Is conservatism killing opportunity in the airline business?

Six years after the so-called ‘Great Recession’ Tom Bacon wonders if it isn’t time for a little more exuberance in revenue management

Put back on those rose tinted spectacles – your current lenses are blocking the light!

In 2007-8, when the financial crisis struck (the ‘Great Recession’), many observed that the world had not suffered such an economic setback over many decades. The financial whizz-kid developers of elaborate financial models and pricing algorithms used in finance and in numerous other industries had experienced an extended period of relative strength and growth. They successfully leveraged the growing global marketplace for years. So, when the bubble burst it was generally regarded as a ‘Black Swan’, an extraordinary event that could not have been predicted from historic data.

Now we have had six years of post-recession economics. Six years of conservatism, persistent economic frustration, and slow recovery of unemployment, of property values, and of confidence. We are certainly doing better – in fact, US stock market values have completely recovered. However, have we now replaced the arrogance of pre-2007 with excess conservatism? Are we missing new opportunities available today because we continue to wear recession-era lenses? Are many revenue managers and planners ‘fighting the last war’?

Excess conservatism can be as costly as excess exuberance

Excess conservatism can be as costly as excess exuberance. We can miss opportunities in new markets and new routes but also in tactical arenas like pricing, distribution and sales. Just like the revenue opportunity for peak holidays can represent a huge portion of annual opportunity, the opportunity associated with an economic upswing can represent a huge proportion of profitability over a business cycle.

In pricing, we are trained to measure uncertainty and to take calculated risks on saving seats for higher fares. However, if we base our forecasts on recent history but the market is strengthening, we are likely to set aside too few seats for the higher fares. Many models use the previous three years of history – not really the best data for the economic upswing we are now experiencing. 

We review booking performance daily to determine if we need to adjust the forecast – up in some markets, down in others. But if we come from a period of relative weakness, we should be particularly vigilant to a possible strengthening in demand. Specific actions for pricing include:

1)      Regular testing of higher fare demand – isn’t premium demand growing vs history?
2)      More large-scale demand adjustments for a large group of flights/routes over an extended period of time. Relying less on isolated one-off adjustments
3)      Increases in existing ancillary fees and introduction of new fees. A generally favourable demand-supply relationship is the perfect opportunity for experiments in higher fees

Many airlines are now investing in product and distribution enhancements. These investments would have been much riskier a few years ago; in the context of increasing demand, however, they represent prudent initiatives – the investment-oriented airlines strive to capitalise on the economic rebound and realise a disproportionate share of the recovery. Similarly, two ‘ultra low cost airlines’ in the US, Spirit and Frontier, are growing capacity much faster than the US domestic market, entering dozens of new markets in 2015.

Their revenue managers cannot make pricing decisions based on history – getting a ‘fair share’ of a market that may have been stagnant or depressed; their growth plans are built on a predicted continuing upswing in market strength. Carriers that do not have such aggressive growth plans should be even more oriented toward capturing the economic recovery through premium pricing.

Lower fuel prices seem to push airlines in the other direction – cost-based pricing would drive more aggressive pricing and lower fares. However, RM is not directly cost-based. As the economic recovery continues, demand is likely to further outstrip supply and RM managers need to capitalise on the pricing opportunities that follow from this.

Guest columnist Tom Bacon is 25-year airline veteran and industry consultant in revenue optimisation. 

Questions? Email him or website to find out more 

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