Look long-term: is your revenue management strategy looking out beyond its nose?
Planning revenue management in advance is something that we don’t often do and rightly so. However, taking a longer-term view can also reap benefits. Here Tom Bacon, EyeforTravel.com guest columnist, gives us four tips on how to do just that.
As we all know, revenue management is generally not a long-term proposition. Fleet planning looks out five to 20 years, route planning looks out one to five years, but revenue management typically focuses on the short-term. Although flights can be booked up to 365 days in advance, most bookings still occur zero to 60 days before departure. For revenue managers, often 90+ days constitutes ‘long term’.
Although this observation applies to most airlines, hotels, and car rental firms, there are some notable exceptions. Gaylord Hotels, for example, caters to a large conventions or group business (groups of 500 and up) that often plan years in advance. Thus, unlike most travel companies, Gaylord may well strive to be booked at 70-80% of capacity more than a year out.
In addition to the fact that most airline demand is ‘close in’, revenue managers also recognise that many of the factors that influence demand, including the schedule, other airlines’ schedules, fares and fare structures, and market conditions change all the time. In addition they are more stable or, at least, better understood two to three months out than more than six months out.
All revenue management systems, nevertheless, mechanically calculate demand by Origin & Destination (O&D) or by ‘bucket’ whether the flight is tomorrow or 12 months from now. And they then dutifully allocate seats based on optimising revenue on the flight or across the network.
Thus, the historically high-demand markets see extreme tightening of inventory even nine months out. If the flight is projected to be full, the system will allocate the scarce seats to the highest value passengers and close out the lowest fares and least profitable O&D’s. If the booking curve is truncated to higher fare passengers booking 30 days in advance, very few bookings will be allowed prior to that. However, this all assumes that the schedules, fares, and market conditions, as currently envisioned, will remain.
Does this make any sense?
Given that markets are dynamic – that fares, flights and markets are all likely to change in a nine-month period - don’t we need a more robust RM solution than a point forecast based on inputs that assume so many characteristics of the status quo?
Here are four guidelines for such long-term RM:
1. Give the best markets a demand haircut
With the best markets more likely to deteriorate (as more capacity is added to the market over time or as demand shifts) than to further improve, it is appropriate to lower projected demand for far-out periods. A 10% “haircut” will often be enough to allow some bookings to occur before the 90-day mark and anticipate likely market changes.
2. Target a base load factor 90 days out (going into the prime selling period).
It takes courage – or recklessness – to come to the 90-day mark with less than a 10% booked load factor. For the strongest markets, you may not want to book above 25% very far in advance but a small base is prudent given the dynamics of the airline industry.
3. Apply more macro forecast process to validate the RM projection
RM Systems use a very micro approach – O&D forecast by time of day/day of week; all fare levels; etc. This may be terrific for extrapolating current trends to flights next month but it is less suitable for a longer term forecast starting from zero bookings.
Gaylord Hotels, for example, doesn’t use a typical RM system for managing its hotel inventory. It uses an internally built model that recognises longer-term industry trends (new hotels, general economic indicators, etc.)
Airline Planning departments, consistent with their longer term time horizon for routes and aircraft, produce forecasts by route/flight that can be useful in validating any long-term projections by the RM system.
4. Accelerate system responsiveness to key changes (schedule, fares)
Given that you anticipate change, don’t let change occur without an immediate reaction. Many RM systems take up to three months to adjust to a change – they are calibrated to sort out ‘noise’ or demand blips that don’t portend a structural change in demand. So, when such a structural change actually occurs, it is important to ensure the RM system incorporates that change immediately.
The last word
RM systems and RM departments rightly focus their efforts on the short-term – where most of the revenue lies and where the biggest sell-up opportunities lie. However, RM systems still produce forecasts, calculate optimal allocations, and close out low fares up to 360 days in advance of a flight departure. Airlines need to ensure these forecasts are robust and that prudence and common sense are applied to automated results longer-term, just as they do closer in.
Tom Bacon is a former airline executive and industry consultant in revenue optimisation. His views are his own email@example.com.