Getting Airline Revenue Management to Drive More Revenue
Throughout the succeeding waves of consolidation and intensifying competition that have characterized the airline industry for the past three decades, perhaps no single tool has been more essential to companies’ profitability than revenue management. The ability to differentiate prices, experiment with various levers, and make use of massive amounts of customer data has enabled airlines (as well as hotels, car rental companies, and others in the travel industry) to drive revenue by using increasingly sophisticated pricing models.
This sophistication has come at a price: complexity. Today, revenue management systems juggle and sort a seemingly endless number of factors—some of which the airlines control, many of which they don’t. The latest wave of company consolidation is ushering in a new phase of competition, this one characterized by an increasing “unbundling” of services and prices. The ability of revenue management systems to measure what’s working and what isn’t—and where the real value is being generated—may now be more critical to an individual company’s success than ever before.
The Size of the Prize
Carriers of all stripes today—domestic, international, low cost, legacy—are experimenting with unbundling services and charging separately for the many different components of carrying a passenger from point A to point B. Low-cost carriers are earning a significant part of their revenue from ancillary charges, such as bag fees. Spirit Airlines in the U.S. reportedly derives more than a third of its revenue from ancillary sources. American Airlines offers four pricing bundles, altering such variables as change fees, “free” checked baggage, additional bonus miles, and premium beverages on board as a part of the standard online ticket-buying experience. In India, IndiGo has started charging extra for window, aisle, exit-row, and front-row seats (with higher charges on international than on domestic flights) and has introduced per-use charges at several of its airport lounges. We expect this trend to continue as carriers look to stay competitive on basic ticket prices and find new sources of incremental revenue.
An increasingly important part of the equation for all airlines will be identifying which changes and innovations are creating real value, particularly as companies look to increase the degree of unbundling. The opportunity is large. Global air-transport revenues reached almost $600 billion in 2011, according to the International Air Transport Association.
By combining our pricing expertise across multiple industries with our work in revenue management, we have developed a methodology for revenue enhancement in the travel and tourism industry that has helped individual airlines increase revenue per available seat mile (or kilometer) by 1 to 2 percent, sometimes gaining as much as 20 percent on specific routes. We have helped client airlines build new capabilities into already highly functioning revenue-management organizations and drive improved performance on a continuing basis.