Revenue management is changing. Instead of just allocating seats to fare classes, it increasingly sets minimum prices, by market segment, channel or even individual customer; and then accepts or rejects offers.
Ancillaries are a growing portion of revenue and should be managed along with fare revenue. That is not possible yet in every channel – but it will be.
Channel management is becoming more important and should be integrated with revenue management, as different channels yield different net prices. So, too, may different payment methods, but integration here is more difficult.
There is much more data available to revenue analysts, and IT applications must make intelligent use of that data. Revenue management will be integrated much more tightly with other systems and data sources.
PROS’ real-time dynamic pricing makes revenue management more customer-centric, argues Ajay Damani, the company’s vicepresident of product engineering. “You can offer the right products to the right customer at the right time.”
Traditional low-fare airlines (LFAs) increasingly went with fenceless fares, leading to fare dilution. Damani says PROS’ hybrid revenue management can prevent this downward spiral of fares. PROS also provides the ability to look not only at competitive schedules and frequencies, but at competitive pricing, by importing data from lnfare and QL2. “We see a lot of customers using this now,” Damani notes. “You can get fares every four or eight hours, or every night.”
New O&D Focus
The PROS exec sees more focus on origin and destination (O&D) revenue management as carriers build micro-hubs and attract more connecting traffic.
More information, sometimes called Big Data, is also putting pressure on revenue analysts to exploit its riches. To help analysts understand patterns of demand and focus on important markets, PROS offers a demand heat map. “You visualise where you require manual efforts for things that are going on that revenue management does not know,” Damani explains.
PROS’ senior director of research, Tom Gorin, says real-time dynamic pricing greatly reduces analyst workload. “It makes a thousand pricing decisions per second on two computer nodes, more with more nodes,” he explains. The approach determines an optimum price and decides whether to accept or reject an offer.
Customising prices for individual passengers might run into legal or other problems, Gorin argues. Personalised pricing may be more useful after a seat is sold and airlines decide which ancillary products to offer at what prices.
Expected ancillary revenue should be part of revenue management. Gorin says most carriers do not have sufficient ancillary data to do this. “This is a work in progress. We want to do it, and they will get more data as they collect ancillary payments on credit cards,” he remarks.
Some LFAs think they can just fill flights and then make money on ancillaries. “That is not the right way to do it,” Gorin insists. “You should revenue manage ancillaries along with fares.” Revenue management will get more complex, but PROS can handle complexity.
Many airlines now have Facebook pages, so they can develop deeper relationships with customers. “You may see an offer to 200 people on a social network,” Damani notes.
Search engines are changing, seeking for example a beach vacation in a season at a certain budget, rather than specific destinations on a given day. “Revenue management will drive these offers and interact with these different search engines,” Damani predicts.
Stefan Auerbach, senior vice-president airline solutions, Lufthansa Systems (LSY), argues that the company’s ProfitLine/Yield O&D is the most advanced revenue management solution in the market because it recognises choices among departure times and routings, as well as fares and service classes. “It provides a new approach to revenue management, allowing airlines to publish new price levels or fare structures that are immediately considered by revenue management,” Auerbach stresses. Users can be proactive, rather than reactive.
Different approaches and standards complicate management of ancillary revenue. Some approaches integrate well, for example empty seat and upgrade travel options. Others do not – yet. Auerbach expects most approaches will eventually complement, rather than change, revenue management.
Revenue management with dynamic pricing optimises for different sales channels. “One attribute for real-time evaluation in dynamic pricing is the sales channel,” Auerbach explains. Different prices can be provided for different channels, allowing optimisation of both fare and channel mix. New payment systems and costs can be defined as new channels, and dynamic pricing tailored to their requirements.
LSY expects further integration of revenue management, pricing and other applications like fleet assignment. The company’s Integrated Commercial Platform is eroding artificial boundaries between applications for faster, more optimal decisions.
Revenue Analytics helps large airlines with proprietary revenue management, assists with third-party solutions and can build customised revenue management systems, explains partner Michael Bentley. “We want to blow up the conventional definition of revenue management as allocation of perishable inventory,” he declares. “We think it is about group sales, channel strategy, pricing, ancillaries and customer-centric revenue management.”
Better data should enable airlines to do promotions one-to-one, not just to market segments, and estimate the lifetime values of each customer. “Platinum flyers may not be the most valuable, if they earn points on marginal routes and spend points on profitable routes,” Bentley argues. Airlines should build loyalty with new customers of high potential lifetime value, even if these have not flown much yet.
Increasingly, online travel agencies (OTAs) control customers, sending email alerts and promotions. Airlines should have enough data to reclaim customers and bring them back to their websites. Carriers will have credit card data on bag fees, onboard purchases and much more that could strengthen relationships.
Bentley thinks airlines have set too big a gap between economy and premium seats, which are usually given as upgrades anyway. “A business traveller may buy economy, thinking he has an 85% chance of getting premium. He might buy from you anyway because of your hub. If the difference between coach and premium were lower, you might get more passengers to buy premium.”
Airlines need to understand ancillary sales and take these into account in revenue management and estimating route profitability. “They have the data; they need to understand it.” The movement to smartphones will further increase data quality and quantity.
