10 - Revenue Management

Airline Revenue Management
BOEING is a trademark of Boeing Management Company.

Copyright © 2012 Boeing. All rights reserved.
Presentation Goals
 Understanding of Revenue Management structure at airlines
 Familiarization with Revenue Management purpose and value
 Understanding of impact of Revenue Management on airline customers
 Familiarization with basic Revenue Management practices
 Introduction of Revenue Management trends
COPYRIGHT © 2012 THE BOEING COMPANY

Why does airline pricing seem so random?
 How did the passenger next to me pay less than half what I paid?
 Why is the fare for this flight $1,499? It was $499 just yesterday!
 Does it really cost the airline three times as much to fly me on Thursday?
 Why do I have to pay $59 extra to sit in the exit row?
$751 ? $2,095 ?
$1,442 ? $269 ?

What is Revenue Management All About?
 Selling the Right Product

 Time of departure/arrival
 Frequency/Capacity Revenue Management is about
 On-board product/Service
 Refundable/Non-refundable
utilizing effective market
segmentation to maximize
 To the Right Customer revenue on every flight
 Business or Leisure?
 Need to fly, or want to fly?
 Local or connecting passenger?
 At the Right Time

 Leisure passengers typically purchase 21+ days out
 Business passengers typically purchase inside of 14 days
 For the Right Price

 Leisure passengers more price sensitive and willing to sacrifice flexibility and on-board
amenities for lower fares
 Business passengers typically savvy travelers and are willing to pay more for better
products/services and flexibility

Market Segmentation & Revenue Maximization
Revenue maximization is a function of many things. These are the primary ways
airlines drive revenue maximization through market segmentation
Revenue Management
How do you price each product to reach target market

Pricing segment?
How many seats do you make available at each price point

Inventory Management to capture the right traffic mix?
What products & services do you offer to capture your

Product Strategy desired market segment (ie. Premium economy, business
class, ancillary, etc.)?
Where do you fly, and how much capacity and frequency

Planning/Scheduling do you fly to maximize traffic capture while avoiding
revenue dilution?
Airline Revenue Management
Why is revenue management important?
How do economic concepts drive revenue management?
Core principles of revenue optimization
How are customers impacted by revenue management?
How does the revenue management process work?
Challenges and trends in revenue management

Revenue Management Structure
Revenue
management
Inventory
Pricing
management
 Create overall pricing strategy  Forecast high-fare vs. low-fare
based on cost and competition demand for each flight
 Determine fare levels (prices)  Decide how many seats to sell at
 Design fare rules to differentiate each price according to demand
business vs. leisure customers  Monitor demand on each flight &
 Evaluate and respond to adjust fare availability to match
competitor fare/capacity  Manage overbooking levels based
changes on expected cancellations & no-
shows
Revenue Management Structure: Buckets
Economy Business
Fare class Z X G L V H B Y J
Fare range 0 $50- $100- $200- $400- $600- $800- $1,000- $2,000+
$99 $199 $399 $599 $799 $999 $1,999
Pricing responsible for setting fares in each bucket, Inventory Management

responsible for determining number of seats to sell in each bucket

Objectives of revenue management
 Use price levels to balance supply and demand
 Protect seat inventory for the airline’s most valuable customers
 Stimulate demand on (or shift to) flights with excess capacity
 Capture maximum possible revenue from each customer
 Protect the airline’s competitive position in a market
Ultimate goal:
Maximize revenue (minimize loss) on every flight!

Revenue has an outsized impact on profitability
A 1% increase in revenue has same affect on operating profit as:
A 13.1% decrease in maintenance cost

A 10.5% decrease in fuel expense
A 7.1% decrease in ownership cost

2
-2
-4
-6
-8
777-200ER
-10 US International Rules
3,000 nm
-12
-14
Revenue Maintenance Fuel Ownership

Revenue management is the core of the airline’s
revenue-generation chain
 Fleet, network, & schedule planning

 Builds strategic plan for airline growth
Strategic
Longer
 Search for new markets and opportunities

 Sales, marketing, & loyalty (FFP)
 Promote the product to customers
 Develop relationships for market share and yield premium
Time / Flexibility
Execution Lead
 Revenue management
 Optimize revenue based on network / schedule
 Find revenue opportunities & threats
 Distribution
 Make inventory available in every sales channel at lowest cost
Tactical
Shorter
 Target offers to specific customers by segment & channel

