Revenue Management
 

Revenue Management is primarily a business discipline. This generally now includes a Revenue Management Solution (RMS), which is an I.T. system that captures current booked passenger loads, forecasts future unconstrained passenger demand, incorporates anticipated no-shows and cancellations, and then processes this data utilizing a  sophisticated mathematical algorithm which optimises the inventory controls in order to maximise the airline’s revenue.

Revenue Management is applicable to any business which has a fixed, perishable resource such as an airline seat, a hotel room, a car rental, or a cruise ship’s cabin. The origins of RM were in the US airline industry at American Airlines in 1985, where deregulation had occurred. This created a highly competitive environment, with new start up carriers such as People’s Express aggressively undercutting traditional airlines with very low fares. American Airlines responded with a new business process supported by a computerised approach to inventory allocation which created Yield Management, now known as Revenue Management. This is now generally regarded as the catalyst for Revenue Management in the airline industry, as the situation gave birth to the World’s first airline RMS, American’s Sabre Airmax. The Revenue management systems developed at American Airlines were recognized by the Edelman Prize committee of INFORM for contributing $1.4 billion in a three year period at the airline. Since the ‘80s many off the shelf RMSs have become available from a variety of vendors, allowing even the smallest carrier to enter the RM arena and to compete with far larger airlines effectively.

There are four essential conditions for revenue management to be applicable in any industry:

1)      That there is a fixed amount of resources available for sale.

2)      That the resources sold are perishable. This means that there is a time limit to selling the resources, after which they cease to be of value.

3)      That different customers are willing to pay a different price for using the same amount of resources.

4)      That segmentation can be applied and controlled to differentiate the prices applied to the various products offered within one item e.g. a flight.

Revenue Management is of especially high relevance in cases where the constant costs are relatively high compared to the variable costs. The less variable cost there is, the more the additional revenue earned will contribute to the overall profit. This is because it focuses on maximising expected marginal revenue for a given operation. It optimises resource utilisation by ensuring inventory availability to customers with the highest expected net revenue contribution and extracting the greatest level of ‘willingness to pay’ from the entire customer base. Revenue Management has a proven benefit of 3-9% incremental revenue gains due to Revenue Management activity.

 

Revenue Integrity

Revenue leakage is a major factor for airlines’ reduction in profitability. This occurs where the difference between the business that is booked with an airline and the actual revenue that is received after travel has a significant gap. The major causes of this are due to intentional abusage of an airline’s inventory by travel agents wishing to undermine the booking processes and rules, and due to a large number of speculative bookings which either result in late cancellations, or no-shows on departure. All of the malpractices can be rectified by the implementation of a good Revenue Integrity solution.

A Revenue Integrity department using a good solution provides robustness of reservations by ensuring that travel is undertaken and is within the conditions of the sale and also by removing those reservations that create unnecessary additional costs and which reduce saleable inventory space. Many airlines during the last twenty years, have quite rightly invested heavily in Revenue Management solutions. Unfortunately, the majority have ignored the benefits of implementing Revenue Integrity, too, which would maximise their original investment and secure additional benefits, as a RI solution compliments a RMS by delivering accurate reservations data on which to forecast upon.

Paul is recognised as the founder of the term “Revenue Integrity”, and has spent much of the last ten years speaking on the subject, progressing solutions to remedy the situation, and have also created the World’s only independent non-profit making organisation focused on this issue – A.R.I.G. (Airline Revenue Integrity Group), see www.arigroup.org

 

Solve your Revenue Management / Revenue Integrity problems

My expertise in airline Revenue Management, accrued over 30 years in the airline industry, can deliver major benefits to any airline wishing to reduce costs whilst maximizing profitability from increased revenues. Should you be contemplating implementing Revenue Management or Revenue Integrity at your airline, then I can assist by identifying changes to your current business processes and organisation, and help in evaluating Revenue Management solutions and making recommendations as to which solution is the most appropriate to your requirements and budget.

 My extensive experience in the field of Revenue Integrity makes me the natural choice to help an airline identify their revenue leakage problems, create the best environment in which to implement a Revenue Integrity department within the commercial organisation and generally provide expertise where required.

 

Please read my “Biography” page to review my experience.