REVENUE MANAGEMENT IN AIRLINE INDUSTRY

The main objective of RM is to sell the right inventory unit to the right type of
customer, at the right time, and for the right price. RM is a tool to maximize
revenue from the fixed seat capacity, which is perishable at the time of
departure. It is based on the control of the release of a certain number of seats
on sale across the booking classes. It focuses on optimizing the mix of
passengers. In other words, RM is based on decision making whether or not to
accept a booking request. The answer to this problem depends on whether the
yield from this booking exceeds the yield that could be earned by denying the
request and leaving the space in the aircraft for later sale at higher prices. RM
assists in balancing between three types of costs:
spoilage cost
displacement cost
diversion cost
Airlines currently use one of two RM methods: Traditional method or Low cost
carrier method.
Traditional method
With a traditional approach airlines offer a wide range of fares with various sale
conditions and restrictions within each RBD and each cabin. In this case, the
price is fixed and the main task of RM is to maximize revenues by controlling
capacity, it means to allocate capacity among all the proposed fares. It can also
be described as quantity-based revenue management method.
Low cost carrier method
Most low-cost carries do not segment market on the basis of willingness to pay
for air ticket with different conditions and restrictions. Conversely they offer at
any time a single price for one product at each departure. This price is generally
increasing with approaching departure. As offered air tickets are one-way
tickets, minimum stay at the destination or Saturday night rule cannot be
applied. On the other hand tickets are non-refundable and ticket changes are
either completely prohibited or a subject to any administrative change fee.
Capacity control in this case is not a problem, because instead of more various
products for sale there is only one for sale at any one time. The problem is
deciding when to close the sale of tickets in the one particular price and open
sale in the next price level. This requires closer integration of pricing
department and RM. RM main objective is therefore to maximize revenue
through dynamic pricing, which means managing price levels currently on sale.
Airlines operate in a highly competitive market, and the low cost operators, by
the nature of this, are fiercely competitive. The environment in which they
operate is one of high fixed costs, fixed capacity in the short term, a perishable
product and seasonal variable demand. The five functional aspects of yield
management, as outlined below:
Market segmentation
Price management
Demand forecasting
Availability and/or capacity management
Reservation/negotiation

FACTORS INFLUENCING AIR TICKET PRICE
Airline pricing strategies mainly depends on the decisions of the company itself
and on the RM, which they apply when managing revenues. But there are three
major external factors that have a significant impact on the development of air
ticket prices: market structure, demand and operational factors. The market
structure is meant as the whole external environment, which the carrier operates
its flights in, and the way the airline industry is organized in the country. The
environment is influenced by various governmental regulations, environmental
economics, market competition, international relations etc. It is generally
acknowledged that demand affects the ticket price. If the demand is greater than
supply ticket prices are increasing. In the contrary, if the demand for air travel is
less than what airlines offer, the market can expect more discount tickets.
Operational factors are a broad category merging wide range of factors such as
fuel, online booking, aircraft handling, schedule etc.

TYPE OF MARKET
In aviation industry markets are usually segmented based on time sensitive
passengers and markets with price-sensitive passengers. Time-sensitive
passengers are mostly business travellers who need to travel at exact days and
exact times. These travellers typically ignore air ticket price in order to satisfy
their request to travel at specific time. Also, certain leisure passengers may
belong into this group, especially those who need to travel and return according
to a fixed schedule. Price-sensitive passengers choose flights according to ticket
price. Those passengers travel in less demanded days and sometimes their travel
time is significantly longer if the final price is lower.
Another way to divide market is on the markets of business travelers and leisure
travellers. Business travellers require higher frequencies, because their time is
highly valuable in comparison with leisure travellers and they pay higher tax
when they are forced to wait longer than their preferred time departures.
Therefore schedule focused on business travellers is more expensive compared
to the flight schedules created for leisure passengers. On the other hand, higher
revenues from tickets, which are sold at noticeably higher fares, compensate
higher costs.
While some markets are purely focused on business travelers (London City),
others are oriented for leisure passengers (Venice), in most markets airlines
transport mix of both passengers types. In this case, the airline has divided
passengers to different groups based on certain characteristics. At this stage,
each group of passengers pays a different price for tickets.

COMPETITION
As the market consists of customers, vendors and product, market structure
depends on the number and power of sellers and buyers. An important factor is
the number of airline offering their services on a particular O&D. It depends on
the regulation of the environment, location and nature of the market. Based on
these factors, airline creates pricing strategy for the product offered. Market can
be in three stages: market with ideal competition, monopoly and oligopoly.
SEASONALITY, PEAK PERIOD
Seasonal pricing is a tool for charging higher prices at times of bigger demand
when capacity constraints cause high marginal costs. In the aviation industry,
changes in capacity utilization in different days or different flights generate
differences in the seat cost on flights. During the peak period, most of the
aircraft are in the air and expected shadow costs of capacity will be higher.
Due to capacity constraints during periods with increased demand, if airline
wants to increase revenue it must shift some demand from high demanded
flights to flights with low demand. For instance, implementation of advance
purchase rule can be a strategy for maximizing revenue for airline, which has to
face capacity constraints in periods with high demand. Carrier should predict
carefully the peak seasons and offer discounted tickets for flights out of this
period. Passengers with low time costs who originally wanted to fly in the peak
season, will move to low demanded flights.


INCOME
Customers income is one of the major factors influencing demand for air
travel. As soon as economic activity and trade increases, demand for business
air travel grows. With greater economic activity, income of the population rises.
Consequently, people start to have higher expenses for less important goods and
services such as holidays. Similarly, with increasing prosperity, people are less
price-sensitive and more predisposed to product quality. This leads airlines to
sell tickets in higher prices in an effort to offer the best service. Conversely
during a recession customers are more sensitive and are more interested in price
than the comfort and brand image. These facts force airlines to stimulate
demand for air transport with various promotions with discounted tickets. Often
bad financial situation of customers results in shifting of passengers from
traditional airlines to low-cost airlines.

Yield management at easy Jet
easy Jet uses an automated yield management system based around maximizing
the revenue on each flight, every day. The easy Jet reservation system is
somewhat different from those of most of its competitors in that all its booking
must be made directly with the airline reservations staff, via either the phone
system or the internet, as no agency bookings are accepted. The yield
management system, managed by the revenue manager, is one specifically
developed for and by easy Jet, and is modified on a regular basis and adjusted as
operations mature. easy Jet has developed the model to cover each flight route,
for every flight and every day. The principal aim is maximization of revenue,
while ensuring that the appropriate balance of passengers is met.
Easy Jet does not segment its customers. However, it does segment its flights
into the following categories:
Destination/route
business
leisure
Flight time
morning and evening flights
day time flights.
easy Jet considers that there are, in its sector, two kinds of destination. The first
is business destinations, like Glasgow, where the highest percentage of
passengers are usually going for a short stay for business reasons. The second
destination type is a non-business or leisure destination, like Palma, where the
greatest percentage of passengers is going for non-business reasons with a
longer stay over. The second segmentation is that of flight time, where the early
morning, early evening, weekday flights tend to be regarded as business sector,
while the middle day, late evening and weekend flights are non-business or
leisure. The cheapest are available until, say, 25 seats are sold, then the next
price bracket until 65, then 80, when the almost full price becomes available.
The full price opens approximately ten days from take-off, when the majority of
business segment fliers can be expected.
Importance of yield management at easy Jet
Unlike the major airlines, easy Jet has a price structure with only a small degree
of flexibility: the range in price available for any destination at easy Jet is low.
For example, Nice starts off at a low of 35 per seat, extending up to 129
depending upon level of bookings and number of days out from take-off. At
BA, for a similar flight, the prices ranges from 284 standard fare, to 351 for
business class, and the reduction can be very wide nearer take-off, depending
upon source, e.g. bucket shop, travel agents special late offers. This gives the
major airlines a larger range of discounting opportunities, and more chance of a
contribution to their fixed costs. (Both examples of prices are current at time of
writing and one way.)
easy Jet offers no agency bookings, and passengers can only book or inquire
directly via the telephone sales staff and the internet. Therefore it is essential to
have an easy and quick reservation system that shuts out and opens the various
pricing levels as the take-off date nears, and the booking pattern becomes
clearer.
There can be no doubt that airlines are currently functioning in a harsh
economic climate. Now, more than ever, they must reduce costs and maximize
their revenue. But, surprisingly, many are still not realizing the benets
provided by revenue integrity programmes.Over the last thirty years, a large
number of airlines have invested heavily in traditional revenue management
solutions while ignoringthe possibly greater return on investment offered by
revenue integrity solutions. Revenue leakage the gap between the revenue that
airlines book and the amount that they eventually receive is a signicant
problem. Preventing it is especially important during periods of trafc
downturn. It does not make sense to ignore the problem as so many airlines
have done for so long.
Revenue Integrity is ensuring that passengers travel within the conditions
applied to their ticket. This is achieved by eliminating reservations that either
create unnecessary additional costs or reduce the saleable space available to
other passengers. The airlines must ensure that the correct passengers travel on
the correct ight at the correct fare. If this doesnt happen then airline
investments are not beingmaximized. Abuse of the pricing structure rules causes
revenue leakage or additional cost to recover lost revenue at a later stage.Two
major causes of unnecessary cost to airlines are no-shows by booked
passengersand late cancellations. These are proven to be as high as 30-40
percent on some routes in certain classes and average out at 15 percent for the
industry worldwide. No-shows are the biggest problem. The Association of
European Airlines (AEA) estimates the net cost to be an average of 1.6 percent
of annual revenue for European carriers.Revenue integrity problems can present
themselves in many forms and it is worth emphasizing that an airlines sales are
madethrough various distribution channels.
Some of the Revenue Integrity problems include:-
Unticketed Bookings:-Bookings which do not have legitimate ticketing details
entered into the booking by the deadline specied in the conditions. This
generally results in no passenger travelling leaving an unoccupied seat, which
would have generated revenue for the airline.
Incorrect Booking Classes:- In order to gain a sale the originator of thebooking
deliberately books into an incorrect selling class to secure space on a ight that
has the desired legal classes closed for sale. This results in the airline losing the
difference between the fare that should have been charged for the class booked
and the fare that the passenger actually paid.
Booking below Minimum Connection Time (MCT):-MCTs between
terminals or airports are created to ensure that passengers and their baggage
make a successful transfer between connecting ights. Many agents and
passengers ignore MCTs in order to minimize overall journey times. This often
results in no-shows for the second ight, as the passenger is unable to make the
ight connection.
A number of experts in the industry have identified the problems in Revenue
Integrity and have been working on solutions ever since. An industry focus
group ARIG (Airline Revenue Integrity Group) exists to help airlines with the
issues of revenue integrity. The most important aspect of successful revenue
integrity programmes appears to be a consistent approach 100 percent of the
time. Sporadic checks by airports, reservations staff or revenue management
analysts generally do more harm than good as they result in distorted passenger
demand forecasts, no-show data and cancellation data which in turn can lead to
ofoads, downgrades and empty seats. Relying on check-in agents to catch and
deal with all abuses is not a sensible way forward. It is important to take a
holistic approach and consider both revenue management and revenue integrity.
Traditional revenue or yield management maximizes revenue in the pre-booking
period. However, this represents a very limited part of the total revenue
opportunity. When a booking is made, there is no guarantee it will be used and
even if it is used it is very likely to get changed along the way. As we have
already seen, revenue disappears with problems such as duplicate bookings and
unticketed bookings, multiple bookings and name changes. A complete revenue
programme is necessary. Airlines cannot entirely solve the revenue integrity
problem alone. Their sales occur through a wide variety of distribution channels
over which the airlines have little direct control. They obviously have no
incentive to reduce the resulting revenue leakage for the airlines. Airlines must
work with the GDSs to encourage them to supply more revenue integrity checks
at source.
Airlines utilizing the latest inventory platforms can recognize revenue benefits
incremental to those using traditional inventory controls. This benefit is
primarily recognized by increasing the airlines control to accept and reject
passengers. For example, airlines are recognizing the need to refine the flight-
level inventory controls by point of sale, including city, country, agency and
distribution channel. With flexible technology, airlines create conditional rules
to numerically adjust the availability by user-defined points of sale. Airlines use
these point-of-sale rules to ensure they give preferential availability to the
higher-valued points of sale, demonstrating a real benefit to their bottom line.
Airlines are also leveraging the flexibility provided by multiple, mixed nesting
structures on their networks to improve fare product segmentation. For example,
a leg-segment airline with a mix of unrestricted and restricted fare products can
choose to create two sets of parallel nested fare classes: one for unrestricted,
highly competitive fare classes and one for restricted, traditional fare classes.
By separating the classes, revenue management analysts can force up-sell on
their restricted fare class hierarchy while maintaining availability and
competitive presence in the unrestricted fare classes. For airlines using origin-
destination revenue management, the benefits are shown to have a more
dramatic effect on revenues. O&D inventory control requires accurate, detailed
fare information for all markets served by the airline.
Factors critical to the success of a revenue management function include:
Critical flagging Alert-drive processing based on inventory data to identify
critical flights to analysts for their attention and action,
Automated response The ability to define actions to be taken when a flight
meets certain flexible parameters and enabling the system to update inventory
controls automatically,
Integrated competitor fare data This information is invaluable and should
be utilized within the revenue management system to minimize the number of
systems an analyst has to use. This data can be used for display, alerting and
even automated response actions.
Airlines using tightly integrated inventory and revenue management systems
have the unique advantage of a real-time revenue management solution, which
offers the ability to provide updated optimal inventory controls in real time
based on conditions in the marketplace.

SERVICE QUALITY
Service quality is used in business to refer to the assessment of how satisfying a
service is, according to the customer's expectations. Service quality is achieved
by comparing the expected service to the service currently being offered.
A common definition of a quality service or product is:
That it is consistently fit for its stated purpose.
That it performs to agreed standards.
That it is responsive to the needs of the user.
Providing a quality service is about the meeting and/or exceeding of customer
expectations. Most definitions of service quality use the term perceived
service quality to emphasise that it is service quality from the customers
perspective.

Service Quality Management in airlines:-
The highly competitive market conditions that characterize the airline industry
place airlines under great pressure to deliver high-quality services. This
increasing competition is reflected in such aspects as price. Yet, price is not the
sole source of competition among airlines.
In a market where price competition is fierce, service quality emerges as a
competitive variable. Airlines offer a transportation service conveying
passengers from their point of origin to that of their destination.
Customers journeys are motivated by two main purposes: business (work
motives) or pleasure (tourist activities). The former involves companies
satisfying high-quality demand, while the latter involves the provision of quality
to satisfy the customers travel experience. From the moment a passenger steps
foot in the airport terminal until she leaves the arrival airport, there are a myriad
of elements that can affect her perception of airline quality: the time at which
the flight can be taken, the check-in experience, the aircraft, the reliability of the
cabin crew, the punctuality of take-off, on board comfort, other staffing issues,
price-quality ratio, overall efficiency, etc. Each of these factors has a bearing on
passenger assessment of an airline and companies seeking to provide high
quality services cannot afford to lose sight of this fact. However, it might be the
case that these characteristics are closely associated with the specific nature of
the operational and organizational models adopted by airlines.



Steps in Service Quality Management:-
It is very difficult to measure service quality because it is a subjective
experience. Even if an employee or product performed exactly as intended, a
consumer may be dissatisfied for another reason. Keeping this in mind, there are
five categories that have been found to be reliable indicators of customer
satisfaction: assurance, empathy, reliability, responsiveness, and tangibles. This
is called the Servqual model, which has been modified over the years for use in
a variety of situations.
Elicit a response from the passenger regarding the quality of service.
Measure the assurance of the flight, airline company, or service personnel
involved, such as the flight attendants, baggage personnel etc.
Measure the empathy of the individual employee or the airlines company
as a whole.
Measure the reliability of the airlines company or service personnel.
Measure the responsiveness of the airlines company or service personnel.
Measure the tangible aspects of the passengers experience.