8 ways that operations impact revenue management
Regular columnist, Tom Bacon outlines why pricing, operations and revenue management all go hand-in-hand
As in many industries, pricing in airlines is often considered a headquarters function, a process that may require detailed customer segmentation, complex demand forecast algorithms and optimisation routines.
For airlines, however, revenue management (RM) has so many linkages to operations that close coordination is mandatory for true optimisation. RM has implications for virtually all passenger interfacing employees; in fact, if operations doesn’t get factored properly in RM decision-making, pricing goals are unlikely to be achieved.
Here are eight reasons why:
1. Flight closing by airport agents
First of all, RM relies on airport personnel for accurate data. Even with increased automation, ‘closing’ flights and ensuring proper accounting for those onboard, is an operations function that ends up being the basis for RM system forecasts and optimisation. Accurate and timely data, which is dependent on operational processes, is critical to successful RM performance.
2. Overbooking
Overbooking is critically dependent on operations. The ‘cost’ of overbooking is built into the algorithms for determining how much RM should overbook any specific flight. And that ‘cost’ is dependent on efficient management of over sales by airport personnel. Some airlines avoid overbooking completely due to a concern that passengers will prefer an airline that never must inconvenience any passengers at the gate with: ‘Sorry, we don’t have enough seats’. Some airlines, on the other hand, manage overbooking seamlessly with an abundance of passengers volunteering to take a later flight. There is a need for regular communication between RM and operations regarding overbooking procedures – what isn’t working? Both departments should be receiving regular reporting on over sales and the causes of large variances.
3. Ancillary fees
Pricing departments have become more creative, charging varying amounts for checked vs. carry-on bags, for bags reserved before the flight vs. bag fees paid in advance. Boarding passes may be printed at the airport, potentially for a fee. Fares may include a free drink or video onboard. These all require systems for implementation and disciplined procedures – so airport agents and flight attendants can properly implement and enforce these fares and fees and deliver the extra services that are paid for.
4. Flight changes/standby
RM has ‘expertly’ allocated seats across fare levels by flight but passengers subsequently change their minds or their schedules. As part of the ancillary revolution, change fees have reached $200 and, on some airlines, same-day standby is not permitted. This all sounds good from headquarters -more revenue opportunity! However, dealing with passengers face-to-face can be more challenging. Operations can manage these changes in a way that minimises revenue leakage while maintaining good customer relations – or, mishandled, they can make these fees a series of PR disasters.
5. O&D management
RM often prioritises certain O&D’s on connect flights based on overall network contribution – we give more inventory to an O&D with strong demand and high revenue. However, this is not necessarily based on how easy it is to make the connection. In fact, higher demand may be related to a short connection relative to competitive offerings, which relies on operations for successful execution. Headquarters is often insulated from the challenges of making these high-value connections work; much stress can be borne by all of the hub operations staff – agents, baggage handling, and flight attendants – in tightly scheduled complexes.
6. Through flights
Another example of a revenue concept that is highly dependent on operations is ‘through flights’. ‘Through’ can provide a competitive advantage – customers logically prefer single plane-service rather than rushing to make a connection – but through flights require special procedures for flight attendants: do you allow the through passengers to disembark? If they are allowed to stay on the plane, a flight attendant must stay as well. Are the aircraft cleaning processes adjusted?
7. Market Intelligence
Knowing what’s going on at the airport – with the market, with competition, based on daily observation or true customer feedback – can help RM assess trends or anticipate change. In the airline industry there is constant change and it is the responsibility of RM to insure the forecasts remain accurate and capture new trends and market changes. Often, it is the customer-interfacing employees who are in the best position to see such change.
8. Service
Of course, the most important part operations plays in RM, is in providing good service. RM has little value if strong demand doesn’t fill the planes. Although airline travel is often considered a commodity, customer service is still critical; often, a bad experience heavily influences future airline choice.
RM truly is an operations function. The headquarters department has the explicit responsibility for deployment of the various RM techniques including overbooking, ancillary fees, sell-up, fare rules, optimisation of O&Ds, ‘through’ passengers and so on. Ultimately, however, these are not just headquarters functions. A centralised revenue management department must work closely with operations on each of these responsibilities.
Tom Bacon is a 25-year airline veteran and industry consultant in revenue optimisation.