What’s the latest innovation in airline revenue management? What new algorithms or models are offered by vendors to help improve revenue forecasting or optimization - or better estimate price elasticity - or increase revenue integrity? Are you missing out?
Perhaps these are the wrong questions.
Innovation is certainly important and valuable, yet across many airlines, revenue management advances have already gone beyond the capability of the organization. And when it becomes all too complicated, airlines face a number of limitations in their ability to embrace modern revenue management practices. So what are the four most common challenges, and what can be done to limit their impact on your airline revenue management strategy?
Can you support airline revenue management internally or must you rely completely on a vendor? Either way, you face system limitations, where the internal department is unlikely able to do everything you want. Technology can be a constraint whether you are fairly independent or need vendor support.
And, even if you have a sophisticated IT department, you will find that, for many innovations or customizations on an airline revenue management system, you will still rely on a vendor in some way.
We all strive for systems that are both:
1) Turnkey/easy to use
2) Transparent/easy to understand
Many airline revenue management systems lack one of these, and the most highly sophisticated systems may be difficult to use while, when they try to streamline processes, they are over-simplifying a complex set of model parameters and assumptions. It is difficult to strike the right balance. Many airlines opt for easy to use, and unfortunately in many cases, this can keep users from any real understanding of what’s in the black box. Effectively, the airlines are outsourcing the comprehension of complex forecast and optimization models to the vendor.
Even when a system is easy to use, it often isn’t “turnkey.” Airlines need ongoing support from a vendor, along with regular training and ongoing dialogue with the vendor’s scientists and customer service employees to optimize use of the system.
airRM, of course, is designed specifically for both ease of use and ease of understanding. It has opted for an approach that puts more control in the hands of the airline rather than a black box model.
The data scientists who design innovations in airline revenue management are totally different from the revenue management analysts who must operate the systems on a daily basis at an airline. Although that’s a good thing, it certainly presents challenges. In airline revenue management operations, we need market savvy resources, strong communication skills, and often RES system expertise, along with somewhat different business skills. The varied proficiencies between the scientists and the operators can lead to misuse of the systems and sub-optimal results.
Obviously, airlines require a mix of skills in their revenue management organization. At a major legacy carrier, we recruited a mix of RES-proficient analysts and MBA graduates into revenue management; at a low cost carrier, we had a mix of market analysts and data-driven statisticians; at an international carrier, we had a mix of highly experienced market-oriented analysts and newly minted business analysts. In each case, the airline’s revenue management department recognized the need for a variety of skills – but in the end, each airline also settled for compromises, with each solution resulting in certain limitations. In fact, in all of them, simplicity trumped sophistication. We could get better results with a simple solution that could be properly managed on a daily basis than a more sophisticated “black box” solution that didn’t lend itself to dynamic operations.
Unlike many other airline revenue management systems, airRM is built around the standard skills of a revenue management analyst. Rather than focusing on “statistically optimized” inventory allocations, it relies more heavily on user-maintained business rules and data visualization.
Whatever system is used, and whatever innovation is implemented, airline revenue management continues to be a daily (or hourly) process. The department must constantly respond to market changes and cannot rely on any system to do it all automatically.
Internal airline revenue management processes need to facilitate this – with a combination of system created “flags” and departmental metrics, goals, meetings, and reports. The implementation of a sophisticated airline revenue management system, without having the basic management processes, leads to serious revenue losses. In fact, in general, the processes are more critical to revenue success than a particular system. Revenue management cannot be treated as a technical, system-oriented department without normal management processes. An airline department needs processes to insure the RM system is both fully exploited and, when necessary, properly overridden. No matter how sophisticated the system is, the airline revenue management department, in the end, is responsible for achieving optimal revenue performance.
Likewise, every new innovation in the system likely requires modifications to the management processes. Layering on another revenue management enhancement without a corresponding process to review, maintain, and exploit that particular development will likely be disappointing.
4. Organizational Structure
Revenue management cannot be an airline departmental silo. In addition to responding quickly to market changes, it must work effectively with a variety of internal departments including loyalty, schedules, sales, marketing, ancillary, e-commerce, and distribution, along with IT.
In the end, airline revenue management must be customer-oriented more than technology or systems-oriented. Pricing – what customers pay – is a fundamental element of corporate strategy that touches virtually all departments within an airline. In the end, we are interested in customer behavior, market demand, and competition. Airline revenue management analysts need to be market-oriented and the accompanying system should serve as a tool into demand trends, price elasticity and sell-up opportunities. Information on the customer from the revenue management system needs to operate in two directions: from revenue management to other customer-oriented departments in the airline, and from the other departments back into the system.
Rather than focus on the next innovation, airlines should review their current capabilities and ensure their people, their processes, their organization and their systems are properly supporting optimal revenue management. Before the implementation of the next revenue management module, many airlines would benefit from a wholesale audit of their revenue management departments in which the system itself is just one element.