Revenue management has been long been touted as a strategic tool but what exactly is the “strategy” that is being referred to? When it was initially introduced, the airlines which invested in revenue management technology pursued a quantitative and analytical approach that differentiated them from airlines with simpler pricing. But are “analytical” and “quantitative” still defined as a “strategy” that differentiates an airline from its competitors?
The answer is no. Airline revenue management has become a largely tactical, yet essential tool in many markets, and sophisticated vendors now provide off-the-shelf revenue management solutions. Now, for most airlines, revenue management is not a competitive advantage. Instead, the broader airline leadership team – or the CEO - must clearly define the airline’s vision, by which the entire team is guided and must work towards in order create and sustain competitive advantages.
No longer can revenue management be a “strategy” on its own. It is definitely not considered a tactic to let revenue management “black box” analytics determine which customers are served – independent of a corporate vision, of schedules, sales, loyalty, and customer service. Instead, airline revenue management should in fact be used to implement the defined corporate strategy.
On the other hand, revenue management is an important tool for validating the overall airline strategy. Since its principal role is to allocate demand over scarce capacity, revenue management is constantly monitoring demand. The function is in an ideal position to see if the other strategic initiatives are driving demand as expected, and whether it achieves alignment with the airline’s corporate priorities.
Revenue Management: The Validation Role
Airlines today differentiate themselves on three primary dimensions:
Revenue management can validate each of these strategic differentiators.
Most airlines pursue a schedule strategy that sets them apart from their competitors by focusing on certain markets. American Airlines has the largest schedule in DFW – and expects to gain a share premium from Dallas-based passengers. Allegiant Air offers mostly a low-frequency service to smaller, under-served communities. As bookings and competitive fares are monitored, revenue management in these airlines can help evaluate whether these schedule strategies – in conjunction with other functions – are in fact driving demand accordingly.
Virgin America and jetBlue are among the best known U.S. airlines that employ a product strategy to complement their schedule strategy. They both strive to offset the schedule advantages of their much larger competitors with a unique customer experience.
Spirit Airlines and Allegiant Air both have a greater focus on ancillary than other airlines. Allegiant Air positions itself as a “travel company,” selling all aspects of travel. Spirit Airline strives to reduce the base fare and use ancillary pricing to gain high total revenue.
Revenue management at each of these airlines should see demand consistent with corporate goals as generated by other functions that drive demand (schedules, customer experience, sales, marketing, etc.).
Revenue Management: Alignment with Corporate Strategy
In addition to validating corporate strategy, revenue management is a tool for the implementation of strategy. The function must ensure successful coherence with airline-wide business priorities, and this alignment comes in many forms:
Revenue management is designed to prioritize passengers based on fares and to give seats to the highest fare. Even if the statistically optimum solution is only a $1 better than the next alternative, and those $1s can add up to tremendous value over all the price points on all flights. However, as a strategic tool, revenue management needs to recognize the value of a more robust solution that biases availability to its target market segments, rather than always seeking the additional $1 from non-targeted (presumably more transitory) market segments. Greater availability for frequent flyers or for corporate customers are examples of strategic initiatives. One airline I worked with specifically rejected the “optimum” revenue management solution in favor of a more explicit focus on local passengers whom it felt were more consistent with their long term corporate plan.
The last seat on a flight could sell for $1000 for a desperate passenger. On the other hand, to fill an empty plane, an airline could charge $19 for incremental passengers. A pure revenue maximization strategy can lead to even more market mayhem than the confusing airline pricing structure does already. Instead, a “full service” airline is reluctant to confuse the market with $19 fares and the “low fare” carrier is reluctant to try to extract the last dollar out of its customers. Revenue management must operate within the constraints of the brand, and serve to support the airline’s brand image in the marketplace.
When threatened by a new competitor, or when trying to gain a foothold in a new market, gaining market share may be more important than revenue maximization per the revenue management model. Also, many airlines serve “strategic” routes to maintain presence in key points of sale so tactics should conform to strategic objectives.
Pricing and revenue management departments must adopt a “total revenue” perspective as Spirit Airline and Allegiant Air had. Although all airlines need to be pursuing “total revenue management”, these two airlines have even greater reliance on ancillary fees. Maximizing revenue from the base fare - as done in most airline revenue management systems - would potentially conflict with the overall strategy of the airline.
Cash Flow/Risk Tolerance
Although cash flow is less a strategy than a tactical necessity for some airlines, revenue management must be in sync with the corporate direction on cash. Restricting sales in anticipation of future bookings may not meet the short-term cash needs of the airline. Also, an airline may prefer to prudently position itself for a future economic weakening as opposed to assume the “status quo” in the face of extraordinarily strong market demand.
Airline revenue management has become a strategic tool, not an effective strategy on its own. It has key and integrative roles in both validating and implementing corporate strategy with the respective functional departments, both which are critical for effective strategy execution.