 Airport & onboard service
 Deliver the expected product on every flight, every day
 Create customer experience to drive new and repeat business

A revenue forecast & variances from plan create an
early warning system
 Warns of future revenue shortfalls

 Allows the airline to take action through adjustments to pricing,
distribution, promotions, or schedule
 Identifies specific source(s) of revenue weakness
 Which markets or points of sale?
 Which seasons or days of week?
 Evaluates impact of competitors’ actions and strategies
 Decision to match a competitor’s fare reduction
 Competitive capacity changes relative to total demand

Demand forecasts provide critical information for airline
decisions
· Identify revenue opportunity on each flight

· Allows airline to keep seats available for late
bookings (high-revenue customers)
· Provide guidance for personnel and equipment

planning during peak travel seasons
· Revenue management uses forecasting to match

pricing to demand by opening and closing fare
classes
· Maximize revenue by selectively accepting or
rejecting reservation requests based on value
relative to forecasted demand

Airline Revenue Management - Overview

As price goes up, demand goes down
(“price elasticity”)
Number of people willing to travel at each fare level
$100
Fare
0 100
Demand (number of people)

Offering just one fare limits revenue potential
$100
Passengers: 50
Willing to pay Revenue: $2,500
more for a seat
Fare $50
Economy fare Cannot afford a

higher fare
0 50 100
Seats sold
Unrealized revenue potential

(“consumer surplus”)
Offering just one fare limits revenue potential
Extreme case 1
$80
Passengers: 20
Revenue: $1,600
Fare
Class
High RPK / yield
Low load factor
Low revenue
Demand (passengers)
Extreme case 2
Passengers: 80
Fare
Revenue: $1,600
Low RPK / yield

$20 High load factor
Class Low revenue
Demand (passengers)
Offering multiple fares is good for the airline and its
customer
$100
Passengers: 80
Revenue: $4,000
Fare $50
A
Fare B
Fare C
Fare D
Fare
100
0 50
Seats sold


Price discrimination: Charging customers different
prices for the same product
 Based on willingness or ability to pay
 Business customers can usually pay more for their travel
 The business customer must travel; the leisure customer wants to travel
 A third party (employer) is paying for their travel
 Business ticket purchase patterns are usually easy to detect
 Depart Sunday/Monday; return Thursday/Friday
 Buy tickets close to departure date
 Often change or cancel ticket (need flexibility to do so without penalty)
$751 $2,095
Researcher Sales executive
traveling to speak rushing to save
at conference critical order
$1,442
Once-in-a-lifetime
trip to climb
$269
Mt. Everest Weekend trip
to visit friend
Price discrimination: Not just for airlines
 Many business models utilize price discrimination
 Most useful when fixed costs are high, marginal costs are low, and
inventory is perishable or time-dependent
 Hotels, rental cars, cruise lines
 Cinema, concerts, etc.: Wednesday afternoon vs. Friday night
 Pubs, nightclubs: happy hour, ladies’ night
 Universities: scholarships & other financial aid
 Bakeries: “50% off all baked goods after 15:00”

Pricing strategies must be adapted to match the
airline’s environment
Elasticity Cost structure

• Low costs are necessary to
compete
Price
• Many prices, same basic
product
Quantity
Competition Market
• Schedule / service quality • Economic activity
• Passenger preferences • Market development
• Market share • Passenger characteristics


Optimizing fare class availability
maximizes revenue
$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 Unconstrained
Case 1 Case 2 Case 3
fare 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
Total
140 100 90 100
passengers
Airplane capacity = 100

Optimizing fare class availability
maximizes revenue
Flight: XX190
Leg: AAA-BBB
Departure date: Friday, 26 Jun
Cabin: Economy
Capacity: 000/100
140
Capacity
120
Unrestricted Fare
100
Bookings
80
Structure Fare
60
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 before departure

Example: Protecting peak-flight inventory for
high-yield customers
Flights at
peak hours
protected for
higher fares

How does an airline decide whether it should
accept a booking?
A hypothetical case…
 “Getaway Airlines” has one seat left on a future flight
 The airline sells seats at two prices: $275 & $650
 A passenger calls desiring a $275 ticket for a flight
Decision:
Should the airline …
a) Accept the $275 booking, or
b) Refuse the booking in hopes of selling the same seat to a
$650 passenger?

