Revenue Management Overview

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Revenue Management Agenda

 What is revenue management?

 How and when is revenue management important?
 How are customers impacted by revenue management?
 How does economic theory drive pricing strategy, market
segmentation, and revenue optimization?
 How does the revenue management process work?
 Concepts of revenue maximization
 What are the trends in airline revenue management and
distribution?

Copyright © 2009 Boeing. All rights reserved. |2

Revenue Management
Optimizes Price and Capacity
Revenue Management is. . .
“The integrated management of price and capacity
on future flight departures.”
—Dr. Peter Belobaba, MIT Flight Transportation Lab

“Revenue management enables airlines to sell the right product, to the

right customer, at the right time, for the right price, to achieve the
highest amount of revenue possible.”
—Robert G. Cross, Chairman DFI Aeronomics

Copyright © 2009 Boeing. All rights reserved. |3

Revenue Management Is The Tactical
Delivery of the Strategic Plan

Revenue Planning Strategic

Marketing Plan

Scheduling

Pricing

Sales and Promotion

Distribution

Revenue Management Tactical

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Passenger Demand Profile

Unconstrained Demand - actual number of pax wanting to book

Constrained Demand - actual number of pax booked
Demand Spill - missed booking opportunities

Booking Limit
Booking Enquiries

Days to Departure

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Concepts: Spill and Spoilage

Average Departed Airplane

Demand Load Capacity

Spoilage
% Demand

occurs when
load factor is
less than 100%

Spill
occurs when
demand exceeds
capacity

Unconstrained Passenger Demand

Copyright © 2009 Boeing. All rights reserved. |6

Revenue Management Agenda

 What is revenue management?

 How and when is revenue management important?
 How are customers impacted by revenue management?
 How does economic theory drive pricing strategy, market
segmentation?
 How does the revenue management process work?
 Concepts of revenue maximization
 What are the trends in airline revenue management and
distribution?

Copyright © 2009 Boeing. All rights reserved. |7

Yield and Unit Revenue trend downwards
$0.2200
 Yield = Pax Revenue/ RPMs
$0.2000  Unit Revenue = Pax Revenue/ ASMs

$0.1800

$0.1600
Unit Rev - Domestic
Yield System: -3% per year
USD (2006 dollars)

Unit Rev - Intl

$0.1400 Unit Rev - System
Yield - Domestic
Yield - Intl
$0.1200 Yield - System
Linear (Unit Rev - System)
Linear (Yield - System)
$0.1000

Unit Rev System: -1.5% per year

$0.0800

$0.0600

$0.0400 • Form 41 data

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 • CPI adjusted 2006 USD
Year
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Revenue Management Protects Seats
 High fares make reservations close to departure day

 Low fares could fill the airplane and prevent high-fare

sales

 Revenue Management limits low-fare sales and protects

high-fare space

 Revenue Management does not set fares, pricing does

$1500
$2000 $700 $300
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When Revenue Management is Most
Effective
 Revenue Management is most effective on flights with high
demand
 Protects seats for higher-fare demand for significant incremental
revenue per available seat (RASK, unit revenue)
 High demand flights identified by flown data, anticipated
events
 Weekly peak flights, weekend leisure markets
 Holiday periods
 School vacations `
 Special events

y
y

ay
y
y

y
da

da

a
da

da
da

nd
id
on

s
s

ur
es

Fr
ur
ne

Su
t
Tu
M

Sa
Th
ed
W
 At low demand levels, revenue is determined by pricing
controls
 Advance purchase, stay requirements, refundability
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Small Increases Combine for Dramatic
Revenue Impact
U.S. Majors—Domestic Operations 2000

8.2% $6.1 B 95 $130

Target

2.0% $1.6 B 3 $3.10

6.2% $4.5 B 92 $126.90

Actual

Operating Operating Incremental Incremental

Profit Margin Profit Passengers Revenue per
per Departure Passenger

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An Entire Year’s Profitability Can Be Gained
(or Lost) in One Season
Typical Airline Profitability By Season

Revenue
Cost (variable)
Cost (fixed)

Q1 Q2 Q3 Q4

Copyright © 2009 Boeing. All rights reserved. | 12

Revenue Management Agenda

 What is revenue management?

 When and how is revenue management important?
 How are customers impacted by revenue management?
 How does economic theory drive pricing strategy, market
segmentation?
 How does the revenue management process work?
 Concepts of revenue maximization
 What are the trends in airline revenue management and
distribution?

