June 2018, London
Why functional alignment is the model approach for airlines
How airlines can best align functions across a broad organisation, and why this is a good idea are two issues that Tom Bacon is pondering this April
The challenge of functional silos exists in many industries but it can be a particular problem for airlines. More specifically, how can airline schedules, fleet planning, revenue management and merchandising all better align their efforts?
Traditionally, organisations use a variety of tools to improve alignment across functions:
- Organisational structure
- Employee transfers between departments
- Shared metrics and incentives
- Regular cross-functional meetings
But in a world of big data analytics, there is another key integrating mechanism: the model.
As models drive more decision-making, it makes sense to consider how they can be used to better align functions and promote collaboration. And, how having different models for each function can lead to inevitable conflicts and impair or slow decision-making.
Historically, each function builds models that work specifically for them. Or, each function purchases analytical models from function-specific industry experts. Usually, ‘best in class’ means a different model for everything from fleet planning, schedules and revenue management to ancillary purchases, e-merchandising, marketing, sales, and CRM. Even suppliers that offer models for more than one, typically use function-specific legacy platforms that do not use the same inputs or assumptions across functional models. Models often reinforce the ‘silo’ed’ nature of departments.
Customer choice is the underlying driver behind many of these functions. What makes a customer purchase a $500 ticket at 5pm given all the alternatives? Scheduling needs to understand whether customers prefer the 8 am departure or the 9 am departure and how customers weigh competitive offerings that may be leaving an hour earlier or later. Fleet planning assesses demand for different sizes of airplanes as well as demand by cabin. Marketing projects the value of promotions based on their customer models. Revenue management forecasts demand for each fare level for each O&D. Even ‘operations’ quantifies the value of flight on-time performance and customer satisfaction to use to decide to add more manpower or to increase airport investments. Truly, the entire airline is implicitly or explicitly built around ‘customer choice’.
A tailored approach
Although conceptually there may be one such model, each function still needs a model that is tailored to its specific departmental objective. Each function has different time horizons; each department controls different decisions in meeting customer needs, and they have different data available to them when they make their decisions. Still, alignment of models can aid alignment of the functions.
Perhaps the best example of the need for aligned models lies in e-merchandising – which optimally incorporates ancillary, revenue management, marketing, distribution and CRM. All of these functions are built on customer choice and all focus in on this in the weeks or months before the flight. For example:
- Revenue management is adjusting its forecast nightly and limiting low fare availability.
- Ancillary is merchandising sell-up alternatives like bags and pre-reserved seats during the booking process, or shortly thereafter, and increasingly offering a larger menu of options.
- Marketing is working on creative promotions to stimulate new demand.
- CRM is in contact with frequent flyers with targeted fare or FFP mileage promotions.
- And all of the functions are working with the e-commerce team – and potentially third party distributors – to bring their offers to prospective customers.
Obviously, the functions may be working at cross-purposes if their models are not aligned – if they have different views of customer choice. RM may reject a passenger who represents high ancillary revenue or CRM may offer free checked bags counter to ancillary revenue’s objectives; a marketing promotion could include flights that are already heavily booked; e-commerce and third party distributors may not be appropriately aligned.
A common model of customer behavior and a common measurable objective would help reduce these conflicts and mis-alignments. Adoption of a common metric, total revenue, would align RM and Ancillary but each then needs to also agree on how ancillary prices and merchandising effect Customer Choice. Similarly, if marketing or e-merchandising or CRM have initiatives to drive new demand, alignment with RM means incorporating those demand adjustments in the RM model.
Another alignment opportunity lies in consistent segmentation of customers, particularly as segmentation becomes more micro and thus more individualised. Customer choice increasingly requires multiple models for different customer segments. Targeted initiatives will be more consistent if RM, Ancillary, and e-merchandising are all using the same segmentation scheme.
One industry IT supplier, Amadeus, is currently aligning multiple functional models around customer choice; they recognise the benefits of greater organisational alignment. The ultimate objective of all customer choice modelling is for fleet, schedules, revenue management, ancillary and merchandising to factor in the same drivers in optimising their activities and to work more closely together. This is an exciting development that will ultimately facilitate new ways of cross-functional collaboration that can both improve customer satisfaction and improve airline profits.
Tom Bacon has been in the business 25 years, as an airline veteran and now industry consultant in revenue optimisation. He leads audit teams for airline commercial activities including revenue management, scheduling and fleet planning. Questions? Email Tom or visit his website