accept a booking?
Sell discount fare

$275
Prob (demand > current bkd)

? $650
Wait for higher fare

!
Prob (demand ≤ current bkd)

$0

accept a booking?
Sell discount fare

$275
Prob = 100%
Payoff = $275
Prob (demand > current bkd)
? $650
Prob = 60%
Payoff = $390
Wait for higher fare
!
Prob (demand ≤ current bkd)

$0
Prob = 40%
Indifference probability = $275 / $650 = 42% Payoff = $0
If the probability of a $650 booking > 42%, then the expected payoff
of waiting is higher and we should refuse the $275 booking
When revenue management is most effective
Flights with high demand
 Limit lower-fare availability to protect seats for higher-fare customers
Normal peak travel periods or special events
 Sun/Mon/Thu/Fri for business markets
 Weekends for leisure destinations
 Holidays / school vacations
 Special events with large groups
(conferences, sporting events, etc.) M
on
da
y
Tu
es
da
y
W
ed
ne
s da
y
Th
ur
s da
y
Fr
id
ay
Sa
t ur
da
y
Su
nd
a y
On low-demand flights, customers with higher willingness to

pay are “sold up” to higher fares by pricing rules
 Advance purchase requirement
 Saturday night or minimum stay at destination
 Ability to change/cancel without penalty

End result: Booking data shows customers segmented,
revenue maximized
Economy Business
Fare class Unsold X G L V H B Y J
Fare range -- 0 $100- $200- $400- $600- $800- $1,000- $2,000+

$199 $399 $599 $799 $999 $1,999
Average fare -- 0 $162 $324 $541 $758 $974 $1,624 $2,707
Passengers 8 19 34 23 23 49 23 15 18
(empty)
Load factor 4% 9% 16% 11% 11% 23% 11% 7% 8%
Revenue -- $0 $5,523 $7,473 $12,455 $37,147 $22,418 $24,368 $48,735
Average advance -- -- 65 46 35 32 26 11 6
purchase (days)

Focus on total network revenue, not just
leg-based revenue
“If there is one seat left “Which passenger

on the SNN-LHR flight, contributes the
Passenger 1 which passenger most to network
Full fare Y, SNN-LHR should we bump?” revenue?”
€ 200
SNN
LHR
Passenger 2
Discounted Y, SNN-LED
€ 600
LED A revenue-optimal passenger mix balances
long and short-haul demand, while
SNN LHR maintaining the appropriate level of
discount-fare availability
In this simplified network, which passengers should we
accept to maximize revenue?
 Assume that demand is certain and no connection costs exist
 What is your total revenue?
2 seats available
LED
SNN
1 seat
available LHR
5 seats available FCO
O&D Fare Remaining Demand Accepted Passengers

SNN-LHR €100 1
LHR-FCO €200 2
LHR-LED €225 2
SNN-LED €250 1
SNN-FCO €205 1
Total Accepted

In this simplified network, which passengers should we
accept to maximize revenue?
 Assume that demand is certain and no connection costs exist
 What is your total revenue?
2 seats available
LED
SNN
1 seat
available LHR
5 seats available FCO
O&D Fare Remaining Demand Accepted Passengers

SNN-LHR €100 1
LHR-FCO €200 2 2
LHR-LED €225 2 2
SNN-LED €250 1
SNN-FCO €205 1 1
Total Accepted €1,055 5

Passenger demand profile
Unconstrained demand – customers wanting to book

Constrained demand – customers actually booked
Demand spill – Customers turned away for lack of seats
Booking Limit
Booking Enquiries
Days to Departure

Concepts: Spill and Spoilage
Average Onboard Airplane

Demand Load Capacity
Spoilage
occurs when
% Demand
load factor is
less than 100%
Spill
occurs when
demand exceeds
capacity
Unconstrained Passenger Demand

Concepts: Spill and Spoilage
 Spill is demand that was turned away because:

 Seats were not offered at a fare a customer was willing to pay
 The flight was sold out when the customer was attempting to book
 Spoilage is seats left unsold at departure time because:

 Not enough seats were offered at discount fares
 Too many seats were held back for higher-yield customers
 Customers booked seats but later canceled or no-showed
Optimal revenue management requires a

careful balance between spill and spoilage
Minimize spoilage due to no-shows & cancellations
with overbooking
100
Legend
90
Booked Denied boardings
80 Spoiled seats
Capacity
70 Overbooked Flown
Passengers 60
50
Capacity
40
30
20
10
0
Day 0 Day 1 Day 0 Day 1 Day 0 Day 1 Day 0 Day 1
Departure 1 Departure 2 Departure 3 Departure 4
No overbooking Perfect overbooking Spoiled seats Denied boardings
(no spoiled seats or
denied boarding)

The cost of overbooking: “Bumped” passengers
 Denied boardings will occur because of volatility in no-show rates – forecasts

are never 100% accurate
 Existence of denied boardings does not mean the system has failed
 Some denied boardings are desirable – otherwise unnecessary spoilage occurs
 Ensure that all denied boardings are reported to revenue management to
improve future no-show forecasts
 Overbooking brings additional costs, which should be considered when
determining optimal overbook rates
 Denied boarding compensation
 Alternate transportation … but the revenue benefit
 Hotel and meal vouchers
of overbooking should
 Customer goodwill
 Departure delays outweigh these costs!

The cost of overbooking: “Bumped” passengers
 When a flight is overbooked, ask customers at check-in to volunteer for a

later flight … and offer them enough compensation to make it worthwhile!
 This reduces gate delays and builds customer goodwill
 Ensure that all denied boardings (voluntary or involuntary) are reported to

revenue management to improve future no-show forecasts
Getaway Airlines
Getaway Airlines
Denied
Boarding
Compensation

Why revenue management is challenging
 Seats must be sold at the right price and right time to maximize revenue
 Trade-off between selling discount fares filling the airplane vs. selling full
fares but filling part of the airplane
 Don’t sell seats at a low price today if they probably
can be sold at a higher price tomorrow
 Sell seats at a lower price today if they’re likely to
remain unsold otherwise
 Adjust lowest available fare based on variations

from demand forecast
 Maintain market share while minimizing revenue dilution

 Balance overselling vs. spoilage on high-demand flights
 Forecast how many customers on a flight will cancel or no-show
 Oversell by an equal number of seats


Customers see revenue management at work when
they shop for airline tickets
 Travel websites display widely varying fares for similar itineraries exposing
revenue management strategies and tactics
 Higher (lower) fares available during peak (off-peak) days and times
 Airlines target flexible (low-yield)

customers with “search +/- __ days”
option on website
 Vacation-package providers and consolidators sell seats the airline does not
expect to be able to sell at higher fares
 “Opaque” travel sites hide airline name

and schedule until booking is complete
 Discounted fares for large groups; airline

trades higher yield for reduced booking risk

Revenue management is key to the success of both low-
cost and network carriers
Low fares
available on
off-peak dates;
peak flights
protected for
higher fares

Revenue management is key to the success of both low-
cost and network carriers
How is this
an example
of effective
revenue
management?

Who has more effective revenue management?
Airline “A”
Different price
levels available
at different
departure times

Who has more effective revenue management?
Airline “B”
$99 on
3 of 4 flights
or
$559 at 7 PM


Revenue management process
Initial set-up/system requirements
Forecast demand
Optimize inventory, pricing, overbooking
Monitor flight performance & adjust
Observe/collect flown data

Pricing, inventory management, and scheduling should
give each other continuous feedback …
Inventory
management
“Our normal leisure fare isn’t selling well “Tuesday‘s 9:00 flight has poor loads, even
… could we add a sale fare then?” at our lowest fares. Could we swap in a
smaller airplane?”
Network &
Pricing
Scheduling
“We’re adding another Paris flight, but the new arrival time is
not attractive; could we file a new fare for the eastbound leg?”


