Airline Revenue Management

Airline Revenue Management

• Revenue management is the practice of maximising revenue generated from a fixed seat inventory which is perishable at the time of departure.

components of airline revenue maximization

• It does this by controlling the release of seats for sale at different fares – in other words, by optimising the passenger mix.

components of airline revenue maximization

• Differential pricing: As described, various “fare products” are offered at different prices with different characteristics for travel in the same O-D market.

components of airline revenue maximization

• Yield management (YM): This process determines the number of seats to be made available to each “fare class” on a flight, by setting booking limits on low-fare seats.

components of airline revenue maximization

• Most airlines have implemented YM systems that routinely and systematically calculate the booking limits on each fare class (or booking class) for all future flight departures.

YM systems

• YM systems take a set of differentiated prices/products, schedules and flight capacities as given.

• Under the assumption that the fixed operating costs associated with a committed flight schedule represent a very high proportion of total operating expenses in the short term, the objective of revenue maximization is effectively one of profit maximization for the airline.

YM systems

• YM became necessary when airlines began to realize that differential pricing alone is not enough to maximize revenues.

• Both leisure (discount) and business (full-fare) consumers typically prefer to travel at the same times, and compete for seats on the same flights (e.g., Friday afternoon and Sunday afternoon peak periods).

• Without capacity controls (booking limits) on discount fare seats, it is more likely that leisure travelers will displace business passengers on peak demand flights. This is due to the fact that leisure travelers tend to book before business travelers, a phenomenon made worse by advance purchase requirements on discount fares.

YM systems

• The main objective of YM is therefore to protect seats for later-booking, high-fare business passengers.

• This is accomplished by forecasting the expected future booking

YM is the airline’s “last chance” to maximize revenue

• Aircraft acquisition decisions will have been made years earlier, scheduling decisions will have been made six months or more prior to departure, and pricing decisions will have been made several months in advance.

YM is the airline’s “last chance” to maximize revenue

• Setting booking limits on the different fare classes offered on a specific flight departure is a dynamic and tactical way for the airline to maximize total flight revenues, given the previous aircraft, scheduling and pricing decisions.

YM is the airline’s “last chance” to maximize revenue

• But too much emphasis on yield can lead to too much protection for high-yield passengers and overly severe limits on low fares, resulting in lower overall load factors for the airline.

YM is the airline’s “last chance” to maximize revenue

• On the other hand, too many seats sold at lower fares will increase load factors but reduce yield and leave inadequate protection for late-booking high-yield passengers, with a potentially adverse affect on total airline revenues.

RM

• As mentioned, revenue maximization is the proper goal for an airline. Achieving this goal requires a balance between load factor and yield. As a result, many airlines now refer to “revenue management” (RM) instead of “yield management” (YM). The two terms have come to be used interchangeably in the airline world.

RM

• To maximize revenue, RM systems try to fill each available seat on each future flight departure with the highest possible revenue.

• RM booking limits support the objectives of differential pricing, i.e., to make consumers with higher WTP (willingness to pay purchase) higher fares.

RM

• On high-demand flights, RM systems will set booking limits on discount fare and group bookings, in order to protect seats for later-booking high-fare passengers.

RM

• This can lead to slightly lower average load factors for the airline overall, but higher yields and increased total revenues. On low-demand flights with excess capacity, the proper RM principle is to sell the empty seats at almost any low fare by not setting stringent booking limits on low-fare classes. This can result in higher average load factors and lower yields for the airline, but higher total flight revenues.

RM

• Under a yield maximization approach, the airline might decide to limit low-fare bookings too much, leading to higher yields but relatively low load factors. Under a load factor maximization approach, the airline takes a large proportion of low-fare traffic, but less high-fare traffic is carried.

RM

• The correct RM strategy, as mentioned, is to manage the seat inventory of each flight departure to maximize total flight revenues.

RM

From a route planning perspective, a hub-and-spoke network structure affects how the

economics of new services are evaluated by the airline. New routes to smaller spoke cities

become easier to justify in an established hub network. In the hypothetical hub network

of Figure 6.5, the airline needs only two or three passengers per flight out of a new spoke

city to each of 20 connecting destinations to make the operation of that flight with a

100-seat aircraft profitable.