Copyright © 2009 Boeing. All rights reserved. | 13

Customers Revenue Management at Work

 Passengers see revenue management as they shop for

airline tickets
 Airline websites display available fares for desired travel
 Higher/lower fares available on peak/off-peak days and times
 Websites offering price comparisons expose differing revenue
management strategies and tactics
 Travel agents offer seats at prices airline revenue management is
willing to sell
 Vacation packages and consolidators sell seats the airline does not
expect to be able to sell at higher fares

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Revenue Management is Key to Business of
Low-Cost Carriers
New York City (JFK) to San Juan, Puerto Rico (SJU)

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 Revenue Management is Key to Business of
Network Carriers
New York City (JFK) to San Juan, Puerto Rico (SJU)

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Revenue Management is Key to Business of
Carriers in All Regions

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Revenue Management is Key to Business of
Carriers in All Regions

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Revenue Management Agenda

 What is revenue management?

 When and how is revenue management important?
 How are customers impacted by revenue management?
 How does economic theory drive pricing strategy, market
segmentation?
 How does the revenue management process work?
 Concepts of revenue maximization
 What are the trends in airline revenue management and
distribution?

Copyright © 2009 Boeing. All rights reserved. | 19

As Price Goes Up, Demand Goes Down
The number of people who are prepared to travel at
each fare level

$100

Fare

0 100
Demand, number of people

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Single Fare Provides Lower Revenue
Potential

$100

Passengers: 50
Willing to Revenue: $2,500
pay more for
a seat
Fare $50

Economy Fare Unable to

afford a
higher fare
0 50 100
Seats sold

Unaddressed revenue potential

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Increasing the Number of Available Fares Is a
Win-Win Situation
$100

Passengers: 80
Revenue: $4,000

Fare $50
A
Fare B
Fare C
Fare D
Fare
0 50 100
Seats sold

Unaddressed revenue potential

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 Fares Are Time Sensitive

Typical consumer goods Airline pricing

Price Price

Time Departure
Time

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Pricing Strategies Depend on Several Factors
Elasticity Cost factors

• Understanding of cost structure

Price • Low costs are necessary to compete
• Many prices, same basic product
Quantity

Competitive issues Market factors

• Understanding of • Economic drivers
strategy • Market development
• Passenger appeal • Passenger demographics
• Competition goals
and objectives

Copyright © 2009 Boeing. All rights reserved. | 24

Revenue Management Agenda

 What is revenue management?

 When and how is revenue management important?
 How are customers impacted by revenue management?
 How does economic theory drive pricing strategy, market
segmentation?
 How does the revenue management process work?
 Concepts of revenue maximization
 What are the trends in airline revenue management and
distribution?

Copyright © 2009 Boeing. All rights reserved. | 25

Revenue Management Protects Seats
 High fares make reservations close to departure day

 Low fares could fill airplane and prevent high-fare sales

 Revenue Management limits low-fare sales and protects

high-fare space

 Revenue Management does not set fares, pricing does

$1700
$1900 $900 $600
Copyright © 2009 Boeing. All rights reserved. | 26
Revenue Management System

Booking Global Distribution

request System (GDS)

Airline Reservation
Booking System (ARS)
request
Carrier inventory
Internal
airline
Fares information
Revenue
Management
System
Schedule

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Revenue Management Process

Forecast revenue

Set booking limits

Optimize: capacity, fare mix, overbooking

Forecast demand

Fundamental system requirements

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Forecasting Demand Provides Critical
Information for Airline Decision Making

 Identifying revenue opportunity on each

flight
 Allows an airline to keep seats available for late
bookings (high-revenue passengers).
 Helps airlines plan for peak season travel.
 Revenue management uses
forecasting to open and
close booking classes to
which fares have been
assigned.
 Effective revenue management maximizes
revenue by selectively accepting and rejecting
reservation requests based on the value of
those reservations.
Copyright © 2009 Boeing. All rights reserved. | 29
Applying Revenue Management
Maximizes Revenue
Flight: CAA 190
Leg: AAA-BBB
Departure date: Friday, 26 Jun
Compartment: Economy
Capacity: 000/100
140

120
Full Fare
100 Capacity
Bookings

80
Structured
60 Fare

40 Leisure
Fare
20
Sale Fare
0
120 100 84 72 60 48 38 30 21 19 14 10 7 4 2 0 -1
Days Prior to Departure

Copyright © 2009 Boeing. All rights reserved. | 30

Revenue Management Agenda

 What is revenue management?

 When and how is revenue management important?
 How are customers impacted by revenue management?
 How does economic theory drive pricing strategy, market
segmentation?
 How does the revenue management process work?
 Concepts of revenue maximization
 What are the trends in airline revenue management and
distribution?

Copyright © 2009 Boeing. All rights reserved. | 31

 Focus on Network-Based Revenue, Not Just
Leg-Based Revenue
“Which passenger
Passenger 1:
contributes the Full fare Y, BLA-CCS
BLA
“If there is one seat left greatest to 500 VEF
on the BLA-CCS flight, network revenue?”
which passenger CCS
do you accept?”