Internet transparency makes comparison shopping fast
and convenient
Increases challenge for RM groups to maximize revenue
Reinforces customer perception that airline travel is a commodity,
which pushes airlines into destructive
“price taker” behavior
Price transparency allows competitors to observe
each other’s strategies
Customers booking through 3rd-party portals have a higher cost

vs. an airline’s direct channels (website, call center)

Reduce transparency and lower distribution costs with
“unbundling” of airline products
 Many airlines are “unbundling” the travel
experience into various pieces that
customers to choose to pay for separately
 Checked bags
 Priority check-in and boarding
 Preferred seats
 In-flight entertainment and Internet access
 These “ancillary” products maximize

per-customer revenue capture while making
one-for-one price comparisons more difficult
 Offer in all booking channels to maximize

sales or exclusively via direct channels to
minimize distribution costs

Ancillary revenue: not just for low-cost carriers
 Some of the world’s largest network carriers are among the
most successful generators of ancillary revenue
Top 15 Airlines - Ancillary Revenue per Passenger (2010)
AirAsia X
Qantas Group
United Continental
Jet2.com
Allegiant
Spirit
Aer Lingus
Alaska
Delta
Flybe
jetBlue
Emirates
easyJet
American
Tiger Airways
$10 $15 $20 $25 $30 $35 $40
Source: IdeaWorks’ Yearbook of Ancillary Revenue Results, 2011

Improve customer perception of value through
“fare branding”
 At first, customers may perceive unbundling as unjustified up-charging
 “Why is the airline making me pay for what I used to get for free?”
 Fare branding or “fare families” help clarify the relationship between fare paid
and value received – and can even encourage “buy-up”!
Example: Air New Zealand “fare families”

Summary
Revenue management maximizes revenue by forecasting

demand, segmenting customers, & optimizing fare availability
With thin margins being common in the airline industry, revenue

management can be the deciding factor between profit and loss
Revenue management is based on analysis of human behavior,

making it part art, part science
Successful revenue management requires airlines to have a

strong understanding of their customer base

10 - Revenue Management

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Airline Revenue Management

BOEING is a trademark of Boeing Management Company.

 Familiarization with Revenue Management purpose and value

 Understanding of impact of Revenue Management on airline customers

 Familiarization with basic Revenue Management practices

 Introduction of Revenue Management trends

COPYRIGHT © 2012 THE BOEING COMPANY

 Why do I have to pay $59 extra to sit in the exit row?

COPYRIGHT © 2012 THE BOEING COMPANY

 Selling the Right Product

 At the Right Time

 For the Right Price

COPYRIGHT © 2012 THE BOEING COMPANY

How do you price each product to reach target market

How many seats do you make available at each price point

What products & services do you offer to capture your

Where do you fly, and how much capacity and frequency

Why is revenue management important?

How do economic concepts drive revenue management?

Core principles of revenue optimization

How are customers impacted by revenue management?

How does the revenue management process work?

Challenges and trends in revenue management

COPYRIGHT © 2012 THE BOEING COMPANY

Pricing responsible for setting fares in each bucket, Inventory Management

COPYRIGHT © 2012 THE BOEING COMPANY

 Use price levels to balance supply and demand

 Protect seat inventory for the airline’s most valuable customers

 Stimulate demand on (or shift to) flights with excess capacity

 Capture maximum possible revenue from each customer

 Protect the airline’s competitive position in a market

COPYRIGHT © 2012 THE BOEING COMPANY

A 1% increase in revenue has same affect on operating profit as:

A 13.1% decrease in maintenance cost

A 7.1% decrease in ownership cost

COPYRIGHT © 2012 THE BOEING COMPANY

 Fleet, network, & schedule planning

 Search for new markets and opportunities

 Target offers to specific customers by segment & channel

COPYRIGHT © 2012 THE BOEING COMPANY

 Warns of future revenue shortfalls

COPYRIGHT © 2012 THE BOEING COMPANY

· Identify revenue opportunity on each flight

· Provide guidance for personnel and equipment

· Revenue management uses forecasting to match

COPYRIGHT © 2012 THE BOEING COMPANY

Why is revenue management important?

How do economic concepts drive revenue management?

Core principles of revenue optimization

How are customers impacted by revenue management?

How does the revenue management process work?

Challenges and trends in revenue management

COPYRIGHT © 2012 THE BOEING COMPANY

Number of people willing to travel at each fare level

COPYRIGHT © 2012 THE BOEING COMPANY

Economy fare Cannot afford a

Unrealized revenue potential

Low RPK / yield

Unrealized revenue potential

COPYRIGHT © 2012 THE BOEING COMPANY

 Hotels, rental cars, cruise lines

 Cinema, concerts, etc.: Wednesday afternoon vs. Friday night