businesstraveller.comILLUSTRATION: BENJAMIN SOUTHANOPINION
NOVEMBER 201866
JOHN STRICKLAND
DIRECTOR OF JLS CONSULTINGbetter understanding of
what airlines call “revenue
management” may be helpful
to travellers who regularly
buy their own tickets. Airline
profitability is fragile, so at the very least
a well-managed airline will ensure that
capacity is not wasted. It does this by filling
f lights as full as possible (passenger load
factor), and by maximising revenues for
each seat sold. So airlines employ teams of
revenue management analysts who pore
over data and trends supported by more
and more automation and sophisticated
forecasting tools. Even in the industry it is
not fully understood, and some see it as a
darkart.Butwhyisitsocomplex?SUPPLY AND DEMAND
Howmanypassengersenduptravelling
onaflight,andatwhatpricewillvary
according to numerous factors. Some of
these are regular and predictable, others are
of a more one-off or random nature. The
time of the day, day of week, time of year,
sporting events, holiday periods and changes
in competition all have an effect on demand.
More random factors such as strikes,
weather conditions, terror attacks and
changes in the economic outlook are much
harder to forecast. On top of these market
inf luences, the actual mix of customers on
a f light varies significantly. There will be
variation between higher and lower fares
sold, and – especially on long-haul services- between cabins. This variety of fares paid
will vary significantly, making a dramatic
difference to the final revenue earned. In
other words, even when full and with the
same aircraft type and capacity, profitability
can vary significantly from one f light to
another. More generally, leisure customers
typically book earlier and pay less, while
business travellers tend to book later and
pay more. Except even this generalisation is
becoming less true.BUY NOW, OR BUY LATER?
Airlines don’t want to sell out too early or
too cheaply, only to find they could have
sold last-minute seats at more handsome
margins. Equally, they don’t want to hold
out for more lucrative higher-fare customers
who don’t materialise,
and lose those who
wouldhavebought
lower fares to their
competitors. Rigid
physical cabin
divisions are not easy
to alter, but other
adjustments can be
made – according
to insights gained
from data – to optimise revenue
and passenger load factor.
Airlines have the option
to allocate a fixed or
f lexible amount of seats
to each price.
Complexity goes
beyond these factors.
Especially now, airlines also
have to consider what currency a ticket is
being sold in since volatile exchange rates
play havoc with projected revenues, and so
one market may be favoured over another.
The cost of “producing” a seat is anothervariable. In the past any seat sold for a price
that exceeded direct passenger-related
costs such as catering , airport handling and
ticket taxes was seen as valuable; at least it
contributed towards overheads. Today, with
the growing importance of ancillary (non-
ticket) revenues, that dynamic is changing.
There may be occasions when, much like
supermarket price deals, seats may be sold
as a loss leader if this is compensated by
suficient gains on other purchases from, for
example, baggage fees, speedy boarding and
car rentals. Ryanair earns more than 20 per
cent of its revenues from these other sources.UPSELLING
In an environment where there’s
downward pressure on pricing ,
mechanisms that generate more
revenues on top of the ticket
price and achieving “upsell” to
various extras, or even “trade up”
to another cabin, make all the
difference to profitability.
As AI advances and big data
becomes more accessible, airlines
are learning more about individual
customer behaviour and preferences,
so over time this will allow a more
personalised approach to pricing.
Airlines should find it easier to sell seats
profitably, while more customers should
find their ideal price more often. Given the
concern we all have about how our personal
data is being used, maybe airlines should
be a little less coy about their revenue
management activities, given the benefits to
customers as well as to themselves. Less of a
dark art, more of a necessity.BTDark art or
necessity?
Making sense of the complex ways airlines
try to maximise their incomeA
As AI and big data
advance, airlines are
learning more about
customer behaviour
and preferences