are scheduling and capacity adjustments,
monitoring performance, product distribution, and revenue
management organisation. A supplemental discussion of the
airline industry overall and how challenges and opportunities will
impact revenue management in the future is included in an
addendum to this book.
For learning purposes, the text of each study module assumes
that the reader currently works in a revenue management
position. This course is also appropriate, however, for any
person with an interest in understanding how revenue
management strategies and tools can contribute to the success
and profitability of an airline. People working in airline customer
service, sales and marketing, network planning, or airport
services, for example, may be interested in this course. By
offering a solid overview of airline revenue management, this
course should enhance not only your personal job performance,
but also your ability to support your work team, your
organisation and, of course, your customers.

Introduction