Passenger 2:
Discount Y, BLA-MAD MAD

2000 VEF
BLA

CCS

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Fare Mix: The Extremes

Extreme 1:
$80
Passengers: 20

Fare Revenue: $1,600

Class High RPK/yield; low load factor;
low revenue
Demand (passengers)

Extreme 2:
Passengers: 80
Fare
Revenue: $1,600
Low RPK/yield; high load factor;
$20 low revenue
Class

Demand (passengers) Unaddressed revenue potential

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Example of Fare-Mix Optimization
$30,000
Legend $26,000
$25,000 $24,000
V H B Y
$20,000
Flight $16,000
revenue $15,000

$10,000

$5,000

$0
Case 1 Case 2 Case 3

Average Unconstraine
Case 1 Case 2 Case 3
Fare d Demand
Y $400 20 0 20 20
B $300 30 10 30 30
H $200 40 40 30 40
V $100 50 50 10 10
90
140 100 100
passenger
passengers passengers passengers
s
Copyright © 2009 Boeing. All rights reserved. Airplane capacity = 100 | 34
Successful Airlines Focus on Maximizing
Revenue per Available Seat

Total passenger revenue

ASK yield =
Available seat kilometers

Revenue per seat kilometer

Total passenger revenue

RPK yield =
Revenue passenger kilometers

Revenue per passenger kilometer

Copyright © 2009 Boeing. All rights reserved. | 35

Optimize: Overbooking
Leg: AAA-OOO Friday
100
Legend
90
Booked Denied boardings
80 Spoiled seats
Capacity
70 Overbooked Flown

Passengers 60
50 Capacity
40

30

20

10

0
Day 0 Day1 Day 0 Day 1 Day 0 Day1 Day 0 Day 1
Departure 1 Departure 2 Departure 3 Departure 4
No overbooking Perfect overbooking Spoiled seats Denied seats
at all (no spoiled seats,
no denied boarding)
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 Revenue Generated by Overbooking
$20
Legend

Denied boarding cost

Net revenue
$15

$10
Millions

$5

$0
0 5 10 15 20 25 30

Denied boardings per 10,000 passengers boarded

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Overbooking—A Win Win Process

 Overbooking benefits passengers.

 More can travel on their first choice flight.
 A revenue management system will minimize denied boardings by
overbooking as accurately as possible.
 The net revenue benefits from overbooking far exceed the costs.
 If you are not encountering a certain level of denied boardings,
you are not overbooking aggressively enough on average.
 The presence of denied boardings does not imply the system has
failed.
 A certain level of denied boardings is desirable.
 Posted leg-load factor measures the effectiveness of your
overbooking activity.
Copyright © 2009 Boeing. All rights reserved. | 38
Forecasting Revenue Provides the Airline
with An Early Warning System

 A revenue forecast:
 Warns of future revenue shortfall, which allows the airline to
take action.
 Identifies the specific source of revenue
weakness.
 Which origin or point of sale?
 Which day of the week?
 Evaluates the impact of competitors actions and strategies.
 To match, or not to match, a fare cut?
 If the airline matches the base cut, when and where?

Copyright © 2009 Boeing. All rights reserved. | 39

Revenue Management Agenda

 What is revenue management?

 When and how is revenue management important?
 How are customers impacted by revenue management?
 How does economic theory drive pricing strategy, market
segmentation?
 How does the revenue management process work?
 Concepts of revenue maximization and optimization
 What are the trends in airline revenue management and
distribution?

Copyright © 2009 Boeing. All rights reserved. | 40

Increasing System Sophistication
Achievable Revenue Opportunity

100

Real
world
case,
% 90

80

No control Leg-based Segment- Group O&D First gen Second

based O&D gen O&D

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Distribution Trends

 Fare and inventory distribution trending toward transparency

through internet comparison sites
 “Screen-scraping” compares available fares for specific times and dates,
monitor price trends
 Online travel sites like Orbitz, Travelocity, Expedia provide comparisons
 Some carriers offer “low-fare finders,” searching alternate dates

 Distribution trending toward lower-cost channels

 Airline’s own site (“low-price guarantee”)
 Downward pressure on GDS costs

Copyright © 2009 Boeing. All rights reserved. | 42

Summary

 The revenue management process allows executives to

continually
 Forecast demand
 Optimize capacity, fare mix, overbooking, and decrement
 Set booking limits
 Forecast revenue

 Airline executives use revenue management

 To maximize airline network revenue per departure
 To control the airline’s inventory (seats) and
maximize its potential revenue
 To manage and control millions of seats every day

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