Like Auerbach, Bentley predicts that revenue management will become more integrated with other departments, like marketing, finance and operations.
Amadeus is working on revenue management tools for its Altea customers, says Umit Cholak, head of revenue management and inventory product management. “We can integrate revenue management, inventory management and pricing. No one else can,” he claims.
Executing the plan
Revenue management is planning, forecasting and optimisation, while inventory management must execute the optimised plan by leg, even for O&D approaches. This means moving data back and forth, but Amadeus is able to connect the two systems in real time for Altea users. About 140 carriers use Altea, and 118 use it for inventory management. A minority are LFAs and regionals, “but Southwest just signed up,” Cholak notes.
Amadeus distinguishes between two types of revenue management. “Allocation systems say, ‘Sell these seats and then stop,”‘ Cholak explains. Amadeus has delivered an allocation version to four customers, and four more have signed up. The second type, more sophisticated financial revenue management, sets a minimum bid price for sales. Amadeus will offer this version in 2013.
Traditional systems use cached data to set bid prices, but then an order may find the price is no longer available. Amadeus’s noncached, integrated approach should remove that problem.
Cholak does not expect ancillaries to change revenue management much, but channels could. Revenue management must have large volumes to make forecasts, which is only possible for websites and major GDSs. But inventory management can adjust bid prices by channel according to net prices, in real time, because “we will know more about customers”.
It is hard to reflect different payment methods in revenue management, Cholak says, because “you do not know how they will pay when they ask or order”. For example, credit card charges vary from 1.8% to 4% according to region. “But it is not practical now to recognise this,” he confirms.
Cholak believes more sophisticated revenue management promises big gains for airlines. He thinks most carriers still only manage well the 20% of fares that bring in 80% of the revenue. Obtaining detailed customer data will allow optimisation of sales for all fares. “We can help them get the best prices. For an airline like Southwest, that is a lot of money.”
“Airlines need to see the full potential of ancillaries in revenue management,” stresses Helen Porter, a senior director of SITA passenger service systems. SITA’s Airfare Insight tools now automatically include fuel surcharges in fares and feed the composite fares into revenue management applications, whether provided by SITA or another vendor. Airfare Insight will eventually include other ancillaries.
Tailoring prices for customers and channels is natural, but has often been done with bolt-on systems. “So you lose the ability to manage it centrally, especially for GDSs,” Porter notes. SITA’s next-generation Horizon passenger service system, expected to launch within 18 months, will fully enable central management of this tailored pricing.
Airlines also want to tailor payment methods by channel: for example requiring personal identification numbers (PINs) on their websites but not on reservation systems, or enabling different payment methods for different countries. Business rules enabling this and perhaps different pricing according to payment methods will also be included in the new Horizon.
Payment methods are indeed expanding. eNett International and easyJet recently released a virtual card solution to travel managers and agents. eNett’s new Virtual Account Numbers (VANs) offer travel companies a more secure and effective means of payment to airlines and a reward of 0.4% of revenue on every payment. Agents can seamlessly reconcile payments and invoices in real time, and VANs guarantee all payments, eliminating credit card risk.
Although VANs directly benefit travel agents, eNett says there are important benefits for lowfare carriers. They offer access to more IATA and non-lATA agents, and enable direct ticketing and bypass of the Billing and Settlement Plan, which takes an average of 19 days. Cash will come in faster as payments are settled immediately and reconciled in real time, automatically. Airlines are protected against agency default, and VANs give airlines important data on purchases of tickets and ancillary products.
“VANs can be integrated into a carrier’s website, and are also available via GDS and self-booking tools,” emphasises eNett’s head of sales, Patrick Hall. “The airline becomes easier for travel partners to sell as all payments seamlessly reconcile, which is not possible through traditional physical cards.”
Hall adds that VANs can enable ancillary sales, supporting direct and agency channels. It is a turnkey solution, and more is on the way. “The mobile space is one to watch, and we are working on some exciting new products to provide new channels for our clients,” he reports.
And don’t forget the basics, as markets widen. Since April 2010, Ypsilon.Net has been focusing on fraud prevention. It is one of the few providers of internet travel technology which is certified Class 1 under Payment Card Industry Data Security Standards (PCI DSS). Ypsilon can thus offer secure payment as well as high-end technology solutions to the travel industry.
Ypsilon can execute transactions with customer 3DS cards and replace these with virtual credit cards when needed. Payment methods such as MasterCard, Visa, American Express, Diners Club, UATP, Discover, Carte Bleue, Dankert, direct debit and many more are possible. Ypsilon provides sophisticated fraud checking and tools for reconciling credit card statements with booking data, considerably reducing fraud risks. Its fraud engine can be individually customised, with over 150 parameters available for modification to meet users’ specific requirements.
Based on score results, the application triggers pre-defined actions on all GDSs such as insertion of special remarks, automatic cancellation dates or cancelled bookings. This ability to act based on scoring is unique, claims Ypsilon. Its powerful algorithms are updated daily as the latest fraud trends are spotted in Ypsilon’s massive database. The overall benefits include less fraud, less manual work and fewer false positives.
The ‘new’ revenue management is thus available now, but more is on its way.