Revenue Management has been long been touted as a ‘strategic’ tool but what exactly does this refer to? EyeforTravel.com’s guest columnist, Tom Bacon, tries to shed some light on the matter

When RM was initially introduced, airlines that invested in RM technology pursued a quantitative and analytical strategy that differentiated them from airlines with simpler pricing. But is ‘analytical’ and ‘quantitative’ still a ‘strategy’ that differentiates an airline from its competitors?

The short answer is: no. Revenue management has become a largely tactical tool that is essential in many markets. Moreover, sophisticated vendors now provide off-the-shelf RM System solutions. Now, for most airlines, RM is not a competitive advantage.  Instead, the broader airline management team – or the chief executive - must clearly define the airline vision; and the whole team must work to create and maintain real competitive advantage. No longer can RM be a ‘strategy’ on its own. It is definitely not a strategy to let RM ‘black box’ analytics determine what customers are served – independent of a corporate vision or focus and independent of schedules & sales and loyalty & customer service. Instead, RM should in fact be used to implement a defined corporate strategy. 

On the other hand, revenue management is an important tool for validating the corporate strategy. Since its principal job is to allocate demand over scarce capacity, RM is constantly monitoring the demand. RM is in an ideal position to see if the other strategic initiatives are driving demand as expected and consistent with the overall corporate strategy.

RM as a validation tool

Revenue management is best positioned to see where demand is coming from and whether key elements of the strategy are working properly.

Airlines today differentiate themselves in three primary ways and revenue management can validate each of these strategic differentiators.

1.  Schedule: Most airlines pursue a schedule strategy that differentiates them from their competitors by focusing on certain markets. American has the largest schedule in Dallas Fort Worth International – and expects to gain a share premium from Dallas-based passengers. Allegiant offers a mostly low-frequency service to smaller, underserved communities. As it is monitoring bookings and competitive fares, Revenue Management in these airlines can help evaluate whether these schedule strategies – in conjunction with other functions -- are, in fact, driving demand accordingly.

2.  Product - Virgin America and jetBlue are among the best-known US 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.

3.  Pricing or Ancillary: Spirit and Allegiant both have a greater focus on ancillary than other airlines. Allegiant positions itself as a ‘travel company’, selling all aspects of travel. Spirit, on the other hand, 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 the corporate goals as generated by the other functions that drive demand (schedules, customer experience, sales, marketing, etc). RM has an important role in validating the corporate strategy at every airline.

RM as aligned with corporate strategy

In addition to validating corporate strategy, revenue management is a tool for implementation of strategy. RM must align itself with overall corporate goals. 

Alignment comes in many forms:

1.       Customer Selection: RM 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, those dollars can add up to tremendous value over all of the price points on all of the flights. However, as a strategic tool, RM needs to recognize the value of a more robust solution that biases availability to its target market segments rather than always seek the additional $1 from non-targeted (presumably more transitory) market segments. Greater availability for frequent flyers, or for corporate customers, is an example of a strategic initiative. One airline I worked with specifically rejected the ‘optimum’ revenue management solution in favour of a more explicit focus on local passengers, which it felt were more consistent with its long-term corporate plan.

2.       Branding: 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 confusion 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. RM must operate within the constraints of the brand – and serve to support the airline’s brand image in the marketplace.

3.       Market share: When threatened by a new competitor, or when trying to gain a foothold in a new market, market share may be more important than revenue maximization per the RM model. Also, many airlines serve ‘strategic’ routes to maintain presence in key points of sale so RM’s tactics need to conform to the strategic objectives.

4.       Ancillary:  Pricing and revenue management must adopt a ‘total revenue’ perspective as Spirit and Allegiant have. 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 RM systems - would potentially conflict with the overall strategy of the airline.

5.       Cash flow or risk Tolerance: Although cash flow is less a strategy than a tactical necessity for some airlines, RM 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.

In conclusion, let me say this: revenue management has become a strategy tool, not an effective strategy on its own. It has key roles in both validating and implementing corporate strategy.

This guest article was written by Tom Bacon, former airline executive and industry consultant in revenue optimisation. His views are his own. Questions? Contact Tom at tom.bacon@yahoo.com.