In general it seems that revenue management can work effectively with other departments like sales, distribution and loyalty to refine their procedures, but now a new conflict is emerging, writes EyeforTravel.com guest columnist, Tom Bacon.

Yes, it’s true, sometimes it seems like other departments don’t totally support revenue management. In fact RM has always had to deal with other parts of the organisation with somewhat different goals:

Of course, each of these other departments is actually striving to maximize revenue for the airline through their own initiatives - but in different ways to RM. RM has generally worked effectively with these other departments to refine their procedures so as to best meet overall corporate goals.

Now, more recently, a new conflict has emerged and the question is: is ancillary now undermining RM?

Certainly, new ancillary fees are terrific for airlines; in fact, they have effectively saved airlines – driving billions of new revenue and representing a huge percentage of profitability over the past four years. However, most RM systems still optimize revenue without regard to ancillary fees. As such, a low fare customer, who buys his ticket at the lowest fares on the booking curve, may pay additional fees that make his total revenue exceed that for customers who pay higher stated fares closer in to the departure time.

The RM analyst, in conjunction with the sophisticated RM system, works hard to turn down lower fare demand to keep seats for later-booking, higher fare passengers. But, is RM maximizing revenue when it withholds such inventory in favour of closer-in bookings?

Let’s look at an example: A price sensitive leisure passenger may seek that $99 ticket but may actually be more likely to:

          ·         Check in a suitcase that is too large or heavy to carry around -- $25

          ·         Book an associated car/hotel, driving incremental commissions -- $10

So, restricting capacity to such a passenger in favor of a $124 business passenger may drive lower total revenue. Two questions to think about:

          1.       Is your RM system working properly? 

          2.       Are you managing Total Revenue?

Dealing with probabilities

Unfortunately, we don’t have all of the ancillary information available when we quote fare availability for a passenger either on our own website or through an intermediary. Instead, we are dealing with probabilities and faced with more questions. What types of passengers are most prone to check bags? To make changes? To book a car or hotel on our website? And, can we really offer different fare availability to different customers or different types of customers? On the other hand, probabilities are precisely what drives RM engines today – assessing the probability of filling the plane and of being able to sell up to higher, closer-in fares. And, factoring in ancillary fees – that, for some passengers, may represent 40-50% of the base fare – is ultimately crucial to allocating seats in an optimal way.

Pan Pacific Hotels Group: A Case Study

At a recent EyeforTravel conference in Singapore, Jurgen Ortelee of Pan Pacific Hotels Group provided an example of how a hotel might factor in ancillary revenue in comparing different types of customers. In his analysis for Pan Pacific hotels, convention customers paid similar room rates as corporate customers, on average, but because of the much higher propensity to rent meeting space and incur higher food/beverage charges, convention customers result in 60% higher profitability per room than corporate customers. As another example, the value of a wholesale customer, who is likely to pay among the lowest room rates, is valued more on a Total Revenue basis given his higher propensity to use hotel spa services.

Ortelee’s examples involved negotiated rates between his hotel and its convention, corporate, and wholesale customers. It is, of course, much more difficult to apply to a mass market – for example, bookings through travel distributors including agencies and OTA’s. But, airlines already vary fares based on the booking curve – so does the propensity to utilize ancillary services similarly vary along the curve?

Similar to how RM works with sales, loyalty, and distribution to meet overall corporate goals, revenue management must adjust its processes to account for the value of ancillary. This will likely involve working closely with those ancillary folks who may work in pricing or marketing, e-commerce or customer service.

RM may not simply rely on stated fares to prioritise traffic that is differently inclined to ancillary services. In conjunction with the ancillary folks, RM needs to study customer behavior to develop algorithms that can refine an RM process that focuses on base fares today.

It will certainly be a learning process and there are many things to consider including:

·         Creative data analytics will reveal insights over time

·         Structured experiments can test hypotheses and drive new hypotheses

·         Ancillary services have different costs and therefore different margins

·         Behavior may differ by market or by flight or by season

·         Ancillary charges themselves, still in their relative infancy, will change over time

·         Customers, too, will likely change behaviours over time as some ancillary charges mature, as new ones appear, and as competitors choose different approaches

Crude adjustments, that might be the best short-term approach, will be refined over time.

Ancillary fees are an exciting and important new revenue source for airlines. Revenue management will need to incorporate ancillary revenue into its forecasting and optimization modules in order to properly allocate capacity for the best ‘total revenue’ results.

This article was penned by Tom Bacon, a former airline executive and industry consultant in revenue optimization. His views are his own. Questions? Contact Tom at tom.bacon@yahoo.com.