Lost and found: how airline RM can make a comeback
In recent years, airline RM has become far less effective and strategic but with increased customer engagement, merchandising and personalisation change is afoot, writes Tom Bacon
When airline revenue management (RM) was in its infancy, decades ago now, it was highly strategic. It neatly ticked all the boxes that McKinsey & Company defines as the characteristics of an effective strategy. According to the global consultancy firm, strategy should be analysed through four lenses - financial performance, markets, competitive advantage, and operating model. By doing so, companies are better placed to make unbiased decisions, improve strategic dialogue and make big, bold changes.
Historically, airline RM was on the right track and worked something like this.
- Financial – New sophisticated analytics applied to airline pricing drove large, measurable revenue increases
- Market – By offering low fares – even on a subset of seats --airlines were able to stimulate demand, and drive higher load factors
- Competitive Advantage – The resulting mix of fares meant the airlines could both compete aggressively against lower cost new entrants and retain their higher fare business passengers
- Operational – The airlines set up new RM departments with new recruiting, training, and dedicated market management
But RM has now become much less strategic. It is viewed more like crew scheduling and line maintenance – a basic part of running an airline. In fact, arguably, looking through each of McKinsey’s four lenses it now scores poorly, although there is potential for change.
Let’s take a closer look.
Although airlines may attribute two to five percent of their revenue to RM, they don’t actually measure this gain. Even more rarely do they know how much their unique (that is, strategic) version of RM adds to their profitability. They rarely know where their current process adds value and where the systems didn’t work. Just as RM systems are now commonplace – all airlines have some form of RM – the benefit has become more ‘a given’ and less measurable with the function effectively less accountable.
Travellers love to complain about their airline service. Of course, RM is still a vehicle for offering low fares to price sensitive travellers on a subset of seats – a very customer-friendly outcome. But, over time, RM became viewed as a vehicle for charging more – to increase airline revenue without having to improve the customer experience. This mentality is now changing, fortunately.
All travellers will benefit if the airlines succeed in engaging more fully with their customers
Increasingly, airlines are looking to combine revenue management with product innovations and e-merchandising designed specifically around customer needs. All travellers will benefit if the airlines succeed in engaging more fully with their customers.
Airlines seek a competitive advantage across various functions, including marketing, operations, customer experience, and employee engagement. They rarely, however, see revenue management as way to gain a leg up on competitors. Instead, RM is often a ‘me too’ strategy that simply levels the playing field, but discounts the fact that competitors also use RM.
This is a great missed opportunity. Each airline must position itself strategically in its own marketplace, and the RMS must follow. Personalised offers are a new opportunity for airlines to differentiate themselves with travelers. Now is an exciting time for RM – in conjunction with other functions – to become strategic again.
Ignoring or downplaying the operational side often results in disappointing revenue performance. Airlines are sometimes quicker to create or adopt a new, sophisticated module than to re-organise to properly leverage it. Often, ‘plugging in’ a new more sophisticated revenue management system or module ends up underperforming versus expectations. Usually, this is because the required changes in recruiting, training, organisation, performance metrics, not to mention ongoing management of the system, have not kept up. This remains a risk as airlines now pursue e-merchandising and personalisation – an opportunity that will require close coordination and alignment across most commercial functions and operations.
RM is positioned to become highly strategic again as airlines explore increased customer engagement, merchandising, and personalisation. Looking through McKinsey’s four lenses for strategic alignment applies directly to airlines’ pursuit of new broader revenue management initiatives. Once again, RM has the opportunity to become the highly strategic initiative it represented decades ago.
Tom Bacon has been in the business for 25 years. When he isn’t penning his regular column for EyeforTravel, he is an industry consultant in revenue optimisation, and leads audit teams for airline commercial activities including revenue management, scheduling and fleet planning. Want to find out more? Email Tom or visit his website