ACCORD UNIVERSITY

TOPIC

Fundamentals of Airline Revenue Management

Master of Aviation and

Airport Management Omar Khalif Yousuf
CONTENTS

• OVERVIEW
• Prerequisites for Applying Revenue Management
• The Rationale for Applying Revenue Management
• Fundamental KPIs Used in Airline Revenue Management
• Practitioner View: Balancing Yield and Load Factor
• Revenue Management Within the Value Chain of an Airline
• Challenge: Seasonality of Demand
• Demand Curve Revisited
• Reference
 OVERVIEW
While unit sales have end up continuously below stress during the whole journey enterprise with
inside the ultimate decades, sales control has ended up a necessary and decisive a part of a
business airline agency. Technical and organizational strengths and weaknesses on this subject
typically immediately translate into aggressive benefits and drawbacks related to an instantaneous
upward thrust or decline with inside the profitability of an airline. In intense cases, a non-stop
underinvestment into sales control systems, approaches, and corporations may also even deliver a
whole employer into extreme difficulties.
Some of the latest airline insolvencies have the least been improved to a degree via way of means
of misaligned procedures in sales control in mixture with excessive guide workloads because of
little or small investments into cutting-edge sales control solutions. Hence, greater than ever earlier
than sales control is a decisive lever for the industrial overall performance of an airline.
Technological improvements and a steady extrude of airline enterprise fashions in the direction of
promoting ancillary offerings and retailing will similarly growth the relevance however additionally
the demanding situations for sales control professionals.
 PREREQUISITES FOR APPLYING REVENUE MANAGEMENT

The first essential component for cutting-edge sales control is the supply of obvious and dependable
statistics. This may sound trivial, however in exercise, even massive corporations have a tendency to have
demanding situations with offering the statistics wished for powerful sales control. Typically, whilst
introducing a cutting-edge sales control solution, a full-size a part of the venture paintings can be
committed to statistics sourcing and statistics excellent control, in particular with inside the first section of
an implementation venture. This consists of the detection of structural breaks and outliers with inside the
underlying historic dataset.1 Fundamental modification with inside the aggressive environment, e.g.,
marketplace access or go out of a competitor, or operational disruptions are events, which may result in
biased outcomes from the sales control workflow.
• Revenue control includes 3 predominant steps:
• 1. Data sourcing
• 2. Forecasting
• three. Optimization
 CONTINUE

• In general, the software of sales control calls for positive product traits to be fulfilled. In the following, we
can list those necessities and provide an explanation for every of them briefly. If a product does now no
longer meet all of those traits, it is going to be now no longer appropriate for making use of sales control
techniques. Or to position it differently, any product pleasurable those necessities can be desirable for
sales control approaches.
• 1. Fixed ability: the ability to be advertised and bought is understood and stuck and does now no longer
extrude through the years. In theory, this sounds pretty easy, however in exercise, we regularly discover
conditions wherein this prerequisite is violated. Aircraft kind modifications are in all likelihood the
maximum common cases, wherein through the years' ability does now no longer stay constant and
modifications in the course of the reserving period. This has an instantaneous and full-size effect on the
effectiveness of sales control, as forecasts have a tendency to be biased, as they depend on historic
statistics. Fixed ability: There is a set and regarded ability (variety of seats).
 CONTI
• 2. Product is perishable: contrary to different items and offerings, a flight seat is perishable. After check-in
has been closed, the flight/product is gone. The identical is proper for different merchandise with inside
the journey enterprise like resort beds, cruises, or maybe live shows and sports activities event. Product is
perishable: after check-in has closed, the flight/product is gone
• 3. High constant prices—low marginal prices: the prices of an extra passenger are small as compared to the
general constant prices of a flight. This assumption lets in us to speak approximately sales control, wherein
prices are theoretically absolutely out of scope. In reality, of path, prices do matter, in particular in regard
to pricing. The decrease stop of the rate c program language period is essentially described via way of
means of variable prices in line with passenger, which may be large at a few predominant global airports
like Frankfurt, Amsterdam, or London Heathrow
• 4. Stochastic call for: the call for every flight differs and is a problem to unforeseeable random results. If
destiny call for could be deterministic and foreseeable, sales control could be obsolete, as ability allocations
could be absolutely playable and static. Stochastic call for: the call for every flight is unique and is problem
to random results.
• 5. Advance bookings: sales control calls for that bookings are viable in advance. This assumption holds for
an extensive variety of merchandise with inside the journey enterprise along with flights, hotels, cruises,
etc.
• Advance bookings: tickets may be offered nicely earlier than the flight.
THE RATIONALE FOR APPLYING REVENUE MANAGEMENT

• In this phase, we can illustrate in a simplified instance the principle mechanisms and spotlight
the relevance and effect of sales control in exercise. Figure 1. three indicates the seat map of
an Airbus A320. The common ability of this plane quantities to a hundred and eighty seats in
a complete financial system magnificence configuration. This plane is meant to perform a
flight from starting place A to vacation spot B on a positive day. The essential venture of a
sales supervisor is to fill the hundred and eighty seats with the very best viable general sales.
In this instance, we forget about the capacity effect of ancillary merchandise and offerings,
that have ended up very applicable in airline distribution in the latest years. Instead, we
completely recognition at the natural and on the spot sales from price tag income.
• The call for an unmarried flight can come from diverse client businesses and segments with
pretty unique willingness to pay and product choices. Knowing the corresponding client
businesses and their choices has ended up crucial in the latest years, as we have a look at a
more potent recognition on client centricity with inside the journey enterprise.
 CONTI

1. Business tourists have a tendency to have a brief-time period reserving conduct

and a desire for greater flexibility, as their plans may extrude at brief notice. On
common, they typically have a better willingness to pay than amusement clients do.
 CONTI
• 2. Individual vacationers as a client institution have usually end up lots greater crucial pushed
via way of means of the boom in online journey distribution and the upward thrust of low-fee
carriers. While in exercise this client institution in general is instead heterogeneous, we
expect for the sake of simplicity that an amusement client journeying in my view has a barely
decrease willingness to payer than an average enterprise traveler does.
• 3. VFR (Visiting pals and relatives): This client institution is likewise called “ethnic traffic.”
Nonetheless, the wording “travelling pals and relatives” has ended up greater generally used.
We expect that there's an applicable call for our flight from this client institution with an
instead rate-touchy call for, as they belong to the broader phase of amusement tourists.
• 4. Tour operator: Demand for flight capacities from excursion operators may be pretty full-
size in a few markets. We expect that this additionally holds for our instance flight.
Nonetheless, excursion operators generally are searching for to get rate benefits from
contracting a large extent of seats. Therefore, we expect that the willingness to pay for this
client institution is the bottom as compared to the alternative client segments.
 CONTI

• Table 1.1 summarizes the corresponding assumptions for our instance flight. Business tourists
show off the very best willingness to pay with €2 hundred in line with seat. Overall, there's a
call for fifty seats coming from this client phase. The client institution of man or woman
vacationers has a willingness to pay of €one hundred fifty in line with seat with a complete
call for of forty seats. Finally, VFR clients show off a willingness to pay of €a hundred, at the
same time as the call for equals 50 seats. Tour operators are searching for the agreement a
hundred seats at a rate of €50. The common call for the flight
 CONTI

• The number one venture of the sales supervisor is to determine approximately the best
ability allocation, which maximizes the sales of this flight. In this easy instance, the answer is
pretty smooth and obvious. As we want to steady seats for the ones clients with the very best
willingness to pay on the way to maximize the sales, we want to shield 50 seats for the
enterprise tourists, forty seats for man or woman vacationers, 50 seats for VFR clients, and
subsequently, we can provide forty seats to the excursion operator, which has the bottom
willingness to pay. In that approach, we're constraining the call for excursion operators to
simply forty seats, as we shield seats for clients with a better willingness to pay.
 FUNDAMENTAL KPIS USED IN AIRLINE REVENUE
MANAGEMENT

• We believe that our flight operates from Frankfurt to Barcelona (FRA-BCN). The geographical
distance of this course quantities to 1265 km. This record is wanted to compute a number of
the middle KPIs utilized in sales control, which we can gift and speak during this phase.
 CONTI
• As flights can fluctuate in seat capacities and geographical distances, it's far not unusual place
to apply to be had seated kilometers (ASK) to symbolize the real ability provided in a
marketplace. For our instance flight, the ASK may be without difficulty computed via way of
means of
• ASK = distance x seat ability = 1265 km x a hundred and eighty seats = 227, 700.
• As the entire sales of our flight quantities to €26,000, as proven in Table 1.1, we will now
calculate the sales in line with ASK (RASK). The RASK is one of the maximum vital KPIs in
airline sales control.
• RASK = sales/ASK = €26, 000/227, 700 = 11.41 cent.
• That approach that the airline earns for every seat flown via way of means of one kilometer
11.41 cents irrespective of the seat being taken or now no longer. RASK is likewise called unit
sales, because it suggests how lots an airline gets for one unit of production, i.e., a seat flown
via way of means of one kilometer. Similarly, unit prices for airways are typically defined via
way of means of prices in line with ASK (CASK). The differential among RASK and CASK
determines the profitability of an airline.
PRACTITIONER VIEW: BALANCING YIELD AND LOAD FACTOR

• Generally, the intention of a sales control branch can be to maximize sales, which in flip
approach to maximize the unit sales measured via RASK. In exercise, call for is problem to
random results and strongly relies upon at the aggressive state of affairs and conduct in a
marketplace or on a selected course. At the identical time, unique mixtures of yield in line
with pax and cargo thing can result in the identical sales on a flight and subsequently RASK,
e.g., a excessive load thing and a slight yield in line with pax or as an alternative a slight load
thing and a excessive yield in line with pax can bring about the identical RASK.
• Figure 1.6 indicates unique variables and perspectives, which may have an effect on the best
stability among the 2 of them. Typically, there can be no unique solution to this question. The
marketplace role, the product provides, and the general approach of the airline will regularly
have an effect on the solution. In a marketplace with fierce competition, strolling an excessive
yield approach can be
 CONTI

Essentially impossible, as marketplace gamers will are searching for to shield their
marketplace stocks via way of means of providing low common expenses. The sales
control approach can also be decided via way of means of the general approach of
an airline and the underlying enterprise model. In a strict low-fee enterprise model,
it is going to be crucial to provide appealing expenses with inside the marketplace
on the way to role the product and the logo accordingly, which may constraint rate
potentials on the top stop of the pricing grid.
 REVENUE MANAGEMENT WITHIN THE VALUE CHAIN OF AN AIRLINE

• The significance of sales control for airways has been continuously developing with unit sales
being continuously below stress for the reason that early 1990s. This makes sales control a
decisive lever for the general profitability of an airline. Therefore, sales control is regularly the
ultimate hotel inside an airline’s agency to optimize and have an effect on the industrial
overall performance from a brief-time period perspective.
• A powerful and cutting-edge sales control agency will continually be strongly included into
the broader business vicinity and intently engage with income and advertising groups
alongside the industrial price chain. Otherwise, there can be the threat of reducing expenses
greater than required during times of susceptible call for, as income and advertising on the
only hand, and sales control procedures, on the alternative hand, aren't completely aligned
and coordinated.
• Concisely, the function of sales control is to increase and enforce movements to recognize
marketplace potentials via way of means of providing appropriate ability, for the capacity
clients, at an aggressive rate on the proper factor of time.
 CHALLENGE: SEASONALITY OF DEMAND

• We already careworn with inside the preceding phase that destiny call for is stochastic, as it's far
uncovered to random results. Typically, call for reveals seasonal styles or a so-referred to as
seasonality. Generally, in statistics, a time collection, e.g., call for a flight over a positive period,
may be decomposed into unique additives. The concept is that a time collection is a
composition of additives along with trend, random results, or seasonality.
 DEMAND CURVE REVISITED

• The cause for sales control is immediately associated with the classical call for curve, that is a
part of any standard path in macroeconomics. The call for curve depicts the connection
among rate and quantity. While organizationally a pricing branch determines the rate grids,
sales control allocates the best capacities or portions to the corresponding rate grids, which
can be generally represented via way of means of reservation classes.
CONCLUSION

• Finally, the airline revenue management is very important, we have mentioned above Prerequisites
Fundamental KPIs Used in Airline Revenue Management and other factors which could affect so
forecasting and analyzing these factors lead to more get more profitability.
 REFERENCE

• Cramer, C., & Thams, A. (2021). Airline Revenue Management. In Airline Revenue
Management. https://doi.org/10.1007/978-3-658-33721-6