Airline Revenue Management

Airlines need to expand profitability and productivity and adapt to market change. The airline’s path to total revenue optimization is dependent on a leading revenue management system with the best technologies. Chris Dolley, an Airbus spokesman, says its broader strategy of realizing revenue optimization is now an industry first in terms of revenue optimization.

Many consider that American Airlines was the first of all airlines to start using a form of revenue management. Their strategy was called “yield management strategy“. It intended to maximize revenue by applying a method based on analytics to its inventory. The final goal of the big airline was battling against the threat of low-cost airlines that was growing at the moment.

But what exactly does a “yield management strategy” involve? Why is it considered a form of revenue management? You may wonder. Keep reading below as we answer those questions in detail.

What is revenue management in the airline industry?

As the name implies, airline revenue management in the travel industry can be defined as the strategy and systems set by an airline to maximize its revenues while improving the customer experience to guarantee customer retention.

This is usually achieved by using analytics to predict the customers’ behavior with the final goal of anticipating demand to optimize product availability and pricing to generate the highest possible revenue.

The whole idea is to match supply and demand to take advantage of demand peaks while compensating for low demand periods. Many authors define revenue management as “Selling the right product to the right client at the right moment at the right price via the right distribution channel with the best cost efficiency”.

What are examples of revenue management?

While this is about airline revenue management, a good example can be found in the hospitality industry.

A hotel needs to maximize its revenue while selling a fixed number of rooms. To do it successfully, they need to understand how customers think and their perceptions of value. This may also mean passing on selling a room one day so they can sell it for a higher price the day after, but it might also mean recognizing when demand is too low and might be a better idea to sell at a discounted price.

Another clear example of revenue management is the dynamic pricing applied by most, if not all, airlines. It is widely known that airlines do not sell seats for the same price across flights. They have categories according to the value offered to the passenger and their willingness to pay.

Revenue management systems

In the beginning, applying revenue management systems was very challenging. Keep in mind that the first attempts made by American Airlines came in the 1980s when computing technology was limited, and there were no such things as big data and advanced analytics as we have them today.

Airline revenue management was a more simplified system, but it proved to be very useful to enhance business processes and commercial strategies for meeting revenue objectives.

On the other hand, in the highly competitive environment that airlines operate in nowadays, it is necessary to have a new type of revenue management strategies and systems.

For any airline trying to succeed today, optimizing all available revenue streams is essential, including partnerships, codeshares, alliances, ancillary sales, merchandising, fees, and taxes. And this is only possible with suitable systems that will help them understand complex data and obtain actionable insights.

While it is possible to manually manage flights according to demand groupings by establishing different inventory settings for low-demand days, medium-demand days, and high-demand days, manual control generally assumes that all flights in the same category will perform the same way, and this usually generates hidden, but considerable, losses for the airline every day.

Therefore, new intelligent revenue management solutions offer proven smart functions for handling the most uncertain environments. With the tools provided by these solutions, airline operators can face a continuously changing business market.

Let’s see two essential aspects any airline will require from these systems.

Integration is critical

Airline analysts are likely to struggle to find efficiencies and deliver information on stocking, ticketing, service availability, and other aspects of the airline’s routes and schedules. Revenue management processes must rely on the capabilities of an integrated system to manage all business rules impacting availability and eliminate potential conflicts.

Moreover, revenue management requires optimization across three levels:

• Price
• Capacity
• Demand.

Pricing needs to work closely with Sales to understand competitor pricing at the route and Point of Sale (POS) level.

Scheduling needs to work with both Pricing and Sales to adjust capacity, which means reducing or increasing the ability to optimize yields and revenue with regard to the strategy for each route or route group. Additionally, airline loyalty programs must be considered at this level to ensure that an appropriate number of seats are available for redemption purposes to support the program’s value proposition and meet any regulatory requirements.

The challenge is that many of these decisions must be made long before the scheduled dates for the flights. So, for the airline to do it successfully, there needs to be a constant, direct, and managed interaction across all functional areas involved.

Fortunately, the new system’s technology allows all teams involved to have access to the information and automate their interactions. This way, revenue management teams can reduce manual intervention in their decision-making and business processes.

Demand forecasting

Airline pricing typically is calculated from historical data, previous information, or trends around the specific route, including customer behavior. This information is limited because of the lack of or insufficient details on particular routes.

Nowadays, revenue management can predict the demand for particular routes based on a broad range of external factors. More complicated data is now used to forecast demand, including tools specializing in upcoming special events such as sporting events and their impact on the market for a specific flight.

For example, algorithmic forecasting continuously infuses data and interprets it through machine learning without requiring the intervention of the analysts. It also allows analysts to look at data trends that would be missed in analyzing O&D forecasts or bookings and cancellations forecasts. However, while being very innovative, algorithmic forecasts only evolve with the help of analysts.

This said, let’s see what revenue management teams bring to the table.

Revenue management teams

Although the innovation brought by the intelligent systems described above has made revenue management more accessible, decisions are usually made by people, not the system itself.

Revenue management teams can take the data and recommendations made by the systems, interpret it, and question it before making any decision.

Of course, having more information would make that work very difficult, which is why the airlines provide their teams with access to the resources that will help them gain a competitive advantage.

This way, the people in the teams can overcome their challenges by focusing on increasing the total revenue.

How do I become an airline revenue manager?

From the previous point, it is clear that having skillful and well-trained managers is critical for airlines that want to make a difference in the market. So, if you’re going to become an airline revenue manager, this is what will be required from you.

Education

A university or master’s degree is normally required. The most common degrees include finance, accounting, data analytics, hotel management, or one related to the airline industry.

Skills

Some of the most common skills required include, but are not limited to:

• Ability to lead a team.
• Computational skills.
• Problem-solving skills.
• Written and verbal communication skills.
• Teamwork.
• Organizational skills.
• Managing costs.

Certifications

While not always mandatory, here are the most relevant certifications required by some airlines to become a revenue manager:

• Certified Revenue Management Executive (CRME)
• Certified Management Accountant (CMA)
• The International Air Transport Association (IATA) Airline Revenue